Multiple Choice Questions of Ec

TABLE OF CONTENTS
1. Nature and Scope of Economics

2. Work of Great Economists
3. Microeconomics
Unit1: Consumer Behaviour
Unit2: Demand, Supply and Elasticity
Unit3: Cost and Production
Unit4: Theory of Price Determination and
Market Behaviour
Unit5: Game Theory
Unit6: General Equilibrium
Unit7: Factor Pricing
4. Macroeconomics
Unit 1: National Income Accounting
Unit2: Income Determination
Unit3: Theories of Consumption
Unit4: Saving and Investment
Unit5: The Demand and Supply of Money
Unit 6: Aggregate Demand and Supply
Unit 7: Open Economy and Macroeconomic
Stabilization
Unit 8: Labor Market, Price Expectation
and Unemployment
Unit 9: Macroeconomic Policy Debate
Unit 10: Government Debt and Budget
Deficit
Unit11: Economic Fluctuations and Its
Sources
Unit 12: Long Term Growth and Growth
Models
5. Development Economics
6. Monetary Economics
7. Public Finance
8. International Trade
9. Islamic Economics
NATURE AND
SCOPE OF ECONOMICS
1-The main contribution of Adam Smith is in the

field of:
(a) Economics of state
(b) Wealth of Nations
(c) Value and price
(d) Theory of demand
Ans. b
2- The main contribution of Alfred Marshal is in the
field of:
(a) Research in mathematical economics
(b) Economics of labor
(c) Theory of production
Ans. d
3- The main contribution of Prof.Robbins is in the
field of:
(a) human welfare
(b) national income
(c) multiplicity of wants and scarcity of
resources
(d) theory of production
Ans. c
4- The main contribution of Prof. R.G.D.Allen is in
the field of:
(a) fixation of price
(b) Arc elasticity of demand
(c) Cross elasticity of demand
(d) Wage theory
Ans. b
5- The main contribution of Malthus is in the field
of:
(a) Consumption expenditure
(b) Theory of population
(c) Division of labor
Ans. b
6- The main contribution of Prof. Lord Keynes is in
the field of:
(a) Determination of the rate of interest
(b) Determination of the market price
(c) Determination of the wage rate
(d) Determination of production of firm
Ans. a
7- The main contribution of David Ricardo is in the
field of:
(a) Wages of labor
(b) Factor pricing
(c) Theory of rent
(d) Determination of the rate of interest
Ans. c
8- In 1776, a famous book “An enquiry into the
nature and causes of the wealth of nation” was
written by:
(a) J.S.Mill
(b) Adam Smith
(c) Robert Malthus
(d) David Ricardo
Ans. b
9- In 1932, “The nature and significance of economic
science” was written by:
(a) Prof. Adam Smith
(b) Prof. Alfred Marshal
(c) Prof. Robbins
(d) J.S.Mill
Ans. c
10- In 1890, “Principles of Economics” was written
by:
(a) Prof. Robbins
(b) Alfred Marshal
(c) Prof. Senior
(d) Adam Smith
Ans. b
11- “Liquidity of Preference Theory” was introduced
by:
(a) Alfred Marshal
(b) Lord Keynes
(c) Karl Marx
(d) Prof. Robbins
Ans. b
12- Loanable funds theory of Interest” was developed
by:
(a) Wicksell
(b) Robert San
(c) Ruskin
(d) J.B.Say
Ans. a {Explanation: Loanable funds theory of
Interest► According to the Loanable Funds Theory of
Interest, the rate of interest is calculated on the
basis of demand and supply of loanable funds present
in the capital market. The concept formulated by
Knut Wicksell, the well-known Swedish economist, is
among the most important economic theories. The
Loanable Funds Theory of Interest advocates that
both savings and investments are responsible for the
determination of the rates of interest in the long
run. On the other hand, short-term interest rates
are calculated on the basis of the financial
conditions of a particular economy. The
determination of the interest rates in case of the
Loanable Funds Theory of the Rate of Interest,
depends essentially on the availability of loan
amounts. The availability of such loan amounts is
based on certain factors like the net increase in
currency deposits, the amount of savings made,
willingness to enhance cash balances and
opportunities for the formation of fresh capitals.}
13- “Time Preference Theory of Interest” was

presented by:
(a) Adam Smith
(b) Carl Menger
(c) Ruskin
(d) J.B.Say
Ans. b{ Explanation: Time Preference Theory of
Interest► This theory was initially presented by an
Austrian economist ‘Carl Menger’ in 1871 and by
later developed by ‘Bohn Bawerk. Time preference
theory of interest is the analysis of how
individuals or firms will sacrifice present utility
in the hope of greater future returns. This theory
examines the nature of consumerism, and the factors
that influence consumers to delay current
consumption or expenditures in anticipation of
greater future returns. The rate of time preference
itself can be quantified as the amount of money
required to compensate the consumer for foregoing
current consumption. This theory also attempts to
tie interest rates into the equation by comparing
the perceived value of expected future returns with
the rate of interest paid on current savings.}
14- “Abstinence or Waiting theory of Interest” was
presented by:
(a) Lord Keynes
(b) J.S.Mill
(c) Alfred Marshal
(d) Prof.Senior
Ans. d
Explanation: Abstinence or Waiting theory of
Interest ►This theory of interest is associated with
the name of Senior. According to the theory
"Interest is a reward for abstinence. When a person
saves money from his income and lends it to somebody
else, he in fact makes sacrifice. Sacrifice in the
sense, that he abstains from consuming the whole of
his income which he could have easily spent. As
abstaining from consumption is disagreeable and
painful, so the lender must be rewarded for this.
Thus, according to Senior, interest is the reward
for abstinence from the use of capital on the part
of the lender".
This theory is rejected on the ground that saving
does not necessarily involve discomfort or
sacrifice. A millionaire may save and lend a major
part of his income without undergoing any hardship
or suffering.}
15- According to Robbins, economics is a:

(a) Science of wealth
(b) Science of national welfare
(c) Science of optimality
(d) Science of scarcity
Ans. d
16- Robbin’s definition of economics was criticised
by:
(a) Alfred Marshal
(b) Adam Smith
(c) J.B.Clark
(d) Hicks, Longe and Durbin
Ans. d
17- Marshall’s definition of economics was strongly
criticised by:
(a) Adam Smith
(b) Prof.Pigno
(c) Prof. Robbins
(d) J.B.Clark
Ans. c
18- If a person behaves against the laws of
economics then:
(a) He should be condemned
(b) He may lose his respect from society
(c) He should be punished
(d) He should not be punished or even
criticised
Ans. d
19- Rotten eggs are:
(a) Free goods
(b) Economic goods
(c) Luxury goods
(d) None of the above
Ans. a
20- Scarcity is:
(a) A relative term
(b) An economic term
(c) A dynamic term
(d) As a whole term
Ans. a
21- In economic term water is a:
(a) Free good
(b) Economic good
(c) Both of the above
Ans. a
22- Human wants are:
(a) Thousands
(b) Few
(c) Innumerable
(d) Hundreds
Ans. c
23- Economics is a:
(a) Physical science
(b) Social science
(c) Natural science
(d) Basic science
Ans. b
24- Economics is a:
(a) Exact science
(b) Inexact science
(c) Pure science
(d) All of the above
Ans. b
25- The word “ECONOMICS” is derived from the Greek
terms meanings:
(a) Political economy
(b) Household Management
(c) Production and consumption
(d) Financial Accounting
Ans. b
26-The basic and essential economic problems in a
community are related to choice and:
(a) Freedom
(b) Scarcity
(c) Social class
(d) Politics
Ans. b
27- The situation in between the extremes of the
govt. controlled, planned economy and the perfectly
free, unplanned economy is known as:
(a) Developed economy
(b) Laissez-fair economy
(c) Mixed economy
(d) Capitalistic economy
Ans. c
28- By “scarcity” the economist means that all goods
are scarce relative the people’s:
(a) Desire for them
(b) Purchases
(c) Production
(d) Consumption
Ans. a
29- Economic laws are:
(a) Conditional
(b) Moral by nature
(c) Predicted
(d) Like laws of sports
Ans. a
30- The basic subject matter of economics is:
(a) Money
(b) Capital resources
(c) Scarcity
(d) Inflation
Ans. b
31- All of the following are capital resources
except:
(a) Warehouses
(b) Buildings
(c) Dams
(d) Share of stock
Ans. d
32- Economics define technology as:
(a) Society’s knowledge of production
(b) Applied science
(c) Knowledge of science and mathematics
Ans. a
33- The fundamental choices that a society must make
about the use of its resources include:
(a) How much to produce
(b) How to produce
(c) How to distribute
Ans. d
34- The central problem of economics is:
(a) Declining productivity
(b) Increasing consumption
(c) Limited material wants
(d) Limited resources and unlimited wants
Ans. d
35- Rational economic behavior on the part of the
consumer means that he will:
(a) Save as much of his income as possible
(b) Spend as much of his income as possible
(c) Buy everything at the lowest possible price
(d) Make wise choices among available economic
goods
Ans. d
36- The Law of Proportionality is another name of:
(a) The law of diminishing marginal utility
(b) The law of demand
(c) The Law of Diminishing Returns
(d) The law of supply
Ans. c
37-The Latin term ‘citeris paribus’ means:
(a) Other things being equal
(b) Because of this
(c) Due to this
(d) All the factors changes at the same rate
Ans. a
38-In microeconomics, we study:
(a) Aggregates of the economy
(b) Few units of the economy
(c) Large units of the economy
(d) Individual units of the economy
Ans. d
39-Microeconomics is also known as:
(a) Price theory
(b) Demand theory
(c) Supply theory
(d) Income theory
Ans. a
40-J.R.Hicks was:
(a) Neo-classical economist
(b) Classical economist
(c) Keynesian economist
(d) Post-Keynesian economist
Ans. a
41- Revealed Preference Theory was presented by:
(a) Ricardo
(b) Adam Smith
(c) Pigou
(d) Samuelson
Ans. d
42- Law of Variable Proportions is regarding in:
(a) Short-Run
(b) Long-Run
(c) Medium-Run
Ans. a
43- Marginal Productivity Theory deals with the
theory of:
(a) Distribution
(b) Exchange
(c) Market structure
(d) Consumer behaviour
Ans. a
44- General Equilibrium deals with the equilibrium
of the:
(a) Consumer
(b) Producer
(c) Farmer
(d) All the producers and consumers
Ans. d
45- The cost of production is faced by a:
(a) Producer
(b) Consumer
(c) Seller
(d) Firm
Ans. d
46- Regarding economic decisions, economics of
uncertainty identifies:
(a) No risks
(b) Risks
(c) Safety
Ans. b
47- An ‘economic model’ describing the working of an
economy consists of:
(a) Functional relationships
(b) Family relationships
(c) Economic position
(d) Stagnant relationships
Ans. a
48- The water diamond paradox was firstly resolved
with the help of:
(a) Labor theory of value
(b) Individual theory of value
(c) Producer theory of value
(d) Consumer theory of value
Ans. a {Explanation: The paradox of value (also
known as the diamond-water paradox) is the
apparent contradiction that, although water is
on the whole more useful, in terms of survival,
than diamonds, diamonds command a higher price
in the market. The philosopher Adam Smith is
often considered to be the classic presenter of
this paradox The real price of every thing, what
every thing really costs to the man who wants to
acquire it, is the toil and trouble of acquiring
it. Hence, Smith denied a necessary relationship
between price and utility. Price on this view
was related to a factor of production (namely,
labor) and not to the point of view of the
consumer. Proponents of the labor theory of
value saw that as the resolution of the paradox.
The labor theory of value has lost popularity in
mainstream economics and has been replaced by
the theory of marginal utility.}
49- Government planners play a central role in

allocating resources:
(a) Only under socialism(communism)
(b) Only under capitalism
(c) Under both (a) and (b)
Ans. a
50- Karl Marx:
(a) Led the Russian Revolution
(b) Provided the theoretical basis for
socialism(communism)
(c) Developed his theory in response to the
Great Depression of the 1930s
Ans. b
51- Labor theory was firstly rejected by:
(a) Adam Smith
(b) Karl Marx
(c) Ricardo
(d) Pigou
Ans. b
52- Price mechanism has also given the name:
(a) Labor theory
(b) Production theory
(c) Laisseze-faire
Ans. c
53- General equilibrium is concerned with
simultaneous equilibrium of:
(a) Few economic agents
(b) All the economic agents
(c) Two economic agents
(d) Many economic agents
Ans. b
54- In Recardian theory of value, the stress has
been made on:
(a) Marginal cost
(b) Production cost
(c) Labor cost
(d) Supply cost
Ans. a
55- Traditionally, the study of determination of
price is called:
(a) Theory of price
(b) Theory of value
(c) Theory of labor
(d) Theory of cost
Ans. b
56- According to Marginalists, the price of any
commodity is determined by:
(a) Marginal usefulness
(b) Marginal cost
(c) Both of them
(d) None of them
Ans. c
57- With the decrease in marginal valuation of a
specific commodity, the price offered by the people:
(a) Decreases
(b) Increases
(c) Become very high
(d) Remain unchanged
Ans. a
58- According to Smith, by value we mean the value
with respect to use, and the price we mean the value
with respect to:
(a) Production
(b) Consumption
(c) Exchange
(d) Formation
Ans. c
59- The production possibility curve (PPC) is
concerned with:
(a) Resources of the economy
(b) Interests of the economy
(c) Limitations of the economy
(d) Qualities of the economy
Ans. a
60- Scarcity means:
(a) Nil resources
(b) Limited resources
(c) Many resources
(d) Extra resources
Ans. b
61- The partial equilibrium model keeps other
things:
(a) Variable
(b) Constant
(c) Increasing
(d) Decreasing
Ans. b
62- As the price of diamond is higher, so it has:
(a) Higher marginal valuation for consumer
(b) Lower marginal cost for producer
(c) Higher marginal cost for producer
(d) Both (a) and (c)
Ans. d
63- From analysis, it is clear that both Marshal and
Walras market models are:
(a) Unstable
(b) Stable
(c) Variable
(d) Fluctuating
Ans. b
64- The cobweb model will divergent when the slope
of:
(a) Demand curve is more than supply curve
(b) Supply curve is more than demand curve
(c) Supply curve is equal to demand curve
Ans. b
65- The cobweb model will convergent when the slope
of:
(a) Demand curve is more than supply curve
(b) Supply curve is more than demand curve
(c) Supply curve is equal to demand curve
Ans. a
66- Stable cobweb model is a:
(a) Simple model
(b) Dynamic model
(c) Both of them
(d) None of them
Ans. c
67- The model which gives us information about price
and output changes in different periods is:
(a) Stable cobweb model
(b) Perpetual oscillation
(c) Both(a) and(b)
(d) None of them
Ans. c
68- An economic theory is :
(a) An axiom
(b) A proposition
(c) A hypothesis
(d) A tested hypothesis
Ans. d
69- Formulation of an economic theory involves:
(a) Statements of various assumptions or
postulates
(b) Logical deductions from the assumptions
made
(c) Testing the hypothesis against empirical
evidence
Ans. d
70- Market allocation fundamentally relies upon:
(a) A system of relative prices
(b) A belief that employees work for the good
of society
(c) Government ownership of the means of
production
(d) Moral incentives to encourage productive
efficiency
Ans. a (Explanation: Market allocation relies upon
the information provided by relative prices that is
conveyed to both consumers and producers)
71-In economist the term ‘invisible hand’ is refers
to:
(a) Hand of God
(b) Market self regulating system
(c) Hands of invisible people
(d) Regulations of government
Ans. b {Explanation: The term ‘invisible hand’ is
refers to the market self regulating system working
through the forces of supply and demand. In
economics, the invisible hand, also known as
invisible hand of the market, is the term economists
use to describe the self-regulating nature of the
marketplace. This term is firstly used by Adam
Smith.}
72- In a socialist (communist) economy the invisible
hand:
(a) Guides most resource allocation decisions
(b) Operates effectively only in the labor
market
(c) Operates effectively only in the market for
capital
(d) Is prevented from operating effectively
Ans. d (Explanation: The invisible hand is prevented
from working because prices are set by government
planners rather than determined by market forces)
73- Microeconomics deals with the:
(a) Allocation of resources of the economy as
between production of different goods and
services
(b) Determination of prices of goods and
services
(c) Behavior of industrial decision makers
Ans. d
74- The study of economics just in theoretical way
is called:
(a) Positive Economics
(b) Normative Economics
(c) Micro Economics
(d) Development Economics
Ans. a {Explanation: Positive Economics► Positive
economics is the branch of economics that concerns
the description and explanation of economic
phenomenon. It focuses on facts and cause-and-effect
behavioral relationships and includes the
development and testing of economics theories.}
75- The study of economic theory for the sake of
certain objective is called:
(a) Positive Economics
(b) Normative Economics
(c) Micro Economics
(d) Development Economics
Ans. b {Explanation: Normative Economics► Normative
economics is that part of economics that expresses
value judgments (normative judgements) about
economic fairness or what the economy ought to be
like or what goals of public policy ought to be. It
is common to distinguish normative economics ("what
ought to be" in economic matters) from positive
economics ("what is"). }
76- Which is not an essential feature of a socialist
economy?
(a) Social ownership of the means of production
(b) Freedom of enterprise
(c) Use of centralized planning
(d) Government decisions
Ans. b
77-In an economy based on the price system the
decision on what shall be produced is made by:
(a) Government
(b) Consumer
(c) Producer
(d) Stock holder
Ans. b
78- The right of individuals to control productive
resources is known as:
(a) Monopoly
(b) Private property
(c) Workable competition
(d) Oligopoly
Ans. b
79- A mixed economy is characterized by the co-
existence of:
(a) Modern and traditional industries
(b) Public and private sectors
(c) Foreign and domestic investments
(d) Commercial and subsistence farming
Ans. b
80-The name of the system of direct exchange is:
(a) Price system
(b) Barter system
(c) Islamic economic system
(d) Socialistic system
Ans. b
81- The spending of money by the producer to
influence consumers is an example of:
(a) Derived demand
(b) Joint demand
(c) Demand creation
(d) Compressed demand
Ans. c
82 -Which is not a central problem of an economy?
(a) What to produce
(b) How to produce
(c) How to maximize private profit
(d) For whom to produce
Ans. c
83-Micro economics is concerned with:
(a) Product markets
(b) Factor markets
(c) Supply and demand
(d) a, b and c
Ans. d
84- Economic problems arise because:
(a) Wants are unlimited
(b) Resources are scarce
(c) Scarce resources have alternative uses
Ans. D
WORK OF GREAT
ECONOMISTS
1- According to Saint Thomas Aquinas ‘value is

determined by God, but prices by:
(a) Consumers
(b) Employees
(c) People
(d) Labor
Ans. c
2- Who is the founder of classical school of
thought?
(a) David Ricardo
(b) Adam Smith
(c) T.R.Malthus
(d) J.S.Mill
Ans. b
3- When was Adam Smith’s major work” An Enquiry into
the Nature and Causes of Wealth of Nations”
published?
(a) 1756
(b) 1777
(c) 1776
(d) 1801
Ans. c
4- “Rent is a creation of value, not of wealth” who
made this observation?
(a) Adam Smith
(b) David Ricardo
(c) Alfred Marshal
(d) A.C.Pigou
Ans. b
5- Who stated explicitly for the first time the Law
of Camparative Costs?
(a) David Ricardo
(b) Adam Smith
(c) James Mill
(d) A.C.Pigou
Ans. a
6- Which of the following theories of trade cycle
was presented by William Jevons?
(a) Sunspot Theory
(b) Monetary Theory
(c) Saving-Investment Theory
(d) Innovation Theory
Ans. a
7- “The Purchasing Power Parity (PPP) Theory” is
presented by:
(a) J.M.Keynes
(b) E.D.Domar
(c) Adam Smith
(d) Gustav Cassel
Ans. d
8- “The Input-Output Analysis” was originated by:
(a) W.W. Leontief
(b) E.D.Domar
(c) R.G.D.Allen
(d) J.M.Keynes
Ans. a
9- Who wrote “ An Introduction to Positive
Economics”?
(a) R.G.Lipsey
(b) Paul.A.Samuelson
(c) E.D.Domar
(d) J.M.Keynes
Ans. a
10- Who wrote “Mathematical Analysis for
Economists”?
(a) J.P.Lewis
(b) R.G.D.Allen
(c) Paul A.Samuelson
(d) E.D.Domar
Ans. b
11- “The Strategy of Economic Development” is the
work of:
(a) S.Kuznets
(b) H.Liebenstein
(c) A.O.Hirshman
(d) Alfred Marshal
Ans. c
12-Who is the author of “Problems of Capital
Formation in Underdeveloped Countries”?
(a) R.Nurkse
(b) N.Kaldor
(c) S.kuznets
(d) Alfred Marshal
Ans. a
13- Identify the work of Irving Fisher:
(a) Policy on trade
(b) Policy against inflation
(c) The making of index numbers
(d) Labor theory
Ans. c
14- Who formulated the “Post-Keynsian Theory of
Distribution and Growth?
(a) J.M.Keynes
(b) N.Kaldor
(c) C.P.Kindleberger
(d) Irving Fisher
Ans. b
15- Who developed the concept of “ Representative
Firm”?
(a) A.C.Pigou
(b) Alfred Marshal
(c) J.M.Keynes
(d) D.H.Robertson
Ans. b
16- Identify the work of ‘T.W.Schultz’:
(a) Transforming Traditional Agriculture
(b) Productivity and Technical Change
(c) Jobs, Poverty and the Green Revolution
(d) Causes of Poverty
Ans. a
17- Who first used the term ‘Quasi-Rent’?
(a) David Ricardo
(b) Alfred Marshal
(c) J.S.Mill
(d) Karl Marx
Ans. b
18- Who introduced the concept of “ Elasticity of
Demand” into economic theory?
(a) Alfred Marshal
(b) Adam Smith
(c) Karl Marx
(d) George Stigler
Ans. a
19- “Capital and Development Planning” is the work
of:
(a) S.Chakravarty
(b) J.S.Mill
(c) A.C.Pigou
(d) F.W.Taussig
Ans. a
20- Who is the author of “Choice of Technique”?
(a) K.N.Raj
(b) Amartiya Sen
(c) A.C.Pigou
(d) Alfred Marshal
Ans. b
21- Who is the author of “Trade Cycle” ?
(a) R.Nurkse
(b) R.C.Mathews
(c) W.A.Lewis
(d) K.N.Raj
Ans. b
22- Which one of the following has been the most
influential work of F.H.Knight?
(a) Freedom and Reform
(b) The Green Revolution
(c) Economic Integration
(d) Risk ,Uncertainty and Profit
Ans. d
23- Identify the author of “ The Social Framework”:
(a) R.G.D.Alien
(b) J.R.Hicks
(c) A.C.Pigou
Ans. b
24- Who first formulated the “Marginal Productivity
Theory of Distribution”?
(a) J.B.Clark
(b) L.Euler
(c) J.A.Schumpeter
(d) Alfred Marshal
Ans. a
25- Which of the following is the work of A.C.Pigou?
(a) Economics of Welfare
(b) Commerce and Trade
(c) Industrial Economics
Ans. a
26- Who is the author of the famous work “Asian
Drama: An Enquiry intro the Causes of Poverty of
Nations?
(a) Irving Fisher
(b) J.B.Clark
(c) J.M.Keynes
(d) Gunnar Myrdal
Ans. d
27- The ‘Cambridge School of Thought’ refers to the
group of English economists who came under the
influence of:
(a) Alfred Marshal
(b) J.M.Keynes
(c) Paul A.Samuelson
(d) A.C.Pigou
Ans. a
28- “The Modern and Neo-Keynsian Theory of
Interest”was presented by:
(a) Gunner Myrdal
(b) A.C.Pigou
(c) J.M.Keynes
(d) J.R.Hicks
Ans. d
29- Who wrote “ Economics of Imperfect Competition”?
(a) E.H.Chamberlin
(b) Joan Robinson
(c) E.A.G.Robinson
(d) J.M.Keynes
Ans. b
30-With which of the following concepts is the name
of J.M.Keynes particularly associated?
(a) Marginal propensity to consume
(b) Marginal propensity to save
(c) Liquidity preference
Ans. d
31- Identify the author of “The Affluent Society”?
(a) Gunnar Myrdal
(b) N.Kaldor
(c) A.C.Pigou
(d) J.K.Galbraith
Ans. d
32- Who wrote “ A Contribution to the Theory of
Trade Cycle”?
(a) N.Kaldor
(b) J.R.Hicks
(c) A.C.Pigou
(d) J.M.Keynes
Ans. b
33- “ The General Theory of Employment, Interest and
Money” is the major work of :
(a) N.Kaldor
(b) Alfred Marshal
(c) J.M.Keynes
(d) J.S.Duesenberry
Ans. c
34- Identify the economist who first developed the
theory of income determination in its modern form:
(a) Paul A.Samuelson
(b) J.M.Keynes
(c) Joan Robinson
(d) Dr.mehboob ul Haq
Ans. b
35-Identify the author of “The Principles of
political Economy and Taxation”:
(a) Alfred Marshal
(b) J.S.Mill
(c) David Ricardo
(d) A.C.Pigou
Ans. c
MICRO
ECONOMICS
UNIT 1: CONSUMER
BEHAVIOUR
1- Utility means:
(a) The want- satisfying power of a
commodity
(b) Usefulness of commodity
(c) Eating of commodity
(d) None of these
Ans. a
2- Utility is:
(a) A subjective concept
(b) An ethical concept
(c) An objective concept
(d) A historical concept
Ans. a
3-When a consumer is satisfied with his spending
pattern, he is said to be in:
(a) Balance stat
(b) Equilibrium
(c) Disequilibrium
(d) Authenticated form
Ans. b
4-Marshallian approach is also known as:
(a) Cardinal approach
(b) Ordinal approach
(c) Consumer approach
(d) Production approach
Ans. a
5- According to classical approach, utility can be:
(a) Ranked
(b) Consumed
(c) Expressed in numbers
(d) Cannot be expressed in numbers
Ans c
6- The utility function u = f(x) is based upon :
(a) Two goods
(b) Few goods
(c) One good
(d) Zero goods
Ans. c
7-According to Marshallian approach, utility:
(a) Can be added
(b) Can be subtracted
(c) Can be multiplied
(d) Can be divided
Ans. a
8-On the total utility curve the economically
relevant range is the portion over which:
(a) The total utility is rising at a declining
rate
(b) The total utility is raising at an
increasing rate
(c) Total utility is maximum
(d) Total utility is declining
Ans. a
9-Marginal utility (MU) always:
(a) Increases
(b) Decreases
(c) Remains constant
(d) None of above
Ans. b
10- Marginal utility means:
(a) Utility derived from the last unit of
production
(b) Utility derived from the last unit of a
commodity which is being consumed
(c) Total utility- Average utility
Ans. b
11- Marginal utility is only meant for:
(a) Half utility
(b) Full utility
(c) Additional utility
(d) Multiplied utility
Ans. c
12-If Marginal Utility (MU) is zero, then total
utility is:
(a) Maximum
(b) Minimum
(c) Infinite
(d) Not measureable
Ans. a
13- The law of Diminishing Marginal Utility implies
that the marginal utility of a good decreases as:
(a) It gets more expensive
(b) A household consumes more of it
(c) Preference changes
(d) A household’s income goes up
Ans. b
14- According to ‘Diamond Water Paradox’ diamonds
are more expensive than water because:
(a) They yield higher total utility
(b) They yield higher marginal utility
(c) They are more useful
Ans. b
15- If money income is given then consumer is in
equilibrium when:
(a) MU < P
(b) MU >P
(c) MU = P
(d) MU = 0
Ans. c
16- Total Utility (TU) curve:
(a) Always rises
(b) Always falls
(c) First falls and then rises
(d) First rises and then falls
Ans. d
17- We can find total utility by:
(a) Multiplying the number of unit by its
marginal utility
(b) Adding up the marginal utility of all units
(c) Multiplying price by number of units
Ans. b
18- The total utility (TU) curve is:
(a) Concave to X-axis
(b) Convex to X-axis
(c) Concave to Y-axis
(d) Convex to Y-axis
Ans. a
19-Marginal Utility (MU) curve is always:
(a) Rising
(b) Falling
(c) Parallel to X-axis
(d) Parallel to Y-axis
Ans. b
20- The falling part of total Utility (TU) curve
shows:
(a) Increasing marginal utility
(b) Decreasing marginal utility
(c) Zero marginal utility
(d) Negative marginal utility
Ans. d
21- The amount of income left over for a consumer in
equilibrium is :
(a) Consumer surplus
(b) Zero
(c) Two rupees
(d) Excess demand
Ans. b
22-The law of demand is most directly a result of:
(a) The law of comparative advantage
(b) The law of diminishing returns
(c) The principle of substitution
(d) Economics of large scale production
(e) The law of increasing costs
Ans. c {Explanation: The law of demand states
negative relationship b/w quantity demanded and
price and forms negative sloped demand curve. One of
the reasons of negative sloped demand curve is the
substitution effect (S.E) which states that as the
price of a commodity raises then consumer decreases
quantity demanded of that commodity and substitutes
it with some other commodity.}
23- The budget constraint can be written as:
(a) X.PX + Y.PY = 1
(b) X.PX + Y.PY < 1
(c) X.PX + Y.PY > 1
(d) X.PX + Y.PY = 0
Ans. a
24- Consumer surplus is the difference between
(a) Price demanded and price paid
(b) Price quoted and price actually paid
(c) Price that a consumer is willing to pay and
the price actually paid
Ans. c
25- We can measure consumer’s surplus with the help
of
(a) TU curve
(b) MU curve
(c) Supply curve
Ans. b
26- Consumer’s Surplus can also be defined as:
(a) Extra price benefits
(b) Shortage of quantity
(c) Surplus of quantity
(d) Difference between actual price and
potential price
Ans. d
27- For a commodity giving large consumer’s surplus,
the demand will be:
(a) Less elastic
(b) More elastic
(c) Unit elastic
(d) Zero elastic
Ans. b
28- The Law of Equi-Marginal Utility refers to:
(a) Marginal utility of commodity X
(b) Marginal utility of commodity Y
(c) Marginal utility per rupee spent on X and Y
commodities
Ans. c
29- Which of the following would be least likely to
cause a consumer to eat less beef?
(a) An increase in the price of beef
(b) An increase in the price of lamb
(c) A reduction in the consumer’s income
(d) A reduction in the price of lamb
Ans. b (Explanation: An increase in the price of
lamb would cause some consumers to eat more beef
because beef and lamb are substitutes)
30- If two goods have same marginal utility for a
consumer then:
(a) He will consume only one of them
(b) He will consume equal quantities of them
(c) He will be willing to pay the same price
for each of them
(d) The total utility gained from each of them
is equal
Ans. c (Explanation: Consumer is in equilibrium when
MUA /PA =MUB /PB , so if MUA = MUB then PA must be
equal to PB )
31- We can write ordinal utility function as:
(a) U = x1 – x2
(b) U = x1 + x2
(c) U = y1 +x1
(d) U = x1.x2
Ans. d
32- If two goods are complements then indifference
curve (IC) will be:
(a) Straight line
(b) Convex to origin
(c) Concave to origin
(d) L–shaped
Ans. d
33- If the marginal utility of apples to a consumer
exceeds that of bananas then the consumer:
(a) Is not in equilibrium
(b) Will not buy any banana
(c) Will buy some banana but less than he buys
of apples
(d) Is willing to pay more for apples than
bananas
Ans. d (Explanation: For equilibrium marginal
utility should be equal to price (MU = P). Thus, if
the marginal utility of apples exceeds that of
bananas then consumer will pay more for apples than
bananas )
34- In case of economic bads, an IC can be :
(a) Sloping downward
(b) Sloping upward
(c) Positively sloped
(d) Negatively sloped
Ans. b
35- If two goods are perfect substitutes then IC
will be:
(a) Concave to the origin
(b) Convex to the origin
Ans. d
36- If a consumer buys a product that costs Rs.3 and
provides an additional 18 units of satisfaction,
then for this purchase:
(a) Total utility will increase by 6 units
(b) The marginal utility per rupee is 6
(c) The consumer will buy more because marginal
utility is positive
(d) The consumer obtained an extra54 units
Ans. b (Explanation: We know that for consumer
equilibrium MUx / Px =MU of per rupee. So, 18/3 = 6)
37- The ordinal approach was presented by:
(a) Marshal
(b) J.R.Hicks
(c) Adam smith
(d) Rostow
Ans. b
38- When the consumer is in equilibrium not only his
income is fully spent, but the ratio of marginal
utility and price is:
(a) Increased
(b) Equalized
(c) Prominent
(d) Zero
Ans. b (Explanation: in consumer equilibrium the
ratios of marginal utilities of commodities and the
prices are equalized .i.e, MUx /Px = MUy /Py = MUz
/Pz)
39-Indifference curves are downward sloping and are
drawn bowed toward the origin (convex to the origin)
implying:
(a) Consumers prefer to have less satisfaction
than more of both commodities
(b) As more and more of one commodity is
obtained, less and less of the other must be
given up to keep satisfaction constant
(c) The total satisfaction obtained along an
indifference curve decreases at an increasing
rate
Ans. b {Explanation: As the consumer substitute
commodity X for commodity Y, the marginal rate of
substitution (MRS) diminishes of X for Y along an
indifference curve. It means as more and more of X
commodity is obtained, less and less of the Y
commodity must be given up to keep satisfaction
same. That is why the indifference curve is convex
to the origin also called bowed to the origin or
bowed inward.}
40-An indifference curve shows the bundles of two
goods among which a consumer remains:
(a) Indifferent
(b) Different
(c) In equilibrium
(d) Dominant
Ans. a
41-An indifferent curve shows:
(a) That how many utils are obtained from
consuming different bundles of commodities
(b) Different collections of two commodities
the consumer considers to be of equal value
(c) That if price increases there will be an
increases in demand
Ans. b
42- Moving along the indifference curve leaves the
consumer:
(a) Better off
(b) Worse off
(c) In equilibrium
(d) Neither better off nor Worse off
Ans. d
43- The Law of Equi-Marginal Utility states:
(a) MUx x Px = MUy x Py = MUz x Pz
(b) MUx / Px = MUy / Py = MUz / Pz = MU per
income rupee
(c) MUx /Px > MUy / Py > MUz /Pz
(d) MUx / Px + MUy / Py + MUz / Pz
Ans. b
44-According to law of Equi-Marginal Utility when
price of commodity falls then we bought:
(a) More units
(b) Less units
(c) Same units
(d) Zero units
Ans. a
45-Cardinal approach includes arranging:
(a) The different combinations of X and Y
higher and lower without actually measuring the
difference of utility between them
(b) The different combinations of X and Y
higher and lower and measuring the difference of
utility between them
(c) Different combination of X, Y and Z
(d) None of above
Ans. b
46-Ordinal approach includes arranging:
(a) The different combinations of X and Y in
any way the consumer wants
(b) The different combinations of X and Y
higher and lower and measuring the difference of
utility between them
(c) The different combinations of X and Y
higher and lower and not measuring the
difference of utility between them
(d) None of above
Ans. c
47-The budget line is described by each of the
following except:
(a) Prices of products are assumed to be fixed
(b) The consumer need not to spend all his
income
(c) Consumer income is assumed to be fixed
(d) The slope represents relative prices
Ans. b
48- When the income of consumer increases then
budget line will:
(a) Get steeper
(b) Shift parallel to right
(c) To get flatter
(d) To shift upward
Ans. b {Shown in below diagram}
The effect on the demand for a product as a result

of an increase in income can also be analyzed using
indifference curve analysis. An increase in income
shifts the budget line out parallel. The relative
prices of the products have not changed so the
gradient of the budget line is the same; income has
increased so the budget line has shifted outwards as
more of the products can be purchased. The new
combinations of products that maximize utility can
be identified; from this the impact of income
changes on the demand for a product can be analyzed.
In the diagram above on the left B is a normal good.
An increase in income increases the quantity
demanded.}
49-The slope of indifference curve shows:
(a) Income level
(b) Satisfaction level
(c) Marginal rate of substitution
(d) Demand level
Ans. c
50-If the price of a product falls which of the
following would occur?
(a) Indifference curves shift down
(b) Budget line shifts down
(c) Indifference curve shift up
(d) Budget line pivots
Ans. d
If the price of productB falls the budget line now

pivots. The consumer now maximises utility
consuming Q3 of product A and Q4 of product B. The
fall in the price of product B has led to an
increase in quantity demanded.}
51- Indifference curves reflect:
(a) Preferences
(b) Income
(c) Prices
(d) Consumption
Ans. a
52- The advantage of using indifference curves
rather than marginal utilities is:
(a) We do not need to attach ‘util’ values to
consumption
(b) Consumers can attain higher utility
(c) It takes into account how much income the
household has
(d) We can determine how much of one good the
consumer is willing to sacrifice in order to
consume one more unit of another
Ans. a
53- MRSxy measures:
(a) The amount of Y a consumer is willing to
give up to obtain one additional unit of X and
still remain on the same indifference curve
(b) The amount of X a consumer is willing to
give up to obtain one additional unit of Y and
still remain on the same indifference curve
(c) The amount of Y a consumer is willing to
give up to obtain one additional unit of X and
move to a higher indifference curve
(d) The amount of X a consumer is willing to
give up to obtain one additional unit of Y and
move to a higher indifference curve
Ans. b
54-Moving along an indifference curve leaves the
consumer:
(a) Better off
(b) Worse off
(c) Neither better nor worse off
Ans. c{Explanation: Moving along the same
indifferent curve, the consumer gets equal level of
satisfaction so moving from one point to another on
the same indifferent curve leaves it neither better
nor worse off.}
55- On an indifference map higher indifference
curves show:
(a) The same level of price
(b) The same level of satisfaction
(c) The higher level of satisfaction
(d) The lower level of satisfaction
Ans. c
56- An increase in the price of the good measured on
the horizontal axis causes:
(a) The budget line to get steeper
(b) The budget line to shift parallel to the
right
(c) The indifference curve to shift up
(d) The budget line to get flatter
Ans. a
57- An indifference curve normally slopes downward
from:
(a) Left to right
(b) Right to left
(c) Both of them
(d) None of them
Ans. a
58- In case of budget line, we get pairs of two
goods where consumer’s income is:
(a) Fully spent
(b) Half spent
(c) Partially spent
(d) Correctly spent
Ans. a
59- The slope of budget line shows the price ratios
of:
(a) Many goods
(b) Few goods
(c) Two goods
(d) Three goods
Ans. c
60- If the commodities X and Y are perfect
complements then:
(a) MRSxy will be zero
(b) MRSyx will be zero
(c) MRSxy and MRSyx both will be zero
Ans. c
61- If the commodities X and Y are perfect
substitutes then:
(a) MRSxy will be increasing
(b) MRSxy will be decreasing
(c) MRSxy will be constant
Ans. c
62- Which of the following is not a property of
indifference curve?
(a) Convex to the origin
(b) Slopes downwards to the right
(c) Parallel to each other
(d) Cannot intersect each other
Ans. c
63- A budget line shows:
(a) Price of commodity X in terms of Y
(b) Price of commodity Y in term of X
(c) Income of the consumer
Ans. d
64- A budget line shows:
(a) Quantities of commodity X which a consumer
could buy with no amount of Y
(b) Quantities of commodity Y which a consumer
could buy with no amount of X
(c) The different combinations of X and Y that
the consumer could buy
Ans. d
65- When a consumer is in equilibrium then slope of
indifference curve is:
(a) Equal to the slope of budget line
(b) Greater than the slope of budget line
(c) Smaller than the slope of budget line
(d) Parallel to the slope of budget line
Ans. a
66- The income consumption curve (ICC) is the locus
of points of consumer equilibrium resulting:
(a) Only when the price of commodity X changes
(b) Only when the price of commodity Y changes
(c) Only when the consumer’s income is varied
Ans. c
67- The price consumption curve (PCC) for commodity
X is the locus of points of consumer equilibrium
resulting when:
(a) The price of only Y is varied
(b) The price of only X is varied
(c) The prices of both Y and X are varied
Ans. b
68- The Lambda or Langrange Multiplier is a:
(a) Analyst
(b) Catalyst
(c) Pessimist
(d) Optimist
Ans. b
69- In case of income effect, the level of
consumer’s satisfaction rises when:
(a) Income rises
(b) Income falls
(c) Sales rises
(d) Price falls
Ans. a
70-If the commodity is inferior then the increase in
income of the consumer results in:
(a) More purchase
(b) Less purchase
(c) Same purchase
Ans. b
71- If the commodity is normal then Income Effect
(I.E) is:
(a) Negative
(b) Positive
(c) Zero
(d) Infinite
Ans. b
72- The Substitution Effect (S.E) is always:
(a) Negative
(b) Zero
(c) Positive
(d) Infinite
Ans. a
73- If the commodity is normal then fall in price
will result in:
(a) Increase the quantity demanded
(b) Fixed the quantity demanded
(c) Decrease the quantity demanded
Ans. a
74- If the commodity is inferior then Income Effect
(I.E) is:
(a) Negative
(b) Positive
(c) Zero
(d) Infinite
Ans. a
75- If the commodity is inferior then the Income
Effect (I.E) and the Substitution Effect (S.E):
(a) Both move together and reinforce each other
(b) One moves and the other remains constant
(c) Move in the opposite direction and
neutralize each other
(d) Both remain constant
Ans. c {Explanation: If a good is inferior,
substitution effect and income effect move in
opposite directions. The combined effect is
indeterminate. When price rises, the substitution
effect leads to a drop in quantity demanded, but the
income effect is opposite. When price falls, the
substitution effect leads to a drop in quantity
demanded, but the income effect is opposite.}
76- If the commodity is normal then the Income
Effect (I.E) and the Substitution Effect (S.E):
(a) Both move together and reinforce each other
(b) One moves and the other remains constant
(c) Move in the opposite direction and
neutralize each other
(d) Both remain constant
Ans. A {Explanation: If the commodity is normal then
the Income Effect (I.E) and the Substitution Effect
(S.E) both moves together and reinforce each
other.When price falls, both effects lead to a rise
in quantity demanded and when price rises, both
effects lead to a drop in quantity demanded.}
77- In an indifference curve diagram, when the price
of a product increases, the decline in quantity
demanded that results if consumer’s utility or
welfare is kept constant is referred to as the:
(a) Utility effect
(b) Budget line effect
(c) Substitution effect
(d) Income effect
Ans. c {Explanation: The substitution effect of a
price change measures the change in consumer
purchases arising only from a change in relative
prices, holding utility or welfare constant.}
78- In substitution effect, we:
(a) Move to another indifference curve
(b) Move along given indifference curve
(c) Move to a higher indifference curve
(d) Move to a lower indifference curve
Ans. b
79- In income effect, we:
(a) Move to another indifference curve
(b) Move along given indifference curve
(c) Move to lower indifference curve
(d) Move to upper indifference curve
Ans. a
80- If the commodity is inferior then:
(a) Income effect is positive but substitution
effect is negative
(b) Income effect is negative but substitution
effect is positive
(c) Both income effect and substitution effect
are negative
(d) Both income effect and substitution effect
are positive
Ans. c
81- Engel curves shows that:
(a) How commodity’s consumption rate differs at
various levels of price
(b) How commodity’s consumption rate differs at
various levels of satisfaction
(c) How commodity’s consumption rate differs at
various levels of income
(d) How commodity’s consumption rate differs at
various levels of taxes
Ans. c
82- Price effect occurs on the higher IC in case of:
(a) Slutsky approach
(b) Hicksian approach
(c) Marshallian approach
Ans. a
83- If the commodity is normal then price effect is:
(a) Negative
(b) Inverse
(c) Positive
(d) Both (a) and(b)
Ans. d
84- An inferior good/ commodity is inferior for:
(a) Every consumer
(b) Most consumers
(c) All consumers
(d) Some consumers and not for others
Ans. d
85- We can obtain consumer’s demand curve from:
(a) Income Consumption Curve (ICC)
(b) Engel’s Curve
(c) Price Consumption Curve (PCC)
(d) Production Possibility Curve (PPC)
Ans. c
86- Necessary condition for consumer equilibrium is:
(a) fx/Px =fy /Py = λ
(b) fx /Py =fy/Py = λ
(c) fx/Py =fy/Py > λ
(d) fx/Py = fy/Py < λ
Ans. a
87- The relationship between price effect, income
effect and substitution effect is:
(a) P.E = S.E + I.E
(b) S.E = P.E +I.E
(c) I.E = P.E +S.E
(d) S.E = P.E +2I.E
Ans. a
88-In case of giffin good, price effect is:
(a) Positive
(b) Negative
(c) Neutral
(d) Infinite
Ans. a
89- If the prices of goods rise then:
(a) The real income of consumer falls
(b) The real income of consumer rises
(c) The real income of a consumer remains
constant
(d) The real income of consumer becomes zero
Ans. a
90- The consumer is in equilibrium at the where:
(a) Budget line and indifference curve
intersect each other
(b) Budget line and indifference curve are
tangent to each other
(c) Budget line and indifference curve are
opposite to each other
(d) Budget line and indifference curve are
parallel to each other
Ans. b
91- Other things remaining the same, when a
consumer’s income increases his equilibrium point
moves to:
(a) A lower indifference curve
(b) A lower PPC curve
(c) Remains on same indifference curve
(d) A higher indifference curve
Ans. d
92- On all points of budget (price) line:
(a) Total expenditures increases
(b) Total expenditures decreases
(c) Total expenditures are zero
(d) Total expenditures remain same
Ans. d
93-Indifference curve approach (ordinal approach) is
superior to utility approach (cardinal approach)
because:
(a) In ordinal approach we can separate the
income effect from the substitution effect of a
price change
(b) In ordinal approach we can study the
consumer behavior more closely
(c) In ordinal approach the consumer is assumed
more rational
(d) In ordinal approach the consumer has more
income
Ans. a
94- When a consumer reached at the point of
saturation then marginal utility (MU) is:
(a) Negative
(b) One
(c) Positive
(d) Zero
Ans. d
95- After reaching the saturation point consumption
of additional units of the commodity cause:
(a) Total utility to fall and marginal utility
to increase
(b) Total utility and marginal utility both to
increase
(c) Total utility to fall and marginal utility
to become negative
(d) Total utility to become negative and
marginal utility to fall
Ans. c
96- While buying two goods X and Y with unequal
prices, to maximize total utility from his income, a
consumer should get:
(a) Equal MU from both commodities X and Y
(b) More MU from commodity X than from
commodity Y
(c) More MU from commodity Y than from
commodity X
(d) Equal marginal utility from the last rupee
spent on commodity X and commodity Y
Ans. d
97-According to the principle of substitution?
(a) Many goods have no effective substitutes
(b) Nearly all goods have substitutes
(c) The prices of substitute goods must be the
same
(d) Buyers will stop buying a good if its price
rises
Ans. b
98- Which of the following statement is wrong?

(a) A utility function refers to a particular
individual and reflects the tastes of that
individual
(b) When the tastes of an individual changes,
his utility function changes(shifts)
(c) Different individuals usually have
different tastes and thus have different utility
functions
(d) Different individuals have same tastes and
thus have the same utility function
Ans. d
99-Which of the following is called Gossen’s first
law?
(a) Law of production
(b) The Law of Equi-Marginal Utility
(c) The Law of Diminishing Marginal Utility
(d) Law of Variable Proportions
Ans. c {Explanation: Gossen's laws, named for
Hermann Heinrich Gossen (1810 – 1858), are three
ostensible laws of economics:
Gossen's First Law is the “law” of
diminishing marginal utility: that marginal
utilities are diminishing across the ranges
relevant to decision-making.
Gossen's Second Law, which presumes that
utility is at least weakly quantified, is that in
equilibrium an agent will allocate expenditures
so that the ratio of marginal utility to price
(marginal cost of acquisition) is equal across
all goods and services.
where
U is utility
xi is quantity of the i-th good or service
pi is the price of the i-th good or service
Gossen's Third Law is that scarcity is a
precondition for economic value.
100- Law of Diminishing Marginal Utility is

practically untrue because:
(a) It is given to a lot of criticism
(b) It is too difficult to be explained
(c) It is based on assumptions which are unreal
(d) Economists do not agree on this
Ans. c
101- According to Marshal, the Law of Diminishing
Marginal Utility:
(a) Applies on both money and other commodities
(b) Does not apply on money
(c) Does not apply on bank money but applies on
cash money
(d) Applies on all the commodities except on
money
Ans. a
102- If the marginal utility is divided by the price
of the commodity then it is called:
(a) Real Marginal Utility
(b) Gross Marginal Utility
(c) Weighted Marginal Utility
(d) Money Marginal Utility
Ans. c
103- Indifference curve represents:
(a) Only two commodities
(b) Only three commodities
(c) More than three commodities
(d) Any number of commodities
Ans. a
104- The indifference curve technique:
(a) Helps in separating the income effect and
the substitution effect
(b) Does not help in separating the two effects
(c) Mixed up the two effects
Ans. a
105- The substitution effect works to encourage a
consumer to purchase more of a product when the
price of that good is falling because:
(a) The consumer’s real income has increased
(b) The consumer’s real income has decreased
(c) The product is now relatively less
expensive than before
(d) Other products are now less expensive than
before
Ans. c
106- If the price of product A decreases and in the
result the demand for product B increases then we
can say that:
(a) A and B are substitute goods
(b) A and B are complementary goods
(c) A is an inferior good
(d) B is an inferior good
Ans. b
107- If the price of product increases and in the
result the demand for product B also increases then:
(a) A and B are substitute goods
(b) A and B are complementary goods
(c) A is inferior to B
(d) A is superior to B
Ans. a
108- In the case of a normal goods, the income
effect:
(a) Is always equal to the substitution effect
(b) Completely offsets the substitution effect
(c) Partially offsets the substitution effect
(d) Reinforces the substitution effect
Ans. d
109- In the case of an inferior good, the income
effect:
(a) Partially offsets the substitution effect
(b) Reinforces the substitution effect
(c) Is equal to the substitution effect
(d) More than offsets the substitution effect
Ans. a
110- In the case of a giffen good, the income
effect:
(a) Is equal to the substitution effect
(b) More than offsets the substitution effect
(c) Reinforces the substitution effect
(d) Only partially offsets the substitution
effect
Ans. b
111- Total utility:
(a) Diminishes with increased consumption
(b) Reflects the overall level of satisfaction
of the consumer
(c) Is directly related to the price the
consumer is willing to pay for a good or service
(d) Is independent of price changes
Ans. b
112- If two households have identical preferences
but different incomes then:
(a) They must consume the same amounts of all
goods
(b) The wealthier one will have lower marginal
utility for most goods
(c) The wealthier one will have higher marginal
utility for most goods
(d) They will enjoy the same level of utility
Ans. b
113- If the price of a product falls then quantity
demanded tends to increase ceteris paribus because:
(a) The MU/P ratio has decreased
(b) Of the income and substitution effects
(c) Consumers tend to feel poorer when prices
fall
(d) When price falls the demand curve shifts
right
Ans. b{Explanation: when price of a product falls
then consumer substitutes this product for others
due to substitution effect and increase purchase
generally since his real income (purchasing power)
will increase due to income effect}
114- The market demand shedule is determined by:
(a) Adding up the prices consumers are wiling
to pay at each quantity demanded
(b) Multiply each consumer’s demand curve by
the total number of consumers in the market
(c) Adding the quantities denmanded by all
consumers at each alternative price
Ans. c
115- Total utility and price are:
(a) Directly related
(b) Unrelated
(c) Closely related
(d) Negatively related
Ans. b
116- Utility is a function of:
(a) Price
(b) Quantity
(c) Supply
(d) Demand
Ans. b
117- The total utility is gained by consuming:
(a) The last unit of a good
(b) All the units of a good
(c) The first unit of a good
(d) The average unit of a good
Ans. b
118- Marginal utility equals:
(a) Slope of total utility curve
(b) Slope of average utility curve
(c) Slope of marginal utility curve
(d) Slope of total revenue curve
Ans. a
119- An indifference curve slopes down towards right
since more of one commodity and less of another
result in:
(a) Same satisfaction
(b) Greater satisfaction
(c) Maximum satisfaction
(d) Decreasing expenditure
Ans. a
120- The budget-line is also known as the:
(a) Iso-utility curve
(b) Production possibility line
(c) Isoquant
(d) Consumption possibility line
Ans. d
121- Substitution effect means a consumer
(a) Shifts away from the commodity the price of
which has fallen
(b) Shifts in favour of a commodity the price
of which has risen
(c) Shifts away from a commodity the price of
which has risen, in favour of a commodity the
price of which has fallen
Ans. c
122- Income effect operates through an increase
(a) In nominal income
(b) In money income
(c) In wages
(d) In real income because of the fall of price
of a commodity
Ans. d
123- In substitution effect and income effect:
(a) The substitution effect is more certain
(b) The income effect is more certain
(c) The substitution effect is uncertain
(d) The income effect is always positive
Ans. a
1. Meaning of Decomposition of Price

Effect
The price effect is viewed as a combination of

income and substitution effects. The substitution
effect always works in one direction. A consumer is
always induced to buy more units of a cheaper good.
Income effect on the other hand could be positive,
negative or zero in case of normal, inferior
(including Giffen goods) or neutral goods
respectively. Refer chart.1 of the section on income
effect.
Therefore, the price effect, as the final
outcome of the substitution and income
effects, depends on their relative direction
and magnitude. This is summarized in Chart.1.
The substitution and income effects work in

the same direction when good X is a normal
good. The final price effect is then
positive. The consumer tends to increase
consumption of Good X with fall in its price.
When good X is an inferior good, then the
substitution and income effects work in
opposite directions. When price of good X
(Px)falls, the consumer tends to increase
consumption of good X as a result of
substitution effect. However, income effect
here is negative. The price effect then
depends on relative magnitude of the two
effects. The final price effect is positive
for inferior goods, as change in the
consumption of good X as a result of the
substitution effect is greater than the
income effect.
When good X is a Giffen good then also
substitution and income effects work in
opposite directions. When price of good X
(Px)falls, the consumer tends to increase
consumption of good X as a result of
substitution effect. However, income effect
here is negative. Further, the magnitude of
change in units of good X on account of the
substitution effect is less than the income
effect. The price effect, the final outcome,
is therefore negative.
We are now going to study decomposition of

the price effect into income and substitution
effects with the help of indifference curves.
2. Decomposition of Price Effect: Normal

Goods
We use the method of compensatory variation in money
income in order to decompose the price effect into
the income and substitution effects. This is shown
in Figure.1. It starts with the initial optimal
consumption combination attained at point e
Figure.1 Decomposition of Price Effect:

Normal Goods
When the price of good X falls, the consumer

buys OX1 units of good X at the optimal
consumption combination e1 on the budget
constraint PL1 and a higher indifference
curve U1. The price consumption curve (PCC)
obtained by joining points e and e1 rises
upwards.
This price effect can be decomposed into the

substitution and income effects. This is done
by using the method of compensatory variation
in consumer's money income. Suppose, we
reduce consumer's money income at optimal
consumption combination e1 by the amount that
is just sufficient to bring her/him back on
the initial indifference curve U. This will
lead to a downward shift in the budget
constraint as shown by budget constraint AB
which is parallel to budget constraint PL1.
Commodity X is relatively cheaper on budget
constraint AB than on PL. e2 is the optimal
consumption combination at which the consumer
is buying OX2 units of good X. It shows
consumer's preference for cheaper good X even
after reduction in her/his money income.
Suppose the consumer is given back the money

income that was reduced under compensatory
variation in her/his money income. The
consumer then shifts to optimal consumption
combination e1. Thus movement from e2 to
e1 represents income effect. Income effect
here is positive as good X is a normal good.
Thus, price effect is the net total of
substitution effect and income effect.
Consumer's movement from optimal consumption
combination e to e1, as a result of price
effect, can be decomposed into two effects.
First the substitution effect, i.e.,
consumer's movement from e to e2 and then the
income effect, i.e., consumer's movement from
optimal consumption combination e2 to e1.
Thus,
Price Effect = Substitution Effect + Income

Effect
In terms of optimal consumption combination:
e to e1 = e to e2 + e2 e1
In terms of units of good X purchased:
XX1 = XX2 + X2 X1
Here, as shown in chart.1, the substitution
and income effects are working in same
direction. Good X becomes relatively cheaper
with fall in its price and the consumer tends
to increase its consumption. The income
effect is also positive. The consumer tends
to increase consumption of good as it is a
normal good. This is shown by the Income
Consumption Curve (ICC) which is rising
upwards The final price effect is, therefore,
positive. The consumer finally tends to
increase consumption of good X from OX to
OX1 with a fall in its price (Px).
3. Decomposition of Price Effect: Inferior
Goods
Decomposition of the price effect into substitution

and income effects in case of an inferior good is
shown in Figure.2 in which good X is an inferior
good. It starts with the initial optimal consumption
combination attained at point e
Figure.2 Decomposition of Price Effect: Inferior

Goods
When the price of good X falls, the consumer buys
OX1 units of good X at the optimal consumption
combination e1 on the budget constraint PL1 and a
higher indifference curve U1. The price consumption
curve (PCC) obtained by joining points e and
e1 rises upwards. It shows positive price effect.
When price of good X falls the consumer increases
consumption of good X from OX to OX1.
Same as section 2, this price effect can be
decomposed into the substitution and income effects
by using the method of compensatory variation in
consumer's money income. Suppose, we reduce
consumer's money income at optimal consumption
combination point e1 by the amount that is just
sufficient to bring her/him back on the initial
indifference curve U. This will lead to a downward
shift in the budget constraint as shown by budget
constraint AB which is parallel to budget constraint
PL1. Commodity X is relatively cheaper on budget
constraint AB than on PL. e2 is the optimal
consumption combination at which the consumer is
buying OX2 units of good X. It shows consumer's
preference for cheaper good X even after reduction
in her/his money income.
Suppose the consumer is given back the money income
that was reduced under compensatory variation in
her/his money income. The consumer then shifts to
optimal consumption combination e1. Thus movement
from e2 to e1 represents income effect. Income
effect here is negative as good X is an inferior
good.
Thus, price effect is the net total of substitution
effect and income effect. Consumer's movement from
optimal consumption combination e to e1, as a result
of price effect, can be decomposed into two effects.
First the substitution effect, i.e., consumer's
movement from e to e2 and then the income effect,
i.e., consumer's movement from optimal consumption
combination e2 to e1. Thus,
Price Effect = Substitution Effect + Income Effect
XX1 = XX2 + X2 X1
Here, as shown in chart.1, the substitution and
income effects are working in opposite direction.
Good X becomes relatively cheaper with fall in its
price and the consumer tends to increase its
consumption. However the income effect is negative.
The consumer tends to reduce consumption of good X
as it is an inferior good. This is shown by the
Income Consumption Curve (ICC) which is rising
upwards but bending backwards. The final price
effect is, however, positive as the magnitude of
substitution effect is greater than the income
effect. The consumer finally tends to increase
consumption of good X from OX to OX1 with a fall in
its price (Px).
4. Decomposition of Price Effect: Giffen

Goods
Decomposition of the price effect into substitution

and income effects in case of a Giffen good is shown
in Figure.3 in which good X is a Giffen good. It
starts with the initial optimal consumption
combination attained at point e
Figure.3 Decomposition of Price Effect: Giffen Goods

When the price of good X falls, the consumer buys
OX1 units of good X at the optimal consumption
combination e1 on the budget constraint PL1 and a
higher indifference curve U1. The price consumption
curve (PCC) obtained by joining points e and
e1 rises upwards but bending backwards towards Y-
axis. It shows negative price effect. When price of
good X falls the consumer also reduces consumption
of good X from OX to OX1.
Same as above, this price effect can be decomposed
into the substitution and income effects by using
the method of compensatory variation in consumer's
money income. Suppose, we reduce consumer's money
income at optimal consumption combination point
e1 by the amount that is just sufficient to bring
her/him back on the initial indifference curve U.
This will lead to a downward shift in the budget
constraint as shown by budget constraint AB which is
parallel to budget constraint PL1. Commodity X is
relatively cheaper on budget constraint AB than on
PL. e2 is the optimal consumption combination at
which the consumer is buying OX2 units of good X. It
shows consumer's preference for cheaper good X even
after reduction in her/his money income.
Suppose the consumer is given back the money income
that was reduced under compensatory variation in
her/his money income. The consumer then shifts to
optimal consumption combination e1. Thus movement
from e2 to e1 represents income effect. Income
effect here is negative as good X is a Giffen good.
Thus, price effect is the net total of substitution
effect and income effect. Consumer's movement from
optimal consumption combination e to e1, as a result
of price effect, can be decomposed into two effects.
First the substitution effect, i.e., consumer's
movement from e to e2 and then the income effect,
i.e., consumer's movement from optimal consumption
combination e2 to e1. Thus,
Price Effect = Substitution Effect + Income Effect
XX1 = XX2 + X2 X1
Here, as shown in chart.1, the substitution and
income effects are working in opposite direction.
Good X becomes relatively cheaper with fall in its
price and the consumer tends to increase its
consumption. However the income effect is negative.
The consumer tends to reduce consumption of good X
as it is an inferior good. This is shown by the
Income Consumption Curve (ICC) which is rising
upwards but bending backwards. The final price
effect is also negative as the magnitude of
substitution effect is less than the income effect.
The consumer finally tends to reduce consumption of
good X from OX to OX1 with a fall in its price (Px).
UNIT 2: DEMAND, SUPPLY & ELASTICITY
1-Demand is consumer’s:
(a) Ability to get a commodity
(b) Willingness to get a commodity
(c) Willingness and ability to get a commodity
(d) Desire for a commodity
Ans. c
2-An individual consumer’s demand is not determined
by:
(a) Price of the commodity
(b) Price of the substitutes
(c) His household income
(d) Size of country’s population
Ans. d
3-Income distribution effects:
(a) The price of complements
(b) The price of substitutes
(c) The market demand for commodities
(d) The individual’s scale of performances
Ans. c
4-A demand schedule is shown as:
(a) A function of price alone
(b) A result of change in tastes
(c) A result of increase in the size of the
family
Ans. a
5- A typical demand curve cannot be:
(a) Convex to the origin
(b) Concave to the origin
(c) A straight line
(d) Rising upwards to the right
Ans. d
6-Normally when price per unit of time falls:
(a) Quantity demanded increases
(b) Quantity demanded decreases
(c) Quantity demanded remains constant
(d) Quantity demanded becomes zero
Ans. a
7- A demand curve is not related to:
(a) The price of the commodity
(b) The time period
(c) The price of substitutes
(d) Any of the above
Ans. c
8- ‘Ceteris paribus’ clause in the law of demand
means:
(a) The price of substitute does not change
(b) The taste of the consumer does not change
(c) The income of the consumer does not change
Ans. d
9-Change in quantity demanded (expansion and
contraction of demand) is:
(a) Due to change in price while other factors
remain constant
(b) Due to change in factors other than price
(c) Both a and b
Ans. a {Explanation: When there is change in demand
due to change in price, while other factors remain
constant, then it is a case of change in quantity
demand . The cases of expansion and contraction of
demand are indicating the change in quantity
demanded, here movement is along the demand curve. }
10- Change in demand (rise and fall of demand) is:
(a) Due to change in price while other factors
remain constant
(b) Due to change in factors other than price
(c) Both a and b
Ans. b {Explanation: When there is change in demand
due to change in any factor other than price like
income, fashion, weather etc. then it is the case of
change in demand. The cases of increase and decrease
in demand or rise and fall in demand are explaining
the case of change in demand. Here demand curve
shifts right or left.}
11- Increase in demand occurs when:
(a) The price falls and the demand also falls
down
(b) The price increases but demand falls down
(c) The price increases the demand remains
constant and when the price remains constant the
demand goes up
(d) The price remains constant but demand falls
Ans. c
12- When there is decrease in demand the demand
curve:
(a) Moves (shifts) towards the axis
(b) Moves (shifts) away from the axis
(c) Remains unchanged
Ans. a
13- Contraction in demand occurs when:
(a) Price increases and demand decreases
(b) Price increases but demand also increases
(c) Price remains constant but demand falls
down
(d) Price falls down but demand remains
constant
Ans. a
14- When the law of demand operates the demand
curve:
(a) Slopes downward
(b) Slopes upward
(c) Becomes horizontal
(d) Becomes vertical
Ans. a
15-If, at the prevailing price, more of a good is
desired than is available for sale:
(a) The price is below equilibrium
(b) The price is at equilibrium
(c) The price must fall
(d) We cannot tell anything about the price
Ans. a
16- To calculate the elasticity of demand, which of
the following formula is used?:
(a) Percentage change in demand
Original demand
(b) Proportionate change in demand
Proportionate change in price
(c) Change in demand
Change in price
Ans. b
17-If the demand curve is inelastic then:
(a) It may be nearly vertical
(b) Quantity demanded is very sensitive to
income
(c) Demand is hardly affected by income
(d) Close substitutes for the good are abundant
Ans. a
18-The coefficient of the price elasticity of demand
is computed as the absolute value of the percentage
change in quantity demanded divided by:
(a) The change in price
(b) The change in supply
(c) The percentage change in supply
(d) The percentage change in price
Ans. d {Explanation: Price elasticity of demand
(PED) is a measure of responsiveness of the quantity
of a good demanded to changes in its price. The
formula for the coefficient of price elasticity of
demand for a good is
Ed = % change in quantity demanded
% change in price
19- Elasticity of demand is equal to unity while
marginal revenue is:
(a) Positive
(b) Zero
(c) Negative
(d) Indeterminate
Ans. b
20- Which of the following formula determine the
income elasticity of demand?:
(a) Proportionate change in demand
Proportionate change in price
(b) Proportional change in the purchase of Y
Proportional change in the price of X
(c) Proportionate change in demand
Proportionate change in income
Ans. c
21- If the demand curve remains unchanged and supply
increases, the price will:
(a) Rise
(b) Fall
(c) Remain the same
Ans. b
22- If the increase in demand is more than the
increase in supply, the price will:
(a) Rise
(b) Fall
(c) Remain the same
Ans. a
23- A market demand curve presumes that:
(a) All consumers are alike
(b) Incomes of all consumers is the same
(c) Tastes of all consumers are the same
(d) Consumers differ in taste, incomes and
other matters
Ans. d
24-‘Change in quantity demanded’ refers to:
(a) Upward shift of the demand curve
(b) Downward shift of the demand curve
(c) Movement on the same demand curve
Ans. c (Explanation: Change in quantity demanded of
a commodity is always due to change in price of that
commodity)
25- ‘Change in demand’ refers to:
(a) Movement on the same demand curve
(b) Upward shift of the demand curve
(c) Downward shift of the demand curve
(d) Upward or downward shift of the demand
curve
Ans. d( Explanation: Change in demand of a commodity
is always due to the factors other than price like
change in taste of consumer, change in the price of
substitute, change in weather, population , etc.)
26-‘Contraction of demand’ means:
(a) Less quantity demanded at the same price
(b) Less quantity demanded at a higher price
(c) Less quantity demanded at a lower price
Ans. b
27- ‘Extension (expansion) of demand’ means:
(a) More quantity demanded at a lower price
(b) More quantity demanded at a higher price
(c) More quantity demanded at the same price
Ans. a
28- If regardless of changes in its price, the
quantity demanded of a commodity remains unchanged,
then the demand curve for the commodity will be:
(a) Horizontal
(b) Vertical
Ans. b
29-If both demand and supply were to increase then:
(a) Quantity exchanged would fall and price
would rise
(b) Quantity exchanged and price would both
fall
(c) Quantity exchanged would rise and price
might rise or fall
(d) Quantity exchanged and price would both
rise
Ans. c {Explanation: If both demand and supply
increases, then both curves shift to the right, and
quantity exchanged surely increases, but price may
rise or fall depending on which curve shifted
further.}
30-If demand increased and supply decreased then:
(a) Quantity exchanged might rise or fall and
price would rise
(b) Quantity exchanged would rise and price
would fall
(c) Quantity exchanged would rise and price
might rise or fall
(d) Both quantities exchanged and price would
rise
Ans. a {Explanation: If demand increases and supply
decreases, then both curves will shift in the upward
direction. Price will surely rise, but quantity may
increase or decrease.}
31-The demand curve of ostentation goods (Veblen
goods) will be:
(a) Negatively sloped
(b) Positively sloped
Ans. b (Explanation: Veblen Goods ►People buy some
goods for their status value. these goods are called
‘goods of ostentation or Veblen goods’ i.e.
perfumes, fast cars, etc. The more expensive the
goods are, the more people will desire them and
therefore there will be upward slopping demand
curve)
32- When income of the consumer increases then
demand curve of an inferior good:
(a) Shifts rightward
(b) Shifts leftward
(c) Does not shift
Ans. b (Explanation: Inferior good is a good that
decreases in demand when consumer income raises,
i.e. cheaper cars. An increase in income causes a
decrease in demand for inferior good so demand curve
shifts leftwards and vice versa.)
33- The demand curve of giffen goods will be:
(b) Positively sloped
Ans. b {Explanation: A special type of a highly
inferior good may exist known as giffen good. When
the price of a giffen good increases then the demand
for that good also increases and so demand curve
will be upward sloping. Although, there is no exact
exmaple is exist of giffen good but according to Mr.
Giffen when price of cheap bread (giffen good here)
rises then poor people who used to eat cheap bread
and expensive meat will now no longer afford to
supplement cheap bread with better food (meat), so
they decrease the consumption of meat which is more
expensive and increase the demand of bread which is
still the cheapest food which they can get}
34- Extension (expansion) and contraction of demand
are result of:
(a) Change in consumer’s income
(b) Change in consumer’s tastes
(c) Change in price
Ans. c
35- In respect of which of the following category of
goods is consumer’s surplus highest?
(a) Giffen goods
(b) Necessities
(c) Luxuries
(d) Prestige goods
Ans. b {Explanation: Consumer Surplus is defined as
the difference between the price a consumer is
willing to pay for a product and the price that he
has actually paid . the consumer surplus for the
goods which are less elastic (i.e. necessities) is
higher. As an example, for a necessity like food,
the consumer would be willing to pay a higher price
as it is a necessity so the consumer surplus would
be higher in the case of necessities.}
36- Income-demand curve shows:
(a) Income-expenditure relationship
(b) Income-cost relationship
(c) Income-price relationship
(d) Income-quantity relationship
Ans. d
37- An income demand curve of an inferior good is:
(a) Upward sloping
(b) Downward sloping
(c) Constant in slope
Ans. b
38- With an increase in income, consumer is expected
to buy more of:
(a) An inferior good
(b) A giffen good
(c) A normal(or superior) good
Ans. c
39- Identify the coefficient of price-elasticity of
demand when the percentage increase in the quantity
of a commodity demanded is smaller than the
percentage fall in its price:
(a) Equal to one
(b) Greater than one
(c) Smaller than one
(d) Zero
Ans. c
40- Cross-demand curve shows:
(a) The effect of a change in price of X on its
demand
(b) The effect of a change in price of X on the
demand for Y
(c) The effect of a change in price of Y on its
demand
Ans. b
41- In the case of complements, the cross demand
curve slopes:
(a) Downwards to the right
(b) Upwards to the right
(c) Backwards to the top
(d) Inwards at the bottom
Ans. a
42- In the case of substitutes, the cross demand
curve slopes
(a) Downwards to the right
(b) Upwards to the right
(c) Backwards to the right
(d) Inwards at the bottom
Ans. b
43- Which of the following pairs of commodities is
an example of substitutes?
(a) Tea and sugar
(b) Tea and coffee
(c) Pen and ink
(d) Shirt and trousers
Ans. b
44- In measuring price-elasticity:
(a) Price is a dependent variable and quantity
is an independent variable
(b) Price is an independent variable and
quantity is a dependent variable
(c) Price and quantity both are independent
variables
(d) Price and quantity both are dependent
variables
Ans. b
45- Identify the factor, which generally keeps the
price elasticity of demand for a commodity low:
(a) Variety of uses for that commodity
(b) Its low price
(c) Close substitutes for that commodity
(d) High proportion of the consumer’s income
spent on it
Ans. b
46- Which of the following has more elastic demand
curve?
(a) A commodity without substitutes
(b) A commodity with substitutes
(c) A commodity on which a small fraction of
income is spent
(d) A commodity the use of which cannot be
postponed
Ans. b
47- Demand for a commodity is elastic when it has
(a) Only one use
(b) Many uses
(c) Uses which cannot be postponed
(d) Uses very essential for the consumer
Ans. b
48- A decrease in demand lowers the price the most:
(a) In the immediate run
(b) In the short run
(c) When the supply is perfectly elastic
(d) When producers have sufficient time to
fully adjust to the demand change
Ans. a {Explanation: Immediate run is a period in
which the supply curve is completely inelastic and
increase or decrease in supply is impossible in this
period. When demand decreases in immediate run then
producers due to completely inelastic supply curve
cannot decrease the supply so due to decrease in
demand while supply is fixed, the supply exceeds
the demand and hence in the result price decreases}
49- Suppose income increases by 10% and demand for
commodity increases by 5% then the income elasticity
of demand is:
(a) Negative
(b) Positive
(c) Zero
(d) Infinity
Ans. b
50- Cross-elasticity of demand or cross-price
elasticity between two substitutes will be:
(a) Negative
(b) Positive
(c) Infinite
(d) Zero
Ans. b (Explanation: If the two goods are
substitutes, the cross elasticity of demand will be
positive, so that as the price of one goes up the
demand of the other will increase)
elasticity between two perfect substitutes will be:
(a) Negative
(b) Positive
(c) Infinite
(d) Zero
Ans. c
elasticity between two perfect complements will be:
(a) Negative
(b) Positive
(c) Infinite
(d) Negative infinite
Ans. d
elasticity between two complements will be:
(a) Negative
(b) Positive
(c) Infinite
(d) Zero
Ans. a (Explanation: When two goods are complements,
the cross elasticity of demand will be negative for
example car and fuel. The demand for cars decreased
when the price of fuel increased)
elasticity between two independent goods will be:
(a) Negative
(b) Positive
(c) Infinite
(d) Zero
Ans. d (Explanation: If two goods are independent
then cross-elasticity of demand is zero b/c as the
price of one good changes, there will be no change
in demand for the other good)
55- A demand curve which is horizontal and parallel
to x-axis represents:
(a) Infinitely elastic demand
(b) Infinitely inelastic demand
(c) Relatively elastic demand
(d) Relatively inelastic demand
Ans. a
56- Of the following commodities, which has the
lowest price-elasticity of demand?
(a) Car
(b) Salt
(c) Tea
(d) House
Ans. b {Explanation: Salt has lowest elasticity of
demand (less elastic) b/c it is a necessity good.}
57- Income -elasticity of demand will be zero when a
given change in income brings about:
(a) A less than proportionate change in
quantity demanded
(b) A more than proportionate change in
quantity demanded
(c) The same proportionate change in quantity
demanded
(d) No change in quantity demanded
Ans. d
58- Income-elasticity of demand is expressed as:
(a) % change in quantity demanded
% change in income
(b) % change in income
% change in quantity demanded
(c) Change in income
Change in quantity demanded
Ans. a
59- When the demand curve is rectangular hyperbola,
it represents:
(a) Unitary elastic demand
(b) Perfectly elastic demand
(c) Perfectly inelastic demand
(d) Relatively elastic demand
Ans. a
60- Cross-elasticity of demand is measured as:
(a) Percentage change in the quantity of a
commodity demanded divided by the percentage
change in the price of that commodity
(b) Percentage change in the quantity of
commodity X divided by percentage change in the
price of commodity Y
(c) Percentage change in the quantity demanded
of commodity X
(d) Percentage change in the quantity demanded
of commodity X divided by percentage change in
the quantity demanded of commodity Y
Ans. b
61- Price elasticity of demand is best defines as:
(a) Change in the tastes of consumers at
different prices
(b) The rate of response of demand to a change
in supply
(c) The change in costs when output is
increased by one unit
(d) The responsiveness of demand to a change in
price
Ans. d
62- The vertical demand curve for a commodity shows
that its demand is:
(a) Highly elastic
(b) Perfectly inelastic
(c) Fairly elastic
(d) Moderately elastic
Ans. b
63- The horizontal demand curve for a commodity
shows that its demand is:
(a) Highly elastic
(b) Perfectly inelastic
(c) Perfectly elastic
(d) Zero elastic
Ans. c
64-Most of the supply curves with which the average
consumer deals are:
(a) Vertical
(b) Horizontal
(c) Controlled by the largest producers
(d) Unaffected by inflation
Ans. b {Explanation: Since consumers can usually
purchase all they want at given prices, the supply
curve with which the individual deals is perfectly
elastic.}
65- Demand of a commodity is elastic when:
(a) Change in its price causes a
proportionately greater change in its quantity
demanded
(b) Change in its price does not change its
quantity demanded
(c) Change in consumer’s income causes change
in demand
Ans. a
66- Price elasticity of demand can be measured in
the following way:
(a) Percentage change in quantity demanded of a
commodity divided by percentage change in price
of that commodity
(b) Change in quantity demanded of a commodity
divided by change in price of that commodity
(c) Percentage change in price of a commodity
divided by percentage change in quantity
demanded of that commodity
(d) None of that commodity
Ans. a
67-If a ten percent increase in price causes a ten
percent reduction in quantity demanded, elasticity
of demand is:
(a) Perfectly elastic
(b) Elastic
(c) Unitary elastic
(d) Inelastic
Ans. c
68-To get more revenue, a Finance Minister impose
tax on that commodity which has:
(a) Inelastic demand
(b) Elastic demand
(c) Unit elasticity
(d) Zero elasticity
Ans. a
69- The feasible part of the demand curve for the
monopolist who is charging high price will be:
(a) The elastic part of a demand curve
(b) The inelastic part of a demand curve
(c) The constant elastic part of the demand
curve
Ans. b
70-Because the price elasticity of demand for OPEC
oil is approximately .08, in order to increase
revenues OPEC should:
(a) Lower price in order to increase revenues
(b) Lower price in order to decrease the amount
of oil sold
(c) Rise price in order to increase the amount
of oil sold
(d) Raise price in order to increase revenues
Ans. d {Explanation: because the elasticity of
demand of oil is inelastic (less than one) so there
is no benefit of decreasing price to increase
quantity demanded so OPEC will increase price to
increase its revenues.}
71- A country is advised to devalue (reduce external
value of) its currency only when its exports face:
(a) Inelastic demand in foreign markets
(b) Elastic demand in foreign markets
(c) Unit elastic demand in foreign markets
Ans. b
72-Which of the following goods is most likely to be
exchanged in a market of local rather than national
scope?
(a) University professors
(b) Computer components
(c) Building materials
(d) Jet airplanes
Ans. c {Explanation: Building materials are traded
in locally distinct markets b/c it is very costly to
trade it on the national level.}
73- In which case the elasticity shown by the
different points of a curve is the same?
(a) A straight line curve
(b) A downward sloping demand curve
(c) A rectangular hyperbola demand curve
Ans. c {Explanation: Price elasticity of demand is
equal to the instantaneous slope of the demand
curve, or the slope of the tangent line at any point
on the demand curve. Price elasticity is unitary
(equal to one) throughout the rectangular hyperbola
demand curve}
74- Slope of a demand curve is:
(a) Not relevant to elasticity
(b) The only factor determining elasticity
(c) Only one of the factors influencing
elasticity
Ans. b
75- Which of the following does not have a uniform
elasticity of demand at all points?
(a) A vertical demand curve
(b) A horizontal demand curve
(c) A rectangular hyperbola demand curve
(d) A downward sloping demand curve
Ans. d
76- When the slope of a demand curve is infinite
(also known as horizontal demand curve) then
elasticity will be:
(a) Zero (perfectly inelastic)
(b) Equal to one (unitary elastic)
(c) Infinite (perfectly elastic)
Ans. a
77- When the slope of a demand curve is zero (also
known as vertical demand curve) then elasticity will
be:
(a) Zero (perfectly inelastic)
(b) Equal to one (unitary elastic)
(c) Infinite (perfectly elastic)
Ans. c
78- If the demand curve is horizontal then its slope
is:
(a) Infinite
(b) Zero
(c) Equal to one
Ans. a (Explanation: The slope of horizontal demand
curve is infinite b/c here change in quantity
demanded is some positive value and change in price
is zero so dQ/dP = ∞ .It is also called perfectly
elastic demand curve)
79-If the demand curve is vertical then its slope
is:
(a) Infinite
(b) Zero
(c) Equal to one
(d) None of the
Ans. b (Explanation: The slope of vertical demand
curve is zero b/c here change in quantity
demanded is zero and change in price is some
positive value so dQ/dP = 0.It is also known as
perfectly inelastic demand curve)
80- A high value of cross-elasticity indicates that
the two commodities are:
(a) Very good substitutes
(b) Poor substitutes
(c) Good complements
(d) Poor complements
Ans. a
81- In the case of an inferior commodity, the
income-elasticity of demand is:
(a) Positive
(b) Unitary
(c) Negative
(d) Infinity
Ans. c
82- In the case of superior (normal) commodity, the
income elasticity of demand is:
(a) Positive
(b) Unitary
(c) Negative
(d) Infinite
Ans. a
83- In the case where two commodities are good
substitutes then cross elasticity will be:
(a) Positive
(b) Unitary
(c) Negative
(d) Infinite
Ans. a
84- In case the two commodities are complements,
cross elasticity will be:
(a) Positive
(b) Unitary
(c) Negative
(d) Infinite
Ans. c
85- If cross-elasticity of one commodity for another
turns out to be zero, it means they are:
(a) Close substitutes
(b) Good complements
(c) Completely unrelated (independent goods)
Ans. c
86- If as a result of an increase in prices, total
outlay (expenditures) on a commodity decreases, its
price-elasticity of demand is:
(a) Perfect elastic (infinitely elastic)
(b) Relatively elastic (greater than one
elasticity)
(c) Unit elastic
(d) Relatively inelastic (less than one
elasticity)
Ans. b
87- If as a result of a decrease in price, total
outlay (expenditures) on a commodity increases, its
price-elasticity of demand is:
(a) Perfectly elastic (infinitely elastic)
elasticity)
(c) Unit elastic
(d) Relatively inelastic (less than one
elasticity)
Ans. b
88- When with a change in price the total outlay
(expenditures) on a commodity remains constant, it
is a case of:
(a) Perfect elasticity (infinitely elastic)
(b) Perfect inelasticity (zero elasticity)
(c) Unit elasticity
(d) Zero elasticity (infinitely inelastic)
Ans. c
89- When price increases and with it the total
outlay on a commodity also increases, it is a case
of:
(b) Relative elasticity (greater than one
elasticity)
(c) Perfect inelasticity (zero elasticity)
(d) Relative inelasticity (less than one
elasticity)
Ans. d
90- When price decreases and with it the total
outlay on a commodity also decreases, it is a case
of:
(b) Relative elasticity (greater than one
elasticity)
(c) Perfect inelasticity (zero elasticity)
(d) Relative inelasticity (less than one
elasticity)
Ans. d
91- Elasticity (E) expressed by the term, ∞ >E>1,
is:
(a) Perfectly elastic (infinitely elastic)
elasticity)
(c) Unitary elastic
(d) Relatively inelasticity (less than one
elasticity)
Ans. b
92- Elasticity (E) expressed by the term, 1>E>0, is:
(a) Perfectly elastic
(b) Relatively elastic
(c) Unitary elastic
(d) Relatively inelastic
Ans. d
93- If the supply and demand increases equally, the
price will:
(a) Rise
(b) Fall
(c) Remain unchanged
(d) Change depending on respective elasticities
Ans. c
94- When at a given price, the quantity supplied of
a commodity is more than the quantity demanded,
there will be:
(a) An upward pressure on price
(b) A downward pressure on price
(c) Price will remain unaffected
Ans. b
95- When at a given price, the quantity demanded of
a commodity is more than the quantity supplied,
there will be:
(a) An upward pressure on price
(b) A downward pressure on price
(c) Price will remain unaffected
Ans. a
96- The greater the percentage of income spent on a
commodity:
(a) The greater its elasticity is likely to be
(b) The weaker its elasticity is likely to be
(c) The unchanged its elasticity is likely to
be
Ans. a
97-At high prices, demand is likely to be:
(a) More elastic
(b) Less elastic
(c) Unit elastic
(d) Perfectly inelastic
Ans. a
98- At low prices, demand is likely to be:
(a) More elastic
(b) Less elastic
(c) Unit elastic
(d) Perfectly inelastic
Ans. b
99-A market-clearing price:
(a) Is a disequilibrium price
(b) Is an equilibrium price
(c) Means a shortage exists as a market is
cleared
(d) Must be set by the government
Ans. b {Explanation: A market-clearing price is the
price of goods or a service at which quantity
supplied is equal to quantity demanded. It is also
called equilibrium price.}
100-The effect of consumer boycotts usually is:
(a) A rise in the price of the product
(b) A decrease in the demand for the product
(c) A decrease in the supply of the product
(d) An increase in the quantity supplied of the
product
Ans. b {Explanation: If the boycott succeeds in
reducing the number of buyers, the demand for
product decreases and demand curve shifts leftward.}
101- A straight line, downward-sloping demand curve
implies that, as price falls, the elasticity of
demand:
(a) Increases
(b) Decreases
(c) Remains the same
(d) Is zero
Ans. b
102-A shift in the demand for a product is likely to
result from a change in:
(a) The product’s price
(b) Expectations
(c) The prices of factors of production used to
produced it
(d) Production technology
Ans. b {Expectation: Option(a) is wrong b/c a change
in product’s price only changes quantity demanded,
moving along the same demand curve .It does not
shift the demand curve. Option (c) and (d) are also
wrong b/c the prices of factors of production and
production technology both can shift the supply
curve and they can not shift the demand curve.
Option (b) is right answer b/c change in
expectations about the product may cause the demand
curve to shift.}
103- One common definition of a luxury good is a
good with income elasticity:
(a) Greater than one
(b) Equal to one
(c) Less than one but more than zero
Ans. a
104- An inferior commodity is one whose quantity
demand decreases when income of the consumer:
(a) Decreases
(b) Increases
(d) Zero
Ans. b
105-If a good is an inferior good then an increase
in incomes of the consumers will:
(a) Increase demand for the good
(b) Increase supply of the good
(c) Reduce the equilibrium price of the good
Ans. c {Explanation: If the income of consumers goes
up, the demand for an inferior good falls, which
leads to a reduction in the equilibrium price.}
106-If the consumers expect that the price of
computers will decrease in next year then:
(a) Current demand for computers will fall
(b) Current demand for computers will rise
(c) Current demand will change unpredictably
(d) Current supply of computers will rise
Ans. a {Explanation: If the price expected in the
future falls, consumers will substitute future
purchases of computers for present purchases by
reducing current demand.}
107- Decrease in demand results in:
(a) Upward shift in demand curve
(b) Downward shift in demand curve
(c) Movement on the same demand curve
(d) No movement or shift at all
Ans. b
108-For a few products such as insulin for
diabetics,:
(a) The demand curve can be upward sloping
(b) The price elasticity of demand could be
zero
(c) The price elasticity of demand could be
greater than one
Ans. b {Explanation: For such products it is
possible for the demand curve to be vertical
(completely inelastic) with price elasticity equal
to zero. The reason is that the use of insulin is
very necessary for diabetic patients and they would
buy the same amount of insulin on any level of
price.}
109-If at the unchanged price, the demand for a
commodity goes up, or the quantity demanded remains
the same when its price goes up, it is called:
(a) Contraction of demand
(b) Decrease in demand
(c) Increase in demand
(d) Extension of demand
Ans. c
110- If less is demanded at the same price or same
quantity demanded at a lower price, it is a case of:
(a) Contraction of demand
(b) Decrease in demand
(c) Increase in demand
(d) Extension of demand
Ans. b
111-If X and Y are close substitutes, a rise in the
price of X will lead to:
(a) Increase in demand for Y
(b) Decrease in demand for Y
(c) Decrease in demand for both X and Y
(d) No change in demand for Y
Ans. a
112- If X and Y are close substitutes, a fall in
price of X will lead to:
(a) Increase in demand for Y
(b) Decrease in demand for Y
(c) Increase in demand for both X and Y
Ans. b
113-An exceptional demand curve is:
(a) Downward sloping
(b) Upward sloping
(c) Horizontal straight line
(d) Vertical straight line
Ans. b {Explanation: In some exceptional cases law
of demand is violated. For example in the case of
giffen goods, as the price of giffen goods rise then
there demand will also rise. And in the case of
commodities which are used as a status symbols (also
known as Veblen goods), as the price of these goods
rise then their demand will also rise. So in above
exceptional cases, the demand curve will upward
sloping from left to right like supply curve showing
positive relationship between quantity demanded and
price. This demand curve is also called exceptional
demand curve}
114-On a straight line demand curve, elasticity of
demand at the midpoint is:
(a) Equal to zero
(b) Equal to one
(c) Equal to infinity
(d) More than one
Ans. b (Explanation: At the mid point of a demand
curve the area below the mid point and the area
above the mid point both are equal .So according to
geometrical method, elasticity of demand Ed = Lower
segment /Upper segment, the answer will be ‘one’ )
115-At the point where a straight line demand curve
meets the quantity axis (x-axis), elasticity of
demand is:
(a) Equal to zero
(b) Equal to one
(c) Equal to infinite
(d) More than one
Ans. a {Explanation: At the point on demand curve
where it meets the x-axis, the lower segment of
demand curve is zero and upper segment is some
geometrical value so elasticity of demand Ed = Lower
segment /Upper segment, the answer will be ‘zero’}
116- At a point where a straight line demand curve
meets the price axis (Y-axis), the elasticity of
demand is:
(a) Equal to one
(b) Less than one
(c) Equal to zero
(d) Equal to infinite
Ans. d (Explanation: At the point on demand curve
where it meets the Y-axis, the upper segment of
demand curve is zero and lower segment is some
geometrical value .So elasticity of demand Ed =
Lower segment /Upper segment, the answer will be
‘infinite’)
117- At a point above the middle of a straight line
demand curve, elasticity of demand is:
(a) Less than one
(b) Equal to one
(c) More than one
(d) Equal to infinite
Ans. c (Explanation: At the point above the middle
of a straight demand curve, the lower segment of
demand curve is greater than upper segment. So
elasticity of demand Ed = Lower segment /Upper
segment, the answer will be greater than one)\
118- At a point below the middle of a straight line
demand curve, elasticity of demand is:
(a) Less than one
(b) Equal to one
(c) More than one
(d) Equal to infinity
Ans. a (Explanation: At the point below the middle
of a straight demand curve, the lower segment of
demand curve is less than the upper segment. So
elasticity of demand; Ed = Lower segment /Upper
segment, the answer will be less than one)
119-Moving down along a linear demand curve:
(a) Demand becomes less elastic
(b) Elasticity does not change
(c) Demand has unitary elasticity
(d) Demand becomes more elastic
Ans. a
120-If demand is elastic and supply is inelastic
then the burden of a tax on the good will be:
(a) Borne mostly by producers
(b) Borne mostly by consumers
(c) Borne mostly by government
(d) Shared equally by producers and consumers
Ans. a
121-The demand for cigarettes is price inelastic
implying a unit tax on this commodity will
(a) Will mainly paid by sellers of the product
(b) By mainly paid by cigarette smokers
(c) Be mainly paid by tobacco growers
Ans. b {Explanation: Because the demand of
cigarettes is inelastic so the burdens of unit tax
on cigarettes are imposed on consumers. The more
inelastic is demand, the greater the share of a unit
tax bear by consumers. And if the more elastic is
demand, the greater the share of unit tax bear by
producers.}
122-The nominal income of a consumer is income in
terms of:
(a) Goods
(b) Goods and services
(c) Goods and services it can purchased
(d) Monetary units
Ans. d (Explanation: The nominal income of consumer
is the value of consumer’s income measured in terms
of monetary units, i.e. in dollars, rupees etc.)
123-The real income of a consumer is income in terms
of:
(a) Goods
(b) Goods and survices
(c) Goods and survices it can purchased
(d) Monetary units
Ans. c
124- Quantity demanded or supplied is measured in:
(a) Monetary units
(b) Physical units
(c) Relative units
(d) Constant units
Ans. b
125- Price is measured in:
(a) Physical units
(b) Monetary units
(c) Constant units
(d) Current units
Ans. b
126-A price is a ratio of exchange between:
(a) Money and exchange
(b) Quantity and production
(c) Production and consumption
(d) Money and quantity
Ans. d
127-If the price of Pepsi Cola goes down, you would
predict:
(a) An increase in supply of coca cola
(b) A decrease in supply of coca cola
(c) An increase in demand for coca cola
(d) A decrease in demand for coca cola
Ans. d
128-If the price of coffee increases, you would
predict that:
(a) Demand curve for sugar will shift downward
(leftward)
(b) Supply curve for sugar will shift leftward
(upward)
(c) Demand curve for bread will shift downward
(leftward)
Ans. a {Explanation: Since the price of complement
has increased, there will be a decrease in demand
for sugar.}
129- The demand curve slopes downwards due to:
(a) Income effect(I.E)
(b) Substitution effect(S.E)
(c) Taste effect
(d) Opposite effect
(e) Both a and b
Ans. e (Explanation: The demand curve slopes
downward due to I.E and S.E. According to S.E when a
price of a commodity falls, it becomes relatively
cheaper than other substitute commodities and as a
result of this S.E, the quantity demanded of the
commodity whose price has fallen, rises. According
to I.E when the price of a commodity falls, the
consumer’s real income or purchasing power
increases, so he buy more of that commodity. This is
called I.E.)
130- The income effect means that consumer purchase
more when:
(a) Price falls
(b) Price increases
(c) Price is unchanged
(d) Taste changed
Ans. a
131- The ordinary demand curve is also called:
(a) Marshallian demand curve
(b) Hicksian demand curve
(c) Slutsky demand curve
(d) All the above
Ans. a
132- The slope of marshallian demand curve is:
(a) Upward
(b) Vertical
(c) Downward
(d) Horizontal
Ans. c
133- The marshallian demand curve includes:
(a) Substitution Effect
(b) Income Effect
(c) Both substitution and income effect
(d) None of them
Ans. c
134- The Hicksian demand curve includes:
(a) Substitution effect
(b) Income effect
(c) Both substitution and income effect
(d) None of them
Ans. a
135- The slutsky demand curve includes:
(a) Income effect
(b) Price effect
Ans. b
136- The marshallian indirect utility function in
the form of equation is:
(a) x =a-bp
(b) x =b-ap
(c) x =y[Py/PX]
(d) x = f(P)
Ans. c
137- The Hicksian indirect utility function in the
form of equation is:
(a) x =f(P)
(b) x =a-bp
(c) x =
(d) x =y[Py/PX]
Ans. c
138- The indirect utility function is a homogeneous
function of:
(a) degree one
(b) degree zero
(c) degree less than one
(d) degree greater than one
Ans. b
139- Demand is elastic when the coefficient of
elasticity is:
(a) greater than zero
(b) less than one
(c) greater than one
(d) less than one
(e) negative
Ans. c
140- In terms of price, the indirect utility
function may be:
(a) Concave
(b) Quasi-convex
(c) Straight line
(d) Convex
Ans. b
141- Marshallian demand function is also known as:
(a) Utility demand function
(b) Compensated demand function
(c) Collective demand function
(d) Relative demand function
Ans. b
142-Market demand curve is:
(a) Vertical summation of individual demand
curves
(b) Upward summation of individual demand
curves
(c) Downward summation of individual demand
curves
(d) Horizontal summation of individual demand
curves
Ans. d
143- Theory of revealed preference is based on:
(a) Weak orderings
(b) Neutral orderings
(c) Partial orderings
(d) Strong orderings
Ans. d
144- In “Revealed Preference Theory”, a consumer
reveals preference for bundle of:
(a) Two goods
(b) A few goods
(c) One good
(d) Many goods
Ans. a
145- In Revealed Preference Theory, Samuelson proves
P.E = S.E + I.E :
(a) With using indifference curves
(b) With using MRS
(c) Without using indifference curve
Ans. c
146-Which of the following is assumed to be constant
when drawing a demand curve?
(a) Consumer tastes
(b) Prices of inputs
(c) Technology
(d) Number of sellers
Ans. a {Explanation: Option (a) is true b/c when we
draw the demand curve, we assume all factors other
than price constant which can shift the demand curve
like consumer taste, fashion, weather etc. Option
(b), (c) and (d) are wrong b/c the factors like
technology , prices of inputs and number of sellers
can not shift the demand curve but they may shift
the supply curve.}
147- Under Bandwagon effects, people use those goods
which are used by their:
(a) Friends
(b) Relatives
(c) Family
(d) All of them
Ans. d
148- The effects according to which people use those
goods which are concerned with distinctive standard
of living are:
(a) Bandwagon effects
(b) Snob effects
(c) Veblen effects
(d) Steven effects
Ans. b
149- The standard form of demand function is:
(a) Q = a- bP
(b) Q =a- bP2
(c) Y = a- bP
(d) Q = a+ bP
Ans. a
150- The elasticity of demand is equal to slope of
demand function divided by:
(a) Average demand function
(b) Qualified demand function
(c) Constructive demand function
(d) Relative demand function
Ans. a
151- With elasticity of demand, the:
(a) Negative sign is ignored
(b) Positive sign is ignored
(c) None of them
(d) Both of them
Ans. a
152- The arc elasticity is the measure of average
elasticity at the mid-point of the chord and
connects:
(a) Two points on demand curve
(b) Two points on supply curve
(c) Many points on demand curve
(d) Many points on demand curve
Ans. a
153- The demand of the luxuries is:
(a) More elastic
(b) Less elastic
(c) Unit elastic
(d) Zero elastic
Ans. a
154- The demand of the necessities is:
(a) More elastic
(b) Less elastic
(c) Unit elastic
(d) Zero elastic
Ans. b
155- The giffen paradox is an exception to law of:
(a) Supply
(b) Demand
(c) Production
(d) Consumption
Ans. b
156- A good tends to have relatively inelastic
demand, if:
(a) Close substitutes are available
(b) It has a high price
(c) It is a luxury
(d) It has no very close substitutes
Ans. d
157- The cross-price elasticity of the demand for
orange juice with respect to the price of apple
juice is probably:
(a) Negative
(b) Positive
(c) Near infinite
(d) Zero
Ans. b (Explanation: As we know that the apple juice
and orange juice are substitute goods so their
cross-price elasticity will be positive ,i.e. when
the price of apple juice will rise then the people
increase the demand for orange juice instead of
apple juice which is a close substitute of apple
juice and is still cheaper.)
158-Which of the following is assumed to be constant
when a supply curve is drawn:
(a) Technology
(b) Number of buyers in the market
(c) Consumer income
(d) Household tastes
Ans. a
159- Supply curves are most elastic:
(a) In the long-run
(b) In the short-run
(c) For luxuries
(d) In the immediate-run
Ans. a
160- Airlines that try to lower fares in order to
increase revenues believe that demand for airline
services is:
(a) Price elastic
(b) Price inelastic
(c) Income elastic
(d) Income inelastic
Ans. a
161- The good will highest income elasticity is:
(a) Beef
(b) Mutton
(c) Bread
(d) Motion-picture tickets
Ans. d
162- Supply of a commodity refers to:
(a) Total stock of a commodity in the market
(b) Total production of a commodity during the
year
(c) Total production plus total stock of a
commodity
(d) Amount of commodity offered for sale at
some price at a particular place and time
Ans. d
163- Supply of commodity is a:
(a) A stock concept
(b) A flow concept
(c) Both stock and flow
Ans. b
164- Some farm land can be used to produce either
corn or soybeans. If the demand for corn increases
then:
(a) The demand for soybeans should increase
(b) The supply of soybeans should increase
(c) The demand for soybeans should decrease
(d) The supply of soybeans should decrease
Ans. d {Explanation: An increase in the demand for
corn would raise the price of corn, causing some
farmers to grow corn instead of soybeans. This
reduces the supply of soybeans.}
165-In the immediate run:
(a) Supply curves are inelastic
(b) Supply curves are perfectly elastic
(c) Demand curves are elastic
(d) Supply curves are elastic
Ans. a (Explanation: The immediate run is defined to
be a period so short that no quick response in
quantity supplied is possible so in immediate-run,
the supply curves are inelastic. In the long-run,
the supply curves are more elastic.}
166- An increase in the supply of a commodity is
caused by:
(a) Improvements in its technology
(b) Fall in the prices of other commodities
(c) Fall in the prices of factors of production
Ans. d
167-The supply curve would probably shift to the
right if:
(a) Resource( factors of production) used in
production became more costly
(b) The technology of production improves
(c) Consumer’s income increased
(d) Some sellers left the market
Ans. b {Explanation: When technology improves, the
supply curve shifts to the right b/c more can be
produced at each price level.}
168- Elasticity of supply means change in supply due
to change in:
(a) Price of the commodity
(b) Conditions of supply
(c) Taste of the consumer
(d) Demand for the commodity
Ans. a
169-A vertical supply curve parallel to the price
axis implies that the elasticity of supply is:
(a) Zero
(b) Infinite
(c) Equal to one
(d) Greater than zero but less than infinite
Ans. a
170- Any straight line supply which cuts the x-axis
will have:
(a) Zero elasticity
(b) An elasticity greater than one
(c) Unitary elasticity of supply
(d) An elasticity less than one
Ans. b
171-Plumbing and pipe-fitting require many of the
same skills. If the wage paid to pipe-fitters
increased then the effect on the market for plumbers
would probably be:
(a) An increase in demand
(b) A decrease in demand
(c) An increase in supply
(d) A decrease in supply
Ans. d {Explanation: As both jobs require almost
same skills so workers choose whether to sell their
services as pipe-fitters or as plumbers. An increase
in pipe-fitter wages would reduce the supply of
plumbers.}
172-If a new production technology for producing
compact discs is developed and new firms are
attracted to this field:
(a) The supply curve will shift down or right
(b) The supply curve will shift up or left
(c) Both demand and supply curve shifts would
occur
Ans. a {Explanation: By the development of new
technology the supply will increased and supply
curve shifts downwards (rightwards).}
173-Supply and demand changes have their most rapid
impact in:
(a) Auction market
(b) Contract markets
(c) Market for commercial office space
(d) Natural gas market
Ans. a {Explanation: Auction Market ►is a security
exchange in which buyers enter competitive bids and
sellers enter competitive offers at the same time.
The price a stock is traded represents the highest
price that a buyer is willing to pay and the lowest
price that a seller is willing to sell at. Matching
bids and offers are then paired together and the
orders are executed.}
174-A market demand schedule is obtained by adding
individual demand schedules:
(a) Horizontally
(b) Vertically
(c) Permanently
(d) Perpetually
Ans. a
UNIT 3:
COST & PRODUCTION
1-Production is a function of:

(a) Profits
(b) Costs
(c) Inputs
(d) Price
Ans. a
2- Diminishing returns occur when a firm:
(a) Starts incurring losses
(b) Uses more and more of one input while
holding all other inputs constant
(c) Does not utilize its inputs efficiently
(d) Cuts down on the quantity of all inputs it
uses
Ans. b
3-The law of variable proportions comes into being
when:
(a) All factors are variable
(b) There is a fixed factor and variable factor
(c) All factors are non-variable
Ans. b
4-The Law of Diminishing Returns according to the
modern view, applies to:
(a) Agriculture
(b) All fields of production
(c) Industry
(d) Services
Ans. b
5-Production function relates:
(a) Cost to input
(b) Wages to profits
(c) Cost to output
(d) Inputs to output
Ans. d
6-‘Inputs or Factors of production’ are defined as:
(a) Productive resources such as labor and
capital equipment that firms use to manufacture
goods and services are called inputs or factors
of production
(b) Unproductive resources that do not take
part in production process are called inputs or
factors of production
(c) Firm’s own resources are called inputs or
Ans. a
7-For the given production function, technical
efficiency is defined as:
(a) Sets of points relating production function
that maximizes output given input (labor) i.e. Q
= f(L, K)
(b) Sets of points relating production function
that produces less output than possible for a
given set of input (labor) i.e. Q < f(L, K)
(c) Use of imported technology
Ans. a {Diagram is given below}
8- For the given production function, technical
inefficiency is defined as:
(a) Sets of points relating production function
that maximizes output given input (labor) i.e. Q
= f(L, K)
(b) Sets of points relating production function
that produces less output than possible for a
given set of input (labor) i.e. Q < f(L, K)
(c) Use of imported technology
Ans. b {Diagram is given above)
9-Economies of large-scale production:
(a) Lead to greater specialization
(b) Offsets the effects of the law the law of
comparative advantage
(c) Lead to greater diversification of
individual production
(d) Cause firms to use more capital and less
labor
Ans. a
10-A producer attains the least cost combination
when the relation between Marginal Rate of Technical
Substitution (MRTS) and price (P) of the factors x
and y is:
(a) MRTSxy > Px /Py
(b) MRTSxy = Px /Py
(c) MRTSxy < Px /Py
(d) MRTSxy = MRTSyx
Ans. b
11- The external economies of scale experienced by a
firm include the:
(a) Growth of firms processing its waste
materials
(b) Development of research bureau serving the
industry
(c) Supply of suitable skilled labor in the
area
Ans. d
12- According to Marshal, the Law of Diminishing
Returns is applicable to:
(a) Industry
(b) All fields of production
(c) Agriculture
Ans. c
13- Increasing return to scales can be explained in
terms of:
(a) Optimal factor proportions
(b) Fixed scale of plant
(c) External and internal economies
(d) Labor productivity
Ans. c
14- The Law of Diminishing Marginal Returns can be
explained in terms of:
(a) Economies and diseconomies of production
(b) Indivisibility of factors
(c) Fixity of supply of land
(d) Variable factor productivity
Ans. b
15- When the output of a firm is increasing, its
average fixed cost:
(a) Declines continuously
(b) Remains constant
(c) Rises continuously
(d) Declines and then rises
Ans. a
16- Technological efficiency:
(a) Is the same as economic efficiency
(b) Is achieved when the output produced is
maximum for the given level of inputs
(c) Means that there is only one way to produce
a given quantity of output
Ans. b
17- The economic problem of determining the
combination of inputs yielding lowest cost for
producing a given output:
(a) Is only a choice among the technologically
efficient combination
(b) Depends on the relative price of inputs
(c) Depends on the price of the product
(d) Depends on the profits made
Ans. b
18- The least cost combination of factors x , y and
z will generally be the point at which:
(a) Price of x = Price of z
Price of y Price of x
(b) MP of x = MP of y
Price of x Price of x
(c) MP of x = MP of y = MP of z
Price of x Price of y Price of z
(d) MP of x = MP of y = MP of z
Ans. c
19- The cost that a firm incurs in purchasing or
hiring any factor of production is referred to as:
(a) Explicit cost
(b) Implicit cost
(c) Variable cost
(d) Fixed cost
Ans. a
20-Which cost increases continuously with the
increase in production?
(a) Average cost
(b) Marginal cost
(c) Fixed cost
(d) Variable cost
Ans. d
21- Total costs in the short-term (short-run) are
classified into fixed costs and variable costs.
Which one of the following is a variable cost?
(a) Cost of raw materials
(b) Cost of equipment
(c) Interest payment on past borrowing
(d) Payment of rent on buildings
Ans. a
22- The normal long-run average cost curve is
influenced by the:
(a) Principle of diminishing returns
(b) Economies and diseconomies of large scale
production
(c) Principle of constant return to scale
Ans. b
23- Which of the following curves is a rectangular
hyperbola?
(a) ATC
(b) AVC
(c) AFC
Ans. c {Explanation: Average fixed cost (AFC) is
AFC= FC/Q, as production increases the value of Q
increases and thus value of AFC will become smaller
and smaller and get reaches near and near to X-axis
but can never touch the X-axis because AFC can not
become exact zero. Thus the AFC becomes the shape of
rectangular hyperbola curve. It shows unitary
elasticity because we know that the elasticity on
points on rectangular hyperbola curve is equal to
one.}
24- Short run cost curves are influenced by:
(a) Principle of returns to scale
(b) Law of variable proportions
(c) External and internal economies and
diseconomies
Ans. b
25- Each short run average cost curve:
(a) Has to touch the long run cost curve
(b) Has to cross the long run cost curve
(c) Has to lie above all points on the long run
cost curve
(d) Coincides with the long run cost curve at
some point
Ans. d
26- In the long run:
(a) All factors can be used in different
proportions
(b) Management can be re-organized
(c) A firm can experience returns to scale
Ans. d
27- All of the following curves are U-Shaped except:
(a) The AVC curve
(b) The AFC curve
(c) The AC curve
(d) The MC curve
Ans. b
28- MC is given by:
(a) The slope of the TVC curve
(b) The slope of the TVC curve but not the
slope of the TC curve
(c) The slope of the TC curve but not by the
slope of the TVC curve
(d) Either the slope of the TVC curve or the
slope of the TC curve
Ans. d
29- If there are many producers, each of whom has an
individual production possibility curve, then the
lowest marginal cost producer of good X is the
producer:
(a) Who must sacrifice fewer units of every
other goods than any other producer
(b) Who can produce more X per hour than any
other producer
(c) Who must sacrifice more units of every
other goods than any other producer
Ans. a
30- Under monopoly and imperfect competition MC is:
(a) More than the price
(b) Less than the price
(c) Equal to the price
(d) Less than or equal to the price
Ans. b
31- The MC curve cuts the AVC and ATC curves:
(a) At different points
(b) At the falling parts of each
(c) At their respective minimums
(d) At the rising parts of each
Ans. c
32- MC curve is:
(a) L-shaped
(b) U-shaped
(c) V-shaped
(d) Both a and b depending on situation
Ans. d {Explanation: Marginal cost is relatively
high at small quantities of output, then as
production increases it declines due to economies of
scale and reaches a minimum value, then starts
rising due to diseconomies of scale. Thus MC curve
forms the shape of ‘V’ and in some cases forms the
shape of ‘U’. This shape of MC curve is directly
attributable to increasing marginal returns and then
decreasing marginal returns.}
33- Average cost curve contains in it:

(a) Normal profits
(b) No normal profits
(c) Sometimes normal profits and sometimes no
normal profits
(d) Super normal profits
Ans. a
34- Variable cost includes the cost of:
(a) Hiring the building for the factory
(b) Purchasing heavy machines
(c) Paying the manager of the factory
(d) Paying the laborers
Ans. d
35- At the point where the straight line from the
origin is tangent to the TC curve, AC is:
(a) Maximum
(b) Minimum
(c) Equal
(d) Lower
Ans. b
36- The fixed cost of a firm:
(a) Are fixed even in the long period
(b) When expressed as an average, show a
continuous decline with increase of output
(c) Do not reflect diminishing marginal returns
Ans. a
37- Opportunity costs are also known as:
(a) Spill-over costs
(b) Money costs
(c) Alternative costs
(d) External costs
Ans. c
38- Normal profits are considered as:
(a) Explicit costs
(b) Implicit costs
(c) Social costs
(d) Private cost
Ans. b (At normal profit » TR = TC. Normal profit is
included in implicit cost.)
39- Implicit costs are the costs:
(a) Which are not incurred by the firm and may
accrue to the community
(b) Of resources the cost of factors owned by
the firm
(c) Of resources supplied by the household
(d) Of government externalities
Ans. b
40- The difference between average total cost and
average fixed cost shows:
(a) Normal profits
(b) Implicit costs
(c) Variable costs
(d) Opportunity costs
Ans. c
41- Total variable cost curve:
(a) Steps downwards at first and then upwards
(b) Steps upwards, then remains constant and
then falls
(c) Steps downwards
Ans. a
42- All money costs can be regarded as:
(a) Social costs
(b) Opportunity costs
(c) Explicit costs
(d) Implicit costs
Ans. c
43- The difference between average cost and average
revenue is:
(a) Total profit
(b) Average profit
(c) Net profit
(d) Marginal profit
Ans. b
44- Which of the following is not a “U” shaped
curve:
(a) Marginal cost curve
(b) Average variable cost curve
(c) Fixed cost curve
(d) Average cost curve
Ans. c
45- Profits of a firm will be calculated taking into
account the units produced and the difference
between:
(a) Real cost and money cost
(b) Variable cost and fixed cost
(c) Average cost and average revenue
(d) Marginal cost and average cost
Ans. c
46- Variable costs refer to:
(a) Capital cost plus operating costs
(b) Capital costs alone
(c) Capital costs plus spill-over costs
(d) Operating costs alone
Ans. d
47- Marginal cost curve cuts the average cost curve:
(a) At the left of its lowest point
(b) At its lowest point
(c) At the right of its lowest point
Ans. b
48- To attain maximum profits during short-run a
firm should produce the output that will:
(a) Yield maximum total revenue
(b) Minimize marginal cost
(c) Maximize marginal cost
(d) Equate marginal revenue with marginal cost
Ans. d
49- The short run cost curve is “U” shaped because
of:
(a) The operation of increasing cost
(b) The existence of fixed cost
(c) The existence of variable cost
Ans. c
50- The longer the period of time, the elasticity of
supply will be:
(a) Constant
(b) Less elastic
(c) More elastic
(d) Perfectly elastic
Ans. c
51- The difference between the average total cost
and average variable cost as output increases will:
(a) Increases
(b) Remains the same
(c) Diminishes
(d) Zero
Ans. c
52- Increasing returns is not caused by:
(a) Specialization of labor
(b) Technological advancement
(c) Marketing economics
(d) Varying factor proportions
Ans. d
53- Diseconomies of management lead to:
(a) Decreasing returns to scale
(b) Constant returns to scale
(c) Increasing returns to scale
(d) maximum returns to scale
Ans. a
54-The difference between laws of return and laws of
return to scale is:
(a) In case of laws of return, one factor of
production is constant and other is variable
while in laws of return to scale both factors of
production are variable
(b) In case of laws of return to scale, one
factor of production is constant and other is
variable while in laws of return, both factors
of production are variable
(c) Both a and b
Ans. a
55- Law of Returns to Scale shows:
(a) Technical relationship between input of a
variable factor and the resulting output
(b) Any economic relationship between input and
output
(c) An output maximizing relationship
(d) A relationship with input changing and
corresponding changes in output
Ans. a
56- Money spent by a firm on the purchase of capital
equipment is:
(a) Fixed cost
(b) Variable cost
(c) Both fixed and variable costs
Ans. a
57- Which of the following is an implicit cost of
production?
(a) Wages of the labor
(b) Charges of electricity
(c) Interest on owned money capital
(d) Payment for raw materials
Ans. c (Explanation: As we know that the implicit
cost is the cost of resources owned by the firm so
interest on owned money capital of a firm is also an
implicit cost)
58- Which of the following is not an explicit cost
of production?
(a) Wage of self-employed proprietor
(b) Depreciation on machinery
(c) Returns on owned capital
(d) Cost of raw materials
Ans. d (Explanation: The option a, b and c are
implicit costs because these are the costs on the
resources owned by the firm. Option‘d’ is the right
answer because cost of raw material is ‘explicit
cost’ as it involves money payment.)
59- The concept of period refers to:
(a) A specific duration of time
(b) A varying duration of time
(c) A duration of time which permits necessary
adjustments
(d) A period with calculated intervals
Ans. b
60- Marginal cost is found with the help of changes
in:
(a) Total cost or total variable cost
(b) Total explicit cost
(c) Total fixed cost
(d) Total implicit cost
Ans. a
61- The vertical distance between TVC and TC is
equal to:
(a) MC
(b) AVC
(c) TFC
(d) AC
Ans. c (Explanation: As TC = TFC + TVC, so the
vertical distance or difference between TVC and TC
is ; TC –TVC = TFC)
62- In general, most of the production functions
measure:
(a) The productivity of factors of production
(b) The relation between the factors of
production
(c) The economies of scale
(d) The relations between change in physical
inputs and physical output
Ans. b
63- A loss bearing firm will continue to produce in
the short run so long as the price at least covers:
(a) Average variable cost
(b) Average fixed cost
(c) Average variable cost + average fixed cost
(d) Marginal costs
Ans. a
64- Increasing returns imply:
(a) Constant average cost
(b) Diminishing cost per unit of output
(c) Optimum use of capital and factor
(d) External economies
Ans. b
65- The supply curve for the short-run competitive
firm is the same as:
(a) Marginal cost curve
(b) Average variable cost curve
(c) That part of the marginal cost curve which
equals or is greater than AVC
(d) Average total cost curve
Ans. c {Explanation: Supply Curve for Short-Run
Competitive Firm► A perfectly competitive firm's
supply curve is that portion of its marginal cost
curve that lies above the minimum of the average
variable cost curve. A perfectly competitive firm
maximizes profit by producing the quantity of output
that equates price and marginal cost. As such, the
firm moves along its positively-sloped marginal cost
curve in response to changing prices. A perfectly
competitive firm maximizes profit by producing the
quantity of output that equates marginal revenue and
marginal cost. In that price equals marginal revenue
for a perfectly competitive firm, price is also
equal to marginal cost. In other words, the firm
produces by moving up and down along its marginal
cost curve. The marginal cost curve is thus the
perfectly competitive firm's supply curve. Because
the marginal cost curve is positively sloped due to
the law of diminishing marginal returns, so too is
the firm's supply curve. And because all firm's in a
perfectly competitive industry have positively-
sloped marginal cost curves, the market supply curve
for the entire industry is also positively sloped.
This offers a prime explanation for the law of
supply.}
66- The production function can convey to a firm:
(a) The cost of producing any given output
(b) The various combinations of input that
could be employed in production of any given
quantity of output
(c) The various combinations of input that
should be used in producing any given quantity
of output in an efficient manner
(d) The maximum profit level of output
Ans. b
67-The costs which the firms have to face in order
to change the price tags of their products and
services are called:
(a) Product costs
(b) Real costs
(c) Menu costs
(d) Nominal costs
Ans. c
68- External economies are witnessed in:
(a) A rising supply curve
(b) A rising demand curve
(c) A falling supply curve
(d) A falling demand curve
Ans. d
69- The addition or increment to the total cost
involvesd in expanding or contracting output by one
unit is called:
(a) Fixed cost per unit
(b) Variable cost per unit
(c) Total cost per unit
(d) Marginal cost
Ans. d
70- Of the following, which one corresponds to fixed
cost?
(a) Payments for raw materials
(b) Labor cost
(c) Transportation charges
(d) Insurance premium on property
Ans. d
71- In short run, a firm would remain in business as
long as which one of the following of cost is
covered?
(a) Total costs
(b) Fixed costs
(c) Variable costs
(d) Constant costs
Ans. c
72- Given a “U” shaped average cost curve, the
relationship between average cost and marginal cost
is such that marginal cost must always be:
(a) Falling when average cost is falling
(b) Rising when average cost is falling
(c) Falling when average cost is rising
(d) Rising when average cost is rising
Ans. d
73- ‘Average cost’ means:
(a) Cost of the average units
(b) Cost of the last units of average
(c) Cost of the unit of production
(d) Total cost – marginal cost
Ans. a
74- Marginal cost is the cost:
(a) Of the last unit of production
(b) Of marginal unit
(c) Of marginal efficient units
(d) Of the average units of production
Ans. a
75- If a firm produces zero output in the short
period then which statement is true?
(a) Its total cost will be zero
(b) Its variable cost will be positive
(c) Its fixed cost will be positive
(d) Its average cost will be zero
Ans. c
76- Any expansion in output by a firm in the short
period will always reduce the:
(a) Average variable cost
(b) Average fixed cost
(c) Both average fixed and variable cost
Ans. b
77- The point on which the average cost is minimum
in a firm, short run average cost curve will also be
the minimum cost point on the firm’s long-run
average cost curve. This is true:
(a) Always
(b) Never
(c) When LAC is falling
(d) Only at that level of output when LAC is at
its minimum
Ans. d
78- With the expansion of output, the short run
average cost curve, beyond a point, starts rising
because:
(a) Average fixed cost increases sharply
(b) More production yields lower per unit price
(c) The law of variable proportions applies to
short run production
(d) Sales expenses become much larger
Ans. c
79- Marginal cost is always:
(a) Less than the average cost
(b) More than the average cost
(c) Equal to the average cost at minimum point
(d) Never equal to the average cost
Ans. c
80- The long-run average cost is based on the fact
that:
(a) None of the factors are variable in the
long-run
(b) All factors are perfectly divisible in the
long-run
(c) None of the factors is divisible
(d) Management factor is indivisible while all
other factors are divisible and can be varied in
long-run
Ans. d
81- The long-run AC curve is constructed from:
(a) The minimum points on all short-run AC
curves
(b) The lowest points on the short-run MC curve
(c) The minimum points on the short run AVC
curves
(d) It has nothing to do with the short-run
cost curves
Ans. a
82- If a straight line supply curve makes an
intercept on the X-axis, the elasticity of supply
is:
(a) Equal to unity
(b) Less than unity
(c) More than unity
(d) Zero
Ans. b
83- If a straight line supply curve makes an
intercept on the Y-axis, elasticity of supply is:
(a) Equal to unity
(b) Less than unity
(c) More than unity
(d) Zero
Ans. c
84- If a straight line supply curve passes through
the point of origin O, the elasticity of supply is:
(a) Zero
(b) Infinity
(c) Unity
(d) More than unity
(e) Less than unity
Ans. c
85- If the supply curve is not a straight line but
curvilinear, the elasticity on all points of the
supply curve is:
(a) Equal
(b) Different
(c) Zero
(d) Infinity
Ans. b
86-The short-run supply curve for most goods slope
upward most directly as a result of:
(a) The law of comparative advantage
(b) The law of diminishing returns
(c) The principle of substitution
(d) Economics of large scale production
(e) The law of increasing costs
Ans. b and e {Explanation: Because of diminishing
returns, each successive unit of a commodity
produced requires a higher price. Option (e) is also
right answer b/c the law of increasing costs follows
through the same logic, directly from the law of
diminishing returns. When the law of diminishing
returns applies then the law of increasing costs
also applies at the same time.}
87- Which is the correct statement?
(a) The U shape of long-run cost curve is less
pronounced than the short-run cost curves
(b) The U shape of the short-run cost curves is
less pronounced than the long-run cost curves
(c) The U shape of the long-run cost curve is
more pronounced than the short-run cost curves
(d) The long-run cost curves are never U shaped
Ans. a (Explanation: The long run cost curve,i.e.
LAC curve is U-Shaped but less pronounced than the
SAC, because it is actually saucer-type )
88-The firm producing at the minimum point of the AC
curve is said to be:
(a) Operating under diminishing cost
(b) Making optimum use of plant capacity
(c) Operating at excess capacity
(d) Operating under increasing costs
Ans. b
89- Production function shows:
(a) Technical relationship between inputs and
output
(b) Profitability production
(c) Relation between MR and MC
(d) Relation between AR and AC
Ans. a
90- Iso-product curve (isoquant) shows:
(a) A given quantity of output that can be
produced by various combinations of two inputs
(b) Varying quantities of output that can be
produced by the same combination of two factors
(c) Combination of two factors that can give
the least cost of production
(d) Combination of two goods that cost the same
amount to the producer
Ans. a
91- An iso-product (an isoquant) curve slopes:
(a) Downward to the left
(b) Downward to the right
(c) Upward to the right
(d) Upward to the left
Ans. b
92- Law of variable proportions is based on the
assumption of:
(a) Short period of time
(b) Long period of time
(c) Timeless production relationship
Ans. a
93- Under the law of variable proportions, the
average and the marginal product of the variable
factor would ultimately:
(a) Become equal
(b) Decrease
(c) Become constant
(d) Increase
Ans. b
94- Returns to scale is a:
(a) Timeless phenomenon
(b) Short run phenomenon
(c) Long run phenomenon
Ans. c
95- If in the long run, output increases in the same
proportion as increase in all the input in the given
proportion, this is known as:
(a) Increasing returns to scale
(b) Decreasing returns to scale
(c) Constant returns to scale
(d) Variable returns to scale
Ans. c
96- If by doubling all inputs in the long run output
is less than double, it is a case of:
(a) Increasing returns to scale
(b) Decreasing returns to scale
(d) Variable returns to scale
Ans. b
97- If in the long run all factor inputs are
increased three times and the resulting output is
four times as before, it is a case of:
(a) Decreasing returns to scale
(b) Variable returns to scale
(d) Increasing returns to scale
Ans. d
98- In the case of two factor inputs which are
neither perfectly complementary nor perfect
substitutes, the iso-product curve will be:
(a) A downward sloping straight line
(b) A downward sloping curve
(c) An upward rising curve
(d) Right angled iso-quants
Ans. b
99- The slope of the iso-cost line (budget line) is
determined by:
(a) Pricing of two factors
(b) Productivity of the two factors
(c) Degree of substitutability of two factors
Ans. a
100- Least cost combination of two factor inputs is
achieved at a point where:
(a) Budget line cuts the isoquant
(b) Budget line is below the isoquant
(c) Budget line is tangent with isoquant
Ans. c
101- The production process is:
(a) Consuming goods and services
(b) Transforming inputs into outputs
(c) Wasting goods and services
(d) Buying goods and services
Ans. b
102- Classical production function is:
(a) Q = f(L)
(b) U =f(X)
(c) Q =f(K)
(d) Q =f(L,K)
Ans. d
103- When total product falls:
(a) MP is positive
(b) MP is negative
(c) MP is falling
(d) MP is rising
Ans. b
104- The average product is given as:
(a) Q.L
(b) Q- L
(c) Q+ L
(d) Q/L
Ans. d
105-When total product increases at a decreasing
rate:
(a) MP = AP
(b) MP < AP
(c) MP > AP =0
(d) MP > AP
Ans. d
106- When total product (TP) is maximum:
(a) MP is negative
(b) MP is infinite
(c) MP is zero
Ans. c
107- In short run:
(a) Labor is variable
(b) Labor is fixed
(c) Capital is variable
Ans. a
108- In the long-run:
(a) Fixed cost will be greater than variable
cost
(b) Variable costs will be greater than fixed
costs
(c) All costs are variable costs
(d) All costs are fixed costs
Ans. c {Explanation: In the long run a firm can
change all its inputs( size of firm, labor, capital
etc) so all costs are variable in long run.}
109- Law of Substitution in production was presented
by:
(a) Classical economists
(b) Keynes
(c) Neo-classical economists
(d) Karl Marx
Ans. a
110- The budget constraint equation of the firm is:
(a) PL + PK = CK
(b) L.PL + K.PL > C
(c) L.PL + K.PK = C
(d) L.PL + K.PK = C
Ans. c ( Explanation: Here, L means total units of
labor, PL means price of labor, K means total units
of capital, PK means price of capital and C means
total cost or budget.)
111- The proportionality rule in production requires
that the ratios of MP and factor prices are:
(a) Doubled
(b) Equalized
(c) Not equalized
Ans. b
112- The isoquant approach is:
(a) Classical approach
(b) Keynesian approach
(c) Neo-classical approach
(d) Modern approach
Ans. c
113- The isoquant approach is based upon:
(a) One output
(b) One input
(c) Two outputs
(d) Two inputs
Ans. d
114- Production indifference curve (isoquant) is a
curve which shows:
(a) Equal level of output
(b) Unequal level of outputs
(c) Equal level of inputs
(d) Unequal level of inputs
Ans. a
115- The line from the origin to a point on an
isoquant shows:
(a) The wages employment ratio
(b) The capital rent ratio
(c) The rent labor ratio
(d) The capital labor ratio
Ans. d
116- The slope of an iso-quant represents:
(a) MRS
(b) MRT
(c) MRTS
(d) MRPS
Ans. c
117- The MRTS along an iso-quant goes on to:
(a) Appear
(b) Diminish
(c) Prominent
(d) Increase
Ans. b
118- Isocost line shows the combinations of labor
and capital where a firm’s budget is:
(a) Fully spent
(b) Half spent
(c) Partially spent
(d) Nearly spent
Ans. a
119- The slope of isocost line (budget line) shows:
(a) Capital labor ratio
(b) Labor wage ratio
(c) Factor price ratio
(d) Factor labor ratio
Ans. c
120- Along an isoquant, output remains same, and
capital labor ratio:
(a) Is also same
(b) Is different
(c) Is constant
(d) Is zero
Ans. b
121- The minimization of costs subject to output
requires equilibrium at the lowest:
(a) Isoquant line
(b) Isocost line
(c) Indifference curve
(d) Price line
Ans. b
122- The maximization of output subject to cost
requires equilibrium at the:
(a) Lowest isoquant
(b) Lowest isocost line
(c) Highest isoquant
(d) Highest isocost line
Ans. c
123- The expansion point is attained by joining:
(a) Similar optimal combinations
(b) Different optimal combinations
(c) Both of them
(d) None of them
Ans. b
124- According to Cobb-Douglas, in production
function the marginal product of labor is:
(a) MPL = b1[L/X]
(b) MPL = a1[X/L]
(c) MPL = ba[X/L]
(d) MPL = b1[X/L]
Ans. d
125- In case of complementary factors, the isoquants
are:
(a) L-shaped
(b) J-shaped
(c) M-shaped
(d) V-shaped
Ans. a
126- According to translog production function,
elasticity of substitution is:
(b) Less than one
(c) Zero
(d) Equal to one
Ans. d
127- A significant property of the Cobb-Douglas
production function is that the elasticity of
substitution between inputs is:
(b) Less than one
(c) Zero
(d) Equal to one
Ans. d
128- The production techniques are technically
efficient:
(a) Bellow the lower ridge line
(b) Above the upper ridge line
(c) Between the two ridge lines
(d) On the upper ridge line
Ans. c
129- The general form of Cobb-Douglas production
function is:
(a) Q = b0Lb1.K
(b) Q = b0Lb1
(c) Q =b0Lb1.Kb2
(d) Q = b0Qb1.Kb2
Ans. c
130- The CES production function shows:
(a) Decreasing return to scale
(b) Increasing return to scale
(c) Constant return to scale
Ans. c {Explanation: CES production function
(Constant Elasticity of Substitution Function) is
also a form of Cobb-Douglas production function. It
is a Cobb-Douglas production function of degree one
(n=1).It indicates constant returns to scale. It
means if we double the capital (K) and labor(L) ,
the output will also doubled.}
131- We get constant returns to scale when:
(a) α = ½
(b) β = ½
(c) Both of them
(d) None of them
Ans. c
132- If Cobb-Douglas production function is
homogeneous of degree greater than one (n>1), then
it shows:
(a) Constant returns to scale
(b) Increasing returns to scale
(c) Decreasing returns to scale
Ans. b {Explanation: The increasing returns to scale
means if we doubled the inputs, the output will more
than doubled.}
133-If Cobb-Douglas production function is
homogeneous of degree less than one (n<1), then it
shows:
(a) Constant returns to scale
(b) Increasing returns to scale
(c) Decreasing returns to scale
Ans. c {Explanation: The decreasing returns to scale
means if we doubled the inputs, the output will less
than doubled.}
134- A firm will be in equilibrium when the lowest
isocost is:
(a) Tangent to the lowest isoquant
(b) Tangent to the given isoquant
(c) Above the given isoquant
(d) Below the given isoquant
Ans. b
135- If the slope of the isoquant is equal to the
slope of isocost, then isoquant is:
(a) Concave to the origin
(b) Convex to the origin
(c) Tangent to the origin
Ans. b
136- A firm can never produce in the middle area of
input space, in case of:
(a) Concave isoquant
(b) Convex isoquant
(c) Constant isoquant
Ans. a
137- The combination of labor and capital where the
cost of a given output is minimized is known as:
(a) Least cost factor combination
(b) Optimum factor combination
(c) Both a and b
(d) None of them
Ans. c
138- If the production function is homogeneous, the
expansion path will be a straight line through the
origin whose slope determines the optimal:
(a) L/K ratio
(b) K/L ratio
(c) P/L ratio
(d) P/K ratio
Ans. b
139- Some economists refer to iso-product curves as:
(a) Engels curve
(b) Production indifference curve
(c) Budget line
(d) Ridge line
Ans. b
140- With the change in the factor prices, the slope
of the expansion path will:
(a) Not change
(b) Also change
(c) Increase
(d) Decrease
Ans. b
141- The elliptical isoquant represents the:

(a) Economic combinations of labor and capital
(b) Uneconomic combinations of labor and
capital
(c) Both a and b
Ans. c
142- In case of straight-line isoquant, the factors
are not substituted because they are each other’s:
(a) Imperfect substitutes
(b) Perfect substitutes
(c) Complements
Ans. b
143- According to Leontief technology, there:
(a) Is only one technique of production
(b) Are few techniques of production
(c) Are many techniques of production
(d) Are two techniques of production
Ans. a
144- If the factors have to be employed in a fixed
ratio, then the elasticity of substitution under
Leontief technology is:
(a) One
(b) Zero
(c) Two
(d) Five
Ans. b
145- The elasticity of substitution measures the
percentage change in the ratio of inputs when any
producer observes the percentage change in:
(a) Output cost
(b) Output ratio
(c) Input prices
(d) Input ratio
Ans. c
146-Elasticity of Substitution (σ) is defined as:
(a) Percentage change in capital-labor ratio
dividing by percentage change in MRTSL,K
(b) Percentage change in MRTSL,K dividing by
percentage change in capital-labor ratio
(c) Percentage change in inputs dividing by
percentage change in outputs
Ans. a {Explanation: Elasticity of Substitution (σ)
= %∆ (K/L) / %∆ MRTSL,K}
147-Technological Progress (Invention) can be
defined as:
(a) Technological progress shifts the
production function by allowing the firm to
achieve more output from a given combination of
inputs (or the same output with fewer inputs)
(b) Technological progress shifts the
production function by allowing the firm to
achieve less output from a given combination of
inputs (or the same output with more inputs)
(c) Technological progress shifts the import
function to the right
Ans. a
148-‘Neutral Technological Progress’ can be defined
as:
(a) Technological progress that causes to raise
the marginal product of capital and labor in the
same proportion
(b) Technological progress that causes the
marginal product of capital to increase relative
to the marginal product of labor
(c) Technological progress that causes the
marginal product of labor to increase relative
to the marginal product of capital
Ans. a
149-‘Labor Saving Technological Progress’ can be
defined as:
same proportion
Ans. b
150-‘Capital Saving Technological Progress’ can be
defined as:
same proportion
Ans. c
151- The isoquant which are generated by CES
(constant elasticity of substitution) production
function are always:
(a) Positively sloped
(b) Negatively sloped
(c) Concave to the origin
Ans. b
152- In short run, a firm can change its:
(a) Total production
(b) Fixed production
(c) Variable production
Ans. c
153- The cost of one thing in terms of the
alternative given up is known as:
(a) Production cost
(b) Physical cost
(c) Real cost
(d) Opportunity cost
Ans. d
154- The costs faced by the firm against fixed
factors are:
(a) Total costs
(b) Fixed costs
(c) Variable costs
(d) Marginal costs
Ans. b
155- The costs faced by the firm against variable
factors are:
(a) Variable costs
(b) Fixed costs
(c) Average costs
(d) Marginal costs
Ans. a
156- Total variable costs in equation form are:
(a) K.PK
(b) L.PL
(c) L.PL+ K.PK
(d) L.PK+K.PL
Ans. b {Explanation: The variable cost is the cost
of labor which is obtained by multiplying the total
units of labor by the price of labor (L.PL). The
capital is fixed factor.}
157- Which one of the following is also known as
‘Plant Curves’:
(a) Long-run average cost (LAC) curves
(b) Short-run average cost (SAC) curves
(c) Average variable cost (AVC) curves
(d) Average total cost (ATC) curves
Ans. b
158- Total fixed costs are:
(a) K.PK
(b) L.PL
(c) L.PL+ K.PK
(d) L.PK+K.PL
Ans. a
159- Total costs are:
(a) TFC – TVC
(b) TFC/TVC
(c) TVC/TFC
(d) TFC +TVC
Ans. d
160- The shape of the TC curve is:
(a) U
(b) V
(c) P
(d) S(inverted)
Ans. d
161- The relationship between MC and MP shown by the
marginal cost concept is:
(a) Inverse
(b) Direct
(c) Negative
(d) Positive
Ans. a
162- The average cost curve is a geometrical
illustration of:
(a) Hydraulic function
(b) Cubic function
(c) Pentagonic function
(d) Quadratic function
Ans. d(Explanation: The quadratic function shows
that if by increase the value of independent
variable the value of dependent variable is
decreasing then after a certain level it starts to
increase and vice versa. C = a – bQ2 is a quadratic
function.
163- The behavior of MC curve is determined by the
behavior of the:
(a) AC curve
(b) SC curve
(c) TC curve
Ans. c
164- When the level of optimal factor combination is
over and more labor is employed with the fixed
plant, the efficiency of labor:
(a) Increases
(b) Decreases
(d) Becomes zero
Ans. b
165- The relationship between AC and MC curves
depend upon the behavior of:
(a) AP curves
(b) MP curves
(c) Both of them
(d) None of them
Ans. c
166- When AC curve falls, MC curve falls:
(a) More than AC curve
(b) Less than AC curve
(c) Equal to AC curve
Ans. a
167- The average fixed cost (AFC) curve is asymptote
to:
(a) X-axis
(b) Y-axis
(c) Z-axis
Ans. a {Explanation: Asymptote of a curve is a line
such that the distance b/w the curve and the line
approaches zero and the slope of the curve at the
point approaches the slope of the line. So asymptote
is, essentially, a line that a graph approaches, but
does not intersect. The AFC curve is horizontal
asymptote b/c it gets closer and closer to X-axis
but never intersect it.}
168- When marginal costs curve cuts average costs
curve, average costs are:
(a) Maximum
(b) Zero
(c) Minimum
(d) Equal to one
Ans. c
169- The long run total cost is attained by:
(a) LMC.Q
(b) AC.Q
(c) LC.Q
(d) LAC.Q
Ans. d
170- The long run average cost curve is:
(a) Cup-shaped
(b) Oval-shaped
(c) Saucer-shaped
(d) Glass-shaped
Ans. c
171- The long run average cost curve is the envelope
of:
(a) SACs
(b) LACs
(c) SMCs
(d) LMCs
Ans. a
172- A firm considering what type of new plant to
build is involved in a:
(a) Immediate-run decision
(b) Market period decision
(c) Short-run decision
(d) Long-run decision
Ans. d
173- Each SAC represents a particular level of:
(a) Input
(b) Output
(c) Both of them
(d) None of them
Ans. b
174- When SAC curve rises, SMC curve lies its:
(a) Below
(b) Above
(c) Equal level
Ans. b
175- According to current thinking, the law of
diminishing returns applies to:
(a) All fields of production
(b) Agriculture
(c) Mining
(d) Manufacturing
Ans. a
176- The production function of homogeneous of
degree one (n=1) is also called:
(a) Linearly homogeneous
(b) Zero homogeneous
(c) Infinite homogeneous
Ans. a
177- The cost curves of the firm shift due to
changes in:
(a) Input prices
(b) Technological innovations
(c) Both of them
(d) None of them
Ans. c
178- In the range of excess capacity, the average
costs are:
(a) Maximum
(b) Minimum
(c) Equal to one
(d) Equal to zero
Ans. b
179- In modern cost theory, AVC= b1 and MC= b1 in
the range of:
(a) Excess capacity
(b) Reserve capacity
(c) Limited capacity
Ans. b {Explanation: In modern theory of cost, in
the range of reserve capacity, the MC curve and AVC
curve both are equal and same.}
180- In modern theory of costs, a firm normally
utilizes:
(a) 2/3 of capacity of its plants
(b) 3/4 of capacity of its plants
(c) 1/3 of capacity of its plants
(d) 1/2 of capacity of its plants
Ans. a
181- In modern theory, LAC = LMC after the
attainment of:
(a) Maximum optimal scale
(b) Average optimal scale
(c) Minimum optimal scale
Ans. c
182- The optimum level of output in long run takes
place where:
(a) LAC = LMC
(b) SAC = LMC
(c) SAC =MC
(d) SAC =LAC
Ans. d
183- In long run, a firm can change:
(a) Fixed factors
(b) Variable factors
(c) Both of them
(d) None of them
Ans. c
184- There is no difference between fixed and
variable factors in the:
(a) Long run
(b) Short run
(c) Average run
Ans. a
185- In the long run average costs curve, a firm can
change:
(a) Labour
(b) Capital
(c) Both of them
(d) None of them
Ans. c
186- If production increases under constant returns
to scale, the cost will:
(a) Increase at a constant rate
(b) Decrease at a constant rate
(c) Increase at a variable rate
(d) Decrease at a variable rate
Ans. a
187- If the production increases under decreasing
returns to scale, the cost will:
(a) Increase at decreasing rate
(b) Increase at constant rate
(c) Decrease at increasing rate
(d) Increase at increasing rate
Ans. d
188- If production increases under increasing
returns to scale, the cost will:
(a) Increase at decreasing rate
(b) Increase at constant rate
(c) Decrease at increasing rate
(d) Increase at increasing rate
Ans. a
189- LMC represents change in LTC (long-run total
cost) due to producing an additional unit of a good
while the fixed and variable factors:
(a) Cannot be changed
(b) Can be changed
(c) Can partially be changed
Ans. b
190- Which of the following is not a feature of iso-
product curves?
(a) Are downward sloping to the right
(b) Show different input combination producing
the same output
(c) Intersect each other
(d) Are convex to the origin
Ans. c
191- The modern cost curves are based upon the idea
of:
(a) Fixed capacity
(b) Specific capacity
(c) Excess capacity
(d) Reserve capacity
Ans. d
192- The reserve capacity in administration is
advocated on the ground that demand for a product
will:
(a) Decrease in the future
(b) Increase in the future
(c) Remain constant
Ans. b{Explanation: Modern economists are of the
opinion that whenever a firm installs a plant, this
plant should have some more capacity or reserve
capacity to produce in addition to a specific level
of output. On the basis of reserve capacity the
producer can meet the seasonal and cyclical changes
in the demand for his goods so that the demand for
his goods may be rise in future. To meet this rise
in demand the reserve capacity is necessary.}
193- Excess capacity is concerned with the:
(a) V-shaped traditional cost curves
(b) S-shaped traditional cost curves
(c) Modern cost curves
(d) U-shaped traditional cost curves
Ans. d
194- In the modern theory of costs, the level of
production which the firm considers feasible is
known as:
(a) Input factor
(b) Heavy factor
(c) Output factor
(d) Load factor
Ans. d
195- The engineering production function and
engineering costs curves are concerned with the:
(a) Production cost
(b) Collection cost
(c) Raw material costs
(d) Distribution costs
Ans. a {Explanation: Engineering Cost Curves ► The
engineering cost curve are derived with the help of
engineering production function . The production
function specified the techniques of production, the
embodiment of labor and capital etc. It means that
each production method is divided into sub
activities corresponding to the various physical and
technical phases of production for the particular
commodity. Engineering production method/function
are characterized by a limited number of methods of
production. The production iso-quants are kinked
reflecting that the factor substitutability is
limited. It means that the factor of production can
be substituted is only possible at kinked of iso-
quants.}
196-In economics, ‘Externality’ means:
(a) An externality is a cost or benefit which
is not transmitted through prices
(b) An externality is a cost or benefit which
is transmitted through prices
(c) An externality is a production received
through external resources
Ans. a {Explanation: In economics, an externality
(or transaction spillover) is a cost or benefit, not
transmitted through prices, incurred by a party who
did not agree to the action causing the cost or
benefit. A benefit in this case is called a positive
externality or external benefit, while a cost is
called a negative externality or external cost.
Negative
A negative externality is an action of a product on
consumers that imposes a negative side effect on a
third party; it is "social cost". Many negative
externalities (also called "external costs" or
"external diseconomies") are related to the
environmental consequences of production and use.
Examples of negative externalities are:
(i) Air pollution from burning fossil fuels causes
damages to crops, (historic) buildings and public
health.
(ii) Water pollution by industries that adds poisons
to the water, which harm plants, animals, and
humans.
(iii)The consumption of alcohol when it leads to
traffic or other accidents that injure or kill
others.
Positive
Examples of positive externalities (beneficial
externality, external benefit, external economy, or
Merit goods) include:
(i)A beekeeper keeps the bees for their honey. A
side effect or externality associated with his
activity is the pollination of surrounding crops by
the bees. The value generated by the pollination may
be more important than the value of the harvested
honey.
(ii)An individual planting an attractive garden in
front of his or her house may provide benefits to
others living in the area, and even financial
benefits in the form of increased property values
for all property owners.
(iii)A public organization that coordinates the
control of an infectious disease preventing others
in society from getting sick.}
197-Social costs equal private costs when:
(a) Marginal cost is zero
(b) Total cost is zero
(c) External costs are zero
(d) Average costs are zero
Ans. c {Explanation: Social Cost= Private Cost +
External Cost►
When a transaction takes place, it typically
involves both private costs and external costs.
Private costs are the costs that the buyer of a good
or service pays the seller. This can also be
described as the costs internal to the firm's
production function.
External costs (also called externalities), in
contrast, are the costs that people other than the
buyer are forced to pay as a result of the
transaction. The bearers of such costs can be either
particular individuals or society at large. Note
that external costs are often both non-monetary and
problematic to quantify for comparison with monetary
values. They include things like pollution, things
that society will likely have to pay for in some way
or at some time in the future, but that are not
included in transaction prices.
Social costs are the sum of private costs and
external costs.
For example, the manufacturing cost of a car (i.e.,
the costs of buying inputs, land tax rates for the
car plant, overhead costs of running the plant and
labor costs) reflects the private cost for the
manufacturer (in some ways, normal profit can also
be seen as a cost of production. The polluted waters
or polluted air also created as part of the process
of producing the car is an external cost borne by
those who are affected by the pollution or who value
unpolluted air or water. Because the manufacturer
does not pay for this external cost (the cost of
emitting undesirable waste into the commons), and
does not include this cost in the price of the car ,
they are said to be external to the market pricing
mechanism. The air pollution from driving the car is
also an externality produced by the car user in the
process of using his good. The driver does not
compensate for the environmental damage caused by
using the car.
As we know that the social cost is the sum of
private cost and external cost so if external cost
is zero then social cost will be equal to private
cost.}
UNIT 4: THEORY OF PRICE

DETERMINATION
& MARKET
BEHAVIOUR
1-Under the perfect competition, the transportation

cost:
(a) Is considered to be negligible and thus
ignored
(b) Is considered to be vital for the
calculation of total cost
(c) Is charged along with the price of the
commodity
Ans. a
2-Monopoly means:
(a) Where there is no retail trade and every
thing is sold on wholesale basis
(b) Where trading of a particular commodity is
controlled exclusively by one firm
(c) Where many people sell only one commodity
(d) A form of business organization in which
only single proprietorship exists
Ans. b
3-Which of the following formulae explain the term
average revenue?
(a) Total units /No. of Revenues
(b) Total Revenue/No. of Units
(c) Marginal Revenue × Units
(d) Total Units/ Price
Ans. b
4-If we measure the elasticity of demand with the
help of the average and marginal revenue, the
formula is:
(a) Ed = AR/ (AR- MR)
(b) Ed = MR/ (AR-MR)
(c) Ed = AR/(MR-AR)
(d) Ed = AR/ MR
Ans. a
5-Average Revenue means:
(a) Per unit revenue received from all the
units sold by the producer
(b) Revenue of the units having average size
(c) Total number of units× Revenue per unit
(d) Total revenue × Number of units sold
Ans. a
6-Marginal revenue from a given output:
(a) The price at which the marginal unit sells
(b) Total revenue sale of all units divided by
volume of sales
(c) Average revenue of total output – average
revenue of last unit
(d) The change in total revenue resulting from
the sale of one unit more of output
Ans. d
7-The market demand for any commodity is the:
(a) Average requirement for it in any given
place
(b) Amount of it wanted at any given price
(c) Amount that people would like to buy during
a period at different prices
(d) Quantity needed to maintain a given
standard of living
Ans. c
8-Which of the following is not a characteristic of
a perfectly competitive market?
(a) There is perfect information about prices
(b) All participants in the market are small
relative to the size of the overall market
(c) There are many buyers and sellers
(d) Buyers and sellers do not know each other
Ans. d
9- In the perfect competition, there is a process
of:
(a) Restricted entry and exit of the firms
(b) Semi free exit but absolute free entry
(c) Free entry but restricted exit of the firms
(d) Free entry and free exit of the firms
Ans. d
10-In a perfectly competitive market, suppliers must
know:
(a) The incomes of consumers
(b) The price of the good
(c) What other commodities households could
substitute for the good
(d) Consumers expectations of the future
Ans. b {Explanation: Under perfect competition,
suppliers must know the price of the good, but need
not to know the characteristics of demanders.}
11- Gold is bought and sold in a:
(a) Perfectly competitive international market
(b) Perfectly competitive national market
(c) Imperfect international market
(d) Imperfect national market
Ans. a
12-Used cars are sold in:
(a) Perfectly competitive international market
(b) Perfectly competitive national market
(c) Imperfect international market
(d) Imperfect local market
(e) Imperfect national market
Ans. d {Explanation: The market for used cars is
imperfect because buyers do not have perfect
information about product quality. Mostly they can
not be sold in national market b/c used cars are
also relatively costly to transport.}
13-Using total revenue and total cost, a profit
maximizing firm will be equilibrium at a point:
(a) Where the gap between the two is the
smallest
(b) Where the gap between the two is the
greatest
(c) Where the two become equal
Ans. b
14- One way the government can induce a monopolist
to expand his output is by imposing:
(a) A specific tax on the monopolist’s output
(b) A price ceiling that make the monopolist
lower his price
(c) A price floor that make the monopolist
raise his price
(d) A heavy tax on the monopolist’s profit
Ans. b
15- A profit-maximizing monopolist in two separate
markets will:
(a) Charge the same price in both markets
(b) Always charge a higher price in the market
where he sells more
(c) Always charge a higher price in the market
where he sells less
(d) Adjust his sales in the two markets so that
his marginal revenue in each market just equals
his aggregate marginal cost
Ans. d
16- In finding equilibrium position of a profit-
maximizing firm, which technique is most convenient?
(a) Total revenue and total cost technique
(b) Marginal revenue and marginal cost
technique
(c) Demand and supply technique
Ans. b
17- MC = MR = AC = AR shows the long run equilibrium
position of the:
(a) Competitive firm
(b) Oligopolistic firm
(c) Monopolist firm
Ans. a (Explanation: Competitive firm means the firm
working under perfect competition)
18- If a firm is producing output at a point where
diminishing returns have set in, this means that:
(a) Each additional unit of output will be more
expensive to produce
(b) Each additional unit of output will require
increasing amount of inputs
(c) Marginal product of the variable factor of
production decreases as the quantity increases
Ans. d
19-If under perfect competition, in the short
period, price does not cover the average cost
completely, the firm will even then stay in the
market as long as:
(a) The average fixed cost is covered
(b) The average variable cost is covered
(c) Some profit is earned
(d) The entrepreneurs enjoy producing
Ans. b
20-An effective price ceiling usually results in:
(a) Excess demand
(b) Qd > Qs
(c) Shortage of supply
Ans. d {Explanation: Price Ceiling ►A price ceiling
occurs when the government puts a legal limit on how
high the price of a product can be. In order for a
price ceiling to be effective, it must be set below
the market equilibrium price. When a price ceiling
is set, a shortage occurs. For the price that the
ceiling is set at, there is more demand (excess
demand) than there is at the equilibrium price.
There is also less supply than there is set at the
equilibrium price (shortage of supply), thus there
is more quantity demanded than quantity supplied.}
21- If a monopolist is producing under decreasing
cost conditions, increase in demand is beneficial to
the society because:
(a) Consumers get better quality goods
(b) Cost of production falls and hence price
will follow
(c) Goods will be sold in many markets
Ans. b
22-In case of monopoly:
(a) MR<AR
(b) MR>AR
(c) MR=AR
(d) AR=0
Ans. a
23- In first degree price discrimination, monopolist
takes away :
(a) All of the consumer surplus
(b) All of the producer surplus
(c) Some part of the consumer surplus
(d) None of them
Ans. a {Explanation: First Degree Price
Discrimination
This first type of product pricing is based on the
sellers ability to determine exactly how much each
and every customer is willing to pay for a good.
Different consumers have different preferences and
levels of purchasing power and thus the amount they
would be willing to pay for a good often exceeds a
single competitive price. This difference between
what a consumer is willing to pay and the price
actually paid is known, of course, as consumers
surplus. Thus a firm engaging in first degree price
discrimination is attempting to extract all the
consumers surplus from its customers as profits.
The seller will take the time to bargain or 'haggle'
with the customer about the price that customer is
willing to pay - some buyers willing to pay a higher
price other buyers a lower price. The firm will sell
a quantity of output 'Q*' up to the point where the
price of the last unit sold just covers the marginal
costs of production. The difference between the
price charged on each unit and the average costs of
producing 'Q*' units of output will be the firm's
profits.
Figure 2, First Degree Price Discrimination
Common examples of first degree price discrimination

include car sales at most dealerships where the
customer rarely expects to pay full sticker price,
scalpers of concert and sporting-event tickets, and
road-side sellers of fruit and produce.
24- In second degree price discrimination,
monopolist takes away :
(a) All of the consumer surplus
(b) All of the producer surplus
(c) Some part of the consumer surplus
(d) None of them
Ans. c {Explanation: Second Degree Price
Discrimination
The second type of price discrimination involves the
establishment of a pricing structure for a
particular good based on the number of units sold.
Quantity discounts are a common example. In this
case the seller charges a higher per-unit price for
fewer units sold and a lower per-unit price for
larger quantities purchased. In this case the seller
is attempting to extract some of the consumer's
surplus value as profits with residual surplus
remaining with the consumer over and above the
actual price paid. Like the case of first degree
price discrimination, the firm will produce a level
of output where the price charged just covers the
marginal costs of production.
In the diagram below, we find an example of a firm
charging three different prices for the same
product. The price P0 is charged per unit if the
buyer chooses to buy Q0 units of the good. A lower
price P1 is charged for a greater quantity Q1 and
the price P2 is charged for the quantity Q*2 (the
level of output such that P2 = MC -- the marginal
costs of production):
Figure 3, Second Degree Price Discrimination
Common examples of second degree price

discrimination include quantity discounts for energy
use; the variations in price for different sizes of
boxed cereal, packaged paper products; and sodas and
French fries at fast food outlets.
25-Price discrimination occurs when:
(a) Different prices are charged to different
consumers for homogenous products
(b) Same prices are charged for differentiated
products
(c) Different prices are charged for homogenous
goods for successive units to the same customer
(d) Any of the above condition is present
Ans. d
26- Price discrimination is possible:
(a) Only under monopoly situation
(b) Under any market form
(c) Only under monopolistic competition
(d) Only under perfect competition
Ans. a
27- The situation of single buyer and single seller
is called:
(a) Monopoly
(b) Multi-plant monopolist
(c) Bilateral monopoly
(d) Price discrimination
Ans. c {Explanation: Bilateral Monopoly ► A market
that has only one supplier and one buyer. The one
supplier will tend to act as a monopoly power, and
look to charge high prices to the one buyer. The
lone buyer will look towards paying a price that is
as low as possible. Since both parties have
conflicting goals, the two sides must negotiate to
determine the price of the product.}
28- When in a market, the number of buyers is very
large and the number of sellers is very small, it is
known as:
(a) Monopoly
(b) Oligopoly
(c) Imperfect competition
(d) Perfect competition
Ans. b
29- Pure monopoly exists:
(a) When there is a single producer
(b) When there is a single producer without any
close substitute
(c) When there is a single producer with close
substitutes
(d) When a few producers control the industry
Ans. b
30- A monopoly producer usually earns:
(a) Abnormal profits
(b) Only normal profits
(c) Neither profits nor losses
(d) Profits and losses which are uncertain
Ans. a
31- A monopoly producer has:
(a) Control over production but not over price
(b) Control neither on production nor on price
(c) Control over consumers
(d) Control over production as well as over
price
Ans. d
32- The equilibrium level of output for the pure
monopolist is where:
(a) MR = MC
(b) MR > MC
(c) MR < MC
(d) P < AC
Ans. a
33- Even in the long-run equilibrium, the pure
monopolist can make abnormal profits because of:
(a) Advertising
(b) His low LAC
(c) Blocked entry
(d) High price he charges
Ans. c
34- A monopolist will fix the equilibrium output of
his product where the elasticity of his average
revenue curve is:
(a) Less than one
(b) Equal to one
(c) Greater than one
(d) Less than one
Ans. c {Explanation: AR curve of monopolist is a
downward sloping curve .This is also called demand
curve for monopolist showing different level of
elasticities of demand. At the mid point of the AR
curve, elasticity of demand is equal to one and
above the mid point, elasticity is greater than one
and below the mid point elasticity is less than one
.A monopolist fix the amount of his product at a
level where the elasticity of his AR curve (Demand
Curve) is greater than one. It causes total revenue
to increase because here demand is elastic and a
small decline in price will bring a large increase
in total revenue.}
35-Under perfect competition, the average revenue,
marginal revenue and price are shown:
(a) By a same single curve
(b) By three different curves
(c) By downward sloping curve
Ans. a {Explanation: Under perfect competition the
demand curve ( AR curve) which an individual seller
has to face is perfectly elastic and parallel to x-
axis .The individual producer is unable to effect
the market price and so he is a price taker. He
supplies the unlimited quantity of product at
prevailing price. Hence MR equals the price of the
product and AR is also equal to MR. So MR = AR = P.
These three curves are coincide and always shown by
a single curve which is perfectly elastic and
parallel to the x-axis.}
36- For the equilibrium of the firm and the industry
in the short period in a competitive market, the
condition is:
(a) P = AC
(b) P = MC
(c) AC = MC
(d) MC = TR
Ans. b {Explanation: Equilibrium condition in short-
run in perfect competition will prevail at a point
where profit is maximized. This happens where price
is equal to marginal cost (P=MC) .Also at the point
of equilibrium, the marginal cost curve must be
upward sloping.}
37-When a competitive firm is in equilibrium in the
long-run, its output is such that:
(a) Costs per unit of output are lowest
(b) Total profits are highest
(c) Marginal cost is lowest
(d) Profit per unit of output is zero
Ans. a
38- If there are many firms producing similar but
differentiated products, the competition is
generally said to be:
(a) Oligopoly
(b) Pure competition
(c) Perfect competition
(d) Monopolistic competition
Ans. d
39- A monopolist has control over the price he
charges for his product. He will be able to maximize
his profit by:
(a) Lowering the price, if the demand curve is
elastic
(b) Lowering the price, if the demand curve is
inelastic
(c) Rising the price, if the demand curve is
elastic
(d) None of the above is applicable
Ans. a
40- A fall in demand for the product under
monopolistic competition will likely result in:
(a) A fall in price
(b) A decrease in the number of firms in the
long-run
(c) A decrease in the output of each firm
Ans. d
41- If a commodity sold under monopoly is got free
of cost, then MC will be:
(a) Zero
(b) Identical with the MR
(c) A horizontal straight line
(d) Infinite
Ans. a
42- Under perfect competition, at equilibrium,
marginal cost is:
(a) Less than marginal revenue
(b) Equal to marginal revenue
(c) More than marginal revenue
Ans. b
43- In the long-run competitive equilibrium, the
theory predicts that:
(a) TC = TR and MC = MR
(b) Firms operate at a minimum average total
cost
(c) There is no incentive for entry or exit of
firms
(d) All these conditions exist
Ans. d
44- Conditions of perfect competition ensure:
(a) That each firm can influence the price
(b) No single firm can influence the price
(c) Any single firm can influence the supply
condition in the market
(d) Any single firm can influence both supply
and price in the market
Ans. b
45- Under perfect competition, a firm will be in
equilibrium if:
(a) MC = MR
(b) MC cuts the MR from below
(c) MC rises when it cuts the MR
(d) All the above three conditions are
fulfilled
Ans. d
46- The equilibrium conditions, MC = MR = AR = AC,
will happen:
(a) In the short-run under perfect competition
(b) In the long-run under perfect competition
(c) In the short-run under monopolistic
competition
(d) In the long-run under monopolistic
competition
Ans. b
47- Under competitive conditions, the industry will
be in equilibrium:
(a) When each firm is in equilibrium equating
MC with MR
(b) When all the firms are earning only normal
profits
(c) When firms outside have no tendency to
enter the industry and those within, have no
tendency to leave the industry
Ans. b
48- AR curve under perfect competition:
(a) Slopes downwards to the right
(b) Slopes upward to the right
(c) Is vertical to the x-axis
(d) Is horizontal to the x-axis
Ans. d
49- Efficient allocation of resources is likely to
be achieved under:
(a) Monopoly
(b) Monopolistic competition
(d) Any market form
Ans. d
50- Perfect competition implies:
(a) Differentiated goods
(b) Homogeneous goods
(c) Advertised goods
(d) Distress sale of goods
Ans. b
51- Under conditions of perfect competition, price
in the long-run is equal to:
(a) Minimum of average variable cost
(b) Minimum of marginal cost
(c) Minimum of average fixed cost
(d) Minimum of average cost
Ans. d
52- Price-taker firms:
(a) Advertise to increase the demand for their
product
(b) Do not advertise, because most advertising
is wasteful
(c) Do not advertise because they can sell as
much as they want at the current price
(d) Who advertise will get more profits than
those who do not
Ans. c
53-Efficient allocation of resources is achieved to
a greater extent under:
(a) Monopoly
(b) Perfect competition
(c) Monopolistic competition
(d) Oligopoly
Ans. b
54-At the shut-down point in perfect competition:
(a) P = AVC
(b) TR =TVC
(c) The total losses of the firm equal TFC
Ans. d {Explanation: Shut-down point is when price
equals minimum Average Variable Cost (P = AVC). At
this point the firm is indifferent b/w producing or
shutting down. This is because at that point total
revenue (TR) is equal to Total Variable Cost (TVC),
so by producing or shutting-down, the firm is making
a loss equal to Total Fixed Costs (TFC) no matter
what it chooses to do. Now if P <AVC then in this
condition the firm would be compelled to shut-down
operations immediately.}
55- The short-run supply curve of the perfectly
competitive firm is given by:
(a) The rising portion of its MR over and above
the break-even (shut-down) point
(b) The rising portion of its MC over and above
the break-even (shut-down) point
(c) The rising portion of its MC over and above
the AC curve
(d) The rising portion of its MC curve
Ans. b {Explanation: The short-run supply curve for
a perfectly competitive firm is the marginal cost
(MC) curve at and above the shut-down point.
Portions of the marginal cost (MC) curve below the
shut-down point are not part of the short-run supply
curve b/c the firm is not producing in that range
.The short-run supply curve of perfectly competitive
firm is also defined as “The portion of MC curve
that lies above the minimum of the average variable
cost curve”. A perfectly competitive firm maximizes
profit by producing the quantity of output that
equates price and marginal cost. As such, the firm
moves along its positively-sloped MC curve in
response to changing prices.}
56- Perfect competition assumes:
(a) All buyers and sellers have perfect
knowledge of the market
(b) Freedom of entry of firms into the industry
(c) Homogeneous product
Ans. d
57-Which describes a competitive market?
(a) Many buyers and many sellers
(b) One seller, many buyers
(c) One buyer, many sellers
(d) Few sellers, many buyers
Ans. a
58- The point where the supply and demand curves
intersect on a graph determines:
(a) Market price
(b) Equilibrium price
(c) Long-term price
(d) Short-term price
Ans. b
59- In long run competitive equilibrium:
(a) Every firm will earn economic profit
(b) Every firm will incur losses
(c) Every firm will earn only normal profit
(d) The marginal firm will earn no profit
Ans. c
60-In the long-run competitive equilibrium:
(a) There is tendency for firms to enter but
not leave the industry
(b) Firms have no tendency either to enter or
to leave the industry
(c) Some firms may enter while the others may
leave the market even after the equilibrium of
the industry
(d) Entry or exit of the firms cannot be
predicted
Ans. c {Explanation: In perfect competition, new
firms will be tempted to enter the market if some of
the existing firms in the market are earning
positive economic profits. Alternatively, existing
firms may choose to leave the market if they are
earning losses. For these reasons, the number of
firms in a perfectly competitive market is unlikely
to remain unchanged in the long-run.}
61- The competitive equilibrium leads to:
(a) The firms producing with excess capacity
(b) The firms producing at their minimum costs
(c) Firms producing at a cost higher than the
minimum
(d) Some firms producing under decreasing costs
and others under increasing costs
Ans. b
62-A firm under perfect competition has:
(a) An AR curve which is a horizontal straight
line
(b) An AR curve which slopes downward
(c) An AR curve which has a kink
(d) An AR curve shape of which cannot be
predicted
Ans. a
63- Consumers are likely to get a variety of similar
goods under:
(a) Monopoly
(c) Duopoly
Ans. d {Explanation: ‘A variety of similar goods’
means ‘similar but differentiated goods’. Goods of
each firm (working under monopolistic competition)
are similar in nature but different from another in
appearance, quality, taste and composition .For
example chocolates produced by different firms are
different in quality and appearance.}
64- Whenever a group of monopolistic competitors
attains equilibrium, the firms in this group
usually:
(a) Charge different prices, but produce
identical outputs
(b) Produce different outputs, but charge
identical prices
(c) Charge different prices, and produce
different outputs
Ans. c
65- Price discrimination is possible:
(a) When elasticities of demand in different
markets are the same at the ruling price
(b) When elasticities of demand are different
in different markets at the ruling price
(c) When elasticities cannot be known
(d) When elasticities of demands are zero in
different markets at the rulling price
Ans. b
66- Under pure monopoly, there will be:
(a) No distinction between firm and industry
(b) One firm and no industry
(c) No firm and no industry
Ans. a {Explanation: A market in which one company
or firm has control over the entire market for a
product, usually b/c of a barrier to entry such as a
technology only available to that company. Because
there is a single producer so firm and industry are
the same and there is no distinction between firm
and industry. Examples are public utilities (WAPDA,
Railway, WASA , etc) and professional sports
leagues.}
67- Total profits are maximized at the point where:
(a) TR equals TC
(b) The TR curve and the TC curve intersect
such that TR and TC lie at the same point
(c) The TR curve and the TC curve are parallel
and TC exceeds TR
(d) The TR curve and the TC curve are parallel
and TR exceeds TC
Ans. d
68- If price exceeds AVC but in smaller than AC at
the best level of output, the firm is:
(a) Making a profit
(b) Incurring a loss but should continue to
produce in the short-run
(c) Incurring a loss and should stop producing
immediately
(d) Making a normal profit
Ans. b {Explanation: If price exceeds AVC (greater
than AVC i.e. firm covers its AVC) but in smaller
than AC (i.e. firm does not covers its AC) at the
best level of output, the firm is incurring loss but
should continue to produce in the short-run b/c the
firm is atleast covering its AVC.}
69-For monopolistic competitive firm:
(a) P=AR and P>MR
(b) P<AR and P=MR
(c) P=MC and MC=AC
Ans. a
70- Which of the following conditions is met in the
long-run equilibrium in monopolistic competition,
where the firm is earning only normal profits?
(a) MC =AC and P<MR
(b) MC = AC and P=MR
(c) P =MC and P<AR
(d) MC=MR and P =AR= ATC
Ans. d
71- Monopolistic firm can fix:
(a) Both price and output
(b) Either price or output
(c) Neither price nor output
Ans. b {Explanation: Monopolist is a price maker and
has a control over the market supply of goods. But
it does not mean that he can set both price and
output level. A monopolist can do either of the two
things i.e. price or output. It means he can fix
either price or output but not both at a time.}
72- In monopoly, the relationship between average
revenue and marginal revenue curves is as follows:
(a) Average revenue curve lies above the
marginal revenue curve
(b) Average revenue curve coincides with the
(c) Average revenue curve lies below the
(d) Average revenue curve is parallel to the
Ans. a
73- Equilibrium of a discriminating monopolist
requires the fulfillment of which one of the
following conditions?
(a) It must be profitable to him to sell output
in more than one market
(b) Marginal revenue in both markets must be
the same
(c) Marginal revenue in both markets must also
be equal to the marginal cost of producing the
monopolist’s aggregate output
(d) All the above
Ans. d
74- In a competitive market, price is determined
primarily by:
(a) Transportation costs
(b) The interplay of demand and supply
(c) Costs of production
(d) The marginal product of labour
Ans. b
75- Competitors in monopolistic competition have
full control over:
(a) The price of their product
(b) Product quality
(c) The shape of the market demand curve
(d) The elasticity of product substitution
Ans. b
76- In the short-run, in which one of the following
situations would a competitive seller close down
(shut-down)?
(a) When he cannot produce at an economic
profit
(b) When price falls short of average variable
cost at every level of output
(c) When price falls short of average fixed
(d) When price falls short of average total
Ans. b
77- The kink demand curve faced by an oligopolist is
based on the assumption that:
(a) Competitors will follow a price increase
but not a price cut
(b) Competitors will follow a price increase as
well as a price cut
(c) Competitors will ignore both a price
increase and a price cut
(d) Competitors will ignore a price increase
but will follow a price cut
Ans. d
78- In the short-run, the competitive firm can
maximize its profits (or minimize its losses) by:
(a) Equating price and marginal revenue
(b) Equating price and average total cost
(c) Increasing marginal cost and lowering fixed
costs
(d) Equating marginal cost and marginal revenue
Ans. d
79- Kinked Demand Curve is consistent with which one
of the following market situations?
(a) Pure competition
(b) Pure monopoly
(c) Oligopoly
Ans. c
80- Whish of the following represents the average
revenue curve of a firm?
(a) The curve representing the cost per unit of
output
(b) The demand curve of consumers for the
firm’s product
(c) Total receipts realized by the firm
Ans. b
81- Of the following, which one is a characteristic
of monopolistic competition?
(a) Standardized product
(b) Differentiate product
(c) Two firms
(d) No entry
Ans. b
82-A firm in a position of equilibrium is supposed
to be maximizing:
(a) Output
(b) Sales
(c) Profits
Ans. c
83- An optimum level of a firm’s output is:
(a) Where marginal cost is minimum
(b) Where average cost is minimum
(c) Where both the marginal and the average
cost curves are at their respective minimum
(d) Where the firm earns the maximum profits
Ans. b
84- Price discrimination is undertaken with the aim
of:
(a) Increasing sales and maximizing profits
(b) Reducing sales and raising prices
(c) Minimizing cost and maximizing revenue
(d) Serving the markets without earning profits
Ans. a
85-From the resource allocation view point, perfect
competition is preferable because:
(a) The firms operate at excess capacity levels
(b) There is a whole variety of output produced
(c) There is no restriction on entry and exit
of firms
(d) There is no idle capacity
Ans. d
86- If the demand for good is more elastic and
government levied a tax per unit of output, the
price per unit for the firm would:
(a) Rise by the amount of the tax
(b) Rise by more than the amount of the tax
(c) Rise by less than the amount of the tax
(d) Remain the same
Ans. c {Explanation: If the elasticity of supply is
low, more of the tax will be paid by the supplier.
If the elasticity of demand is low, more will be
paid by the customer and if the elasticity of demand
is high then the greater portion of the tax will be
absorbed by the seller. This is because goods with
elastic demand cause a large decline in quantity
demanded for a small increase in price. Therefore in
order to stabilize sales, the seller absorbs more of
the additional tax burden. For example if a product
has elastic demand and has a price of Rs.1. Suppose
Rs.0.50 tax is imposed on each unit of the product.
Now the seller might drop the price of the product
to Rs.0.70 so that, after adding in tax of Rs.0.50,
the buyer pays a total of Rs.1.20. In this example,
the buyer has paid Rs.0.20 of the Rs.0.50 tax (in
the form of post-tax price) and the seller has paid
the remaining Rs.0.30 (in the form of a lower pre-
tax price).}
87- If the demand for good is less elastic and
government levied a tax per unit of output, the
price per unit for the firm would:
(a) Rise by the amount of the tax
(b) Rise by more than the amount of the tax
(c) Rise by less than the amount of the tax
(d) Remain the same
Ans. b
88- A firm enjoys maximum control over the price of
its product under:
(a) Monopoly
(c) Oligopoly
(d) Imperfect competition
Ans. a
89- Firm’s average and marginal revenues are equal
under:
(a) Monopoly
(c) Oligopoly
Ans. b
90- The equilibrium of a firm is determined by the
equality of MC and MR in only:
(a) Under perfect competition
(b) Under monopoly
(c) Under imperfect competition
(d) Under all the above market forms
Ans. d
91- All the firms with identical costs under perfect
competition well, in the long-run, earn only:
(a) Normal profits
(b) Abnormal profits
(c) Differential profits
(d) No profits
Ans. a
92-Now-a-days in real life, we are unable to fined:
(a) Monopoly
Ans. b
93- With firms having cost differences under perfect
competition, a firm, which earns normal profit in
the long-run is called:
(a) An optimum firm
(b) A representative firm
(c) An oxford firm
(d) A marginal firm
Ans. d
94- Selling costs are incurred under monopolistic
competition to:
(a) Attract more customers
(b) Prevent its customers from going to others
(c) Establish superiority of its product on the
others
Ans. d {Explanation: Selling Cost► In economics, the
total amount of money spent on advertisement and
publicity for pushing the sale of the product is
called ‘selling cost’. The need for incurring
selling costs is acutely felt under monopolistic
competition. In case of perfect competition,
products of all producers are homogeneous, so, they
do not feel necessity of any advertisement. Thus
selling cost influences the determination of price
under imperfect competition.}
95- Excess capacity is not found under:
(a) Monopoly
(d) Oligopoly
Ans. c {Explanation: ‘Excess capacity’ refers to a
situation where a firm is producing at a lower scale
of output than it has been designed for. A firm has
excess capacity if it produces less than the
quantity at which ATC is a minimum. Firms in
monopolistic competition operate with excess
capacity in long-run equilibrium. The downward-
sloping curve for the products in monopolistic
competition is the cause of excess capacity. There
is no excess capacity in perfect competition in the
long-run. So, in monopolistic competition, output is
less than the efficient scale of perfect
competition. Excess capacity is a characteristic of
natural monopoly and monopolistic competition. It
may arise b/c as demand increases, firms have to
invest and expand capacity in lumpy or indivisible
portions. Firms may also choose to maintain excess
capacity as a part of deliberate strategy to deter
or prevent entry of new firms.}
96- To calculate the ‘Economic Profit’ we must
deduct which of the following cost from our total
revenues?
(a) Opportunity cost
(b) Direct cost
(c) Rent cost
(d) Wage cost
Ans. a {Explanation: Economic Profit ► Economic
profit is the difference b/w the revenue received
from the sale of an output and the opportunity cost
of the inputs used. In calculating economic profit,
opportunity costs are deducted from revenues earned.
Opportunity costs also called implicit costs are the
alternative returns foregone by using the chosen
inputs. For example, say you invest Rs.100000 to
start a business, and in that year you earn
Rs.120000 in profits. Your accounting profit would
be 120000 – 100000 = 20000. However, say that same
year you could have earned an income of Rs.15000 had
you been employed . Therefore, you have an economic
profit of 120000-100000-18000 = 2000.
Accounting Profit► A firm’s total earnings,
calculated according to Generally Accepted
Accounting Principles (GAAP), and includes the
explicit costs of doing business, such as
depreciation, interest and taxes.
Accounting Profit = TR- Explicit Cost
Economic Profit = TR- Explicit Cost- Implicit Cost
Implicit Cost ►Any cost that result from using an
asset instead of renting, selling, or lending it. It
is also called opportunity cost.
Explicit Cost ►Is a direct payment made to others in
the course of running business, such as wage, rent
and material cost etc.
Economic profit is smaller than the accounting
profit. Economists measure a firm’s economic profit
while accountants measure the accounting profit.}
97-A normal profit is:

(a) A zero economic profit
(b) Revenues less explicit cost
(c) About 10% for most industries
(d) A zero accounting profit
Ans. a {Explanation: Zero economic profit means
normal profit. Zero economic profit does not mean
zero accounting profit. The accountant will
calculate total cost using only explicit costs
(basically a transfer of money) that the firm makes.
On the other hand, economists will factor in
opportunity cost as well. This all means that
economists will calculate higher costs, which means
that economic profit is lower than accounting
profit. The firms under perfect competition in long-
run will always earn zero economic profit due to
large number of firms in industry, but actually they
earn some positive amount of accounting profit.}
98-Which form of market structure is characterized
by interdependence in decision-making as between the
different competing firms?
(a) Oligopoly
Ans. a
99- By increasing the price of its products above
those of its competitors, a perfectly competitive
seller:
(a) Can sell more
(b) Reduces its revenues
(c) Can sell nothing
(d) Increases its revenues
Ans. c
100- By reducing the prices of its products below
those of its competitors, a perfectly competitive
seller:
(a) Reduces its revenues
(b) Increases its revenues
(c) Can sell nothing
Ans. a
101-A monopolist is able to maximize his profit
when:
(a) His output is maximum
(b) He charges a high price
(c) His average cost is minimum
(d) His marginal revenue is equal to marginal
cost
Ans. d
102-In collusive olligopoly, the firms may make:
(a) Open agreements
(b) Secret agreements
(c) Both a and b
Ans. c {Explanation: In collusive olligopoly, there
is an agreement among sellers regarding price or
market share or both.This agreement may be open or
secret. Price leadership and cartels are the main
examples of collusive oligopoly.}
103- In non-collusive oligopoly firms enter into:
(a) Secret agreements
(b) No secret agreements
(c) Bad habits
Ans. b {Explanation: In non-collusive olligopoly,
there is no agreement among firms. Each firm acts
independently.}
104- Cartel is associated with:
(a) Collusive oligopoly
(b) Non-collusive oligopoly
(c) Cartel
Ans. a
105- Price leadership is associated with:
(a) Collusive oligopoly
(b) Non-collusive oligopoly
(c) Cartel
Ans. a
106- Which of the following models are associated
with non-collusive oligopoly?
(a) Bertrand model
(b) Chamberlin model
(c) Kinked demand model (Sweezy Model)
(d) Stackleberg model
(e) Cournot model
(f) All of the above
Ans. f
107-In cournot model, firms face:
(a) Negatively sloped demand curve
(b) Positively sloped demand curve
(c) Horizontal demand curve
(d) Vertical demand curve
Ans. a
108- In cournot model, each firm makes decision
regarding:
(a) Price
(b) Output
(c) Cost
(d) Advertisement
Ans. b
109- The price under perfect competition is settled
by:
(a) Producers
(b) Sellers
(c) Buyers
(d) Sellers and buyers
Ans. d {Explanation: As we know that the equilibrium
price in perfect competition is settled by the
forces of supply and demand. Supply of product is
from the side of sellers and demand of product is
from the side of buyers. So, price is settled by
both buyers and sellers.}
110-The factors of production in perfect competition
are:
(a) Stagnant
(b) Mobile
(c) Immobile
(d) Rare
Ans. b {Explanation: One of the assumptions for
perfect competition is that factors of production
are mobile. Factor mobility refers to the ability to
move factors of production-labor, capital or land
from one production process into another. Factor
mobility also means the movement of factors between
different firms. For example when a worker leaves
employment at a textile firm and begins work at a
automobile factory.}
111- The number of sellers in duopoly is:
(a) A few
(b) Four
(c) Two
(d) Very large
Ans. c
112- The number of sellers in oligopoly is:
(a) Two
(b) One
(c) Very large
(d) A few
Ans. d
113- The number of firms in monopolistic competition
normally range between:
(a) 14 to 28
(b) 14 to 80
(c) 14 to 38
(d) 14 to 60
Ans. b
114-The number of sellers in oligopoly are:
(a) Two
(b) Many
(c) Four
(d) Very few
Ans. d
115-Duopoly is a market where there are:
(a) Two sellers
(b) A few sellers
(c) Five sellers
(d) Many sellers
Ans. a
116-The number of sellers in oligopoly are:
(a) Two
(b) Many
(c) Four
(d) Very few
Ans. d
117-In cournot model, firms sell:
(a) Superior goods
(b) Inferior goods
(c) Identical goods
(d) Differential goods
Ans. c
118-The cost of firms in cournot model are:
(a) identical
(b) differential
(c) very high
(d) very low
Ans. a
119-In cournot model, firms make decisions
separately regarding:
(a) output
(b) input
(c) price
(d) advertisement
Ans. a
120-Each firm in cournot model can:
(a) not ignor the activities of the rival
(b) ignor the activities of the rival
(c) both a and b
(d) none of the above
Ans. a
121-Each firm in cournot model assumes that its
competitor will:
(a) change its output
(b) not change its output
(c) change its price
(d) not change its price
Ans. b
122-The firm in cournot model:
(a) face costs
(b) face taxes
(c) donot face taxes
(d) donot face costs
Ans. d
123-According to critics, the assumption of costless
production is:
(a) true
(b) not true
(c) reliable
(d) deniable
Ans. b
124-In cournot model, each firm expects a reaction
from his rival but the expected reaction is not:
(a) important
(b) materialized
(c) accepted
(d) rejected
Ans. b
125-In cournot model, at equuilibrium when MC = MR,
the elasticity of demand is:
(a) equal to one
(b) zero
(c) negative
(d) equal to 2
Ans. a
126-Each firm in cournot model starts selling:
(a) 1/2 of the total market demand
(b) 1/4 of the total market demand
(c) 1/3 of the total market demand
Ans. a
127-At final equilibrium in cournot model, each firm
sells:
(a) 1/2 of the total market demand
(b) 1/4 of the total market demand
(c) 1/3 of the total market demand
Ans. c
128-The cournot model is a model of:
(a) Instable equilibrium
(b) Stable equilibrium
(c) Constant equilibrium
(d) Fluctuating equilibrium
Ans. b
129-In arriving at stable equilibrium in cournot
model, if one firm decreases output the other firm
will:
(a) Also decrease it
(b) Increase it
(c) Remain uneffected
Ans. b
130-The entry of new firms in cournot model is:
(a) Banned
(b) Free
(c) Partially free
(d) Allowed
Ans. a
131-In cournot model firms:
(a) Cannot make price adjustments
(b) Can make price adjustments
(c) Can adjust number of customers
Ans. a
132-The reaction curve of a firm is attained by
joining the:
(a) Isoprofit curve
(b) Super profit curve
(c) Normal profit curve
(d) Indoprofit curve
Ans. a
133-Cournot equilibrium is attained where two
reaction curves:
(a) Repel each other
(b) Represent each other
(c) Intersect each other
Ans. c
134-In cournot model, during the process of
adjustment, the number of firms:
(a) Donot change
(b) Change
(c) Both a and b
Ans. a
135-The Chamberline model recognizes mutual:
(a) Independence of firms
(b) Interdependence of firms
(c) Independence of individuals
(d) Interdependence of materials
Ans. b
136-In Edgeworth model, prices oscillate between:
(a) Firms and industry price
(b) Monopoly and duopoly price
(c) Competitive and monopoly price
Ans. c
137-In Edgeworth model, price remains:
(a) Constant
(b) On increasing
(c) Independent
(d) Indeterminate
Ans. d
138-In Edgeworth model, if price falls below
competitive price, the demand is:
(a) More than maximum output
(b) More than minimum output
(c) Less than maximum output
(d) Less than minimum output
Ans. a
139-The kinked demand curve comes into being where:
(a) Proportional demand curve (PDC) and
individual demand curve (IDC) intersect each
other
(b) Proportional demand curve (PDC) and
individual demand curve (IDC) are parallel to
each other
(c) Proportional demand curve (PDC) and
individual demand curve (IDC) repel each other
Ans. a
140-In sweezy model (kinked demand curve model), the
overall increase in costs of production:
(a) Do not effect equilibrium
(b) Affect equilibrium
(c) Both a and b
Ans. b
141- In sweezy model (kinked demand curve model),
the role of MC curve:
(a) Can be ignored
(b) Cannot be ignored
(c) Partially be ignored
Ans. a
142-The critics of Sweezy model say that kink
generates:
(a) Frustration
(b) Poverty
(c) Uncertainty
(d) Integrity
Ans. c
143-In context of oligopoly, the kinky demand curve
(kinked demand curve) hypothesis is designed to
explain:
(a) Price and output determination
(b) Price rigidity (price stickness)
(c) Price leadership
(d) Collusion among rivals
Ans. b {Explanation: Kinked demand curve model is an
initial attempt to explain sticky prices. In
oligopolistic market if one firm increases its price
then the other firms will not follow it. But if the
firm decreases its price then other firms also
decrease their prices otherwise they will lose the
considerable part of their consumers. Firms do not
want to raise their prices b/c even a small price
increase will lose many customers. Firms also do not
want to decrease the price b/c when one firm did so
then price war will start from other firms. The
kinked demand curve theory suggests that there will
be price stickiness (price rigidity) in
oligopolistic market and the firms will rely more on
non-price competition to boost sales, revenue and
profits. Some economists also say that this kinked
demand model is also apply in monopolistic
competition.}
144- The largest possible loss that a firm will make
in the short run is:
(a) Zero
(b) Its total fixed cost
(c) Its total variable cost
(d) Equal to one
Ans. b {At the shut-down point, the total maximum
loss of the firm is equal to its total fixed cost
(TFC). At this point firm’s revenues are equal to
total variable cost (TR=TVC) and price is equal to
average variable cost (P=AVC).}
145- The marginal revenue of a perfectly competitive
firm is:
(a) Equal to the prices of its products
(b) Positively related to output
(c) Negatively related to output
(d) Always higher than marginal cost
Ans. a
146- Which of the following oligopoly models is
concerned with the maximization of joint profits?
(a) Price leadership model
(b) Bertrand’s model
(c) Collusive model
(d) Edgeworth’s model
Ans. c
147- Entry of new firms into a competitive market
will shift the supply curve of the:
(a) Firm to the left
(b) Industry to the right
(c) Firm to the right
(d) Industry to the left
Ans. b
148- A firm is a sum of persons who convert:
(a) Goods into services
(b) Output into inputs
(c) Inputs into outputs
Ans. c
149- Under which of the following forms of the
market structure does a firm have no control over
the price of its product?
(a) Monopoly
(c) Oligopoly
Ans. d
150- The main objective of the firm is to:
(a) Face losses
(b) Avoid losses
(c) Bear losses
(d) Make economic decisions
Ans. d
151-Discriminating monopoly implies that the
monopolist charges different prices for his
commodity:
(a) From different groups of consumers
(b) For different uses
(c) At different places
(d) Any of the above
Ans. d
152- The firm is at equilibrium where:
(a) Output is maximum
(b) Profit is maximum
(c) Revenues are maximum
(d) Profit is minimum
Ans. b {Explanation: When both marginal revenue and
marginal cost are equal, the firm is in equilibrium.
The firm at this equilibrium point is insuring
maximum profit or minimizing losses.}
153- According to Chamberlin, the activity of a
monopolistic competitive firm:
(a) Get noticed by the rival firms
(b) Get unnoticed by the rival firms
(c) Get noticed by the employees of the rival
firms
Ans. b (Explanation: According to Chamberlin, the
number of firms in monopolistic competition is so
large that their activities, especially about price
and output, go unnoticed by the rival firms.)
154-In monopolistic competition, the customers are
attached with one product because of:
(a) Product similarity
(b) Product differentiations
(c) Product inferiority
Ans. b {In monopolistic competition, because of
product differentiation (heterogeneous products),
the each group of customers are attached with some
specific product which is called brand loyalty.}
155-The concept of industry in monopolistic
competition has been replaced by:
(a) Firm
(b) Product group
(c) Producers
(d) Shopkeepers
Ans. b{Explanation: Product Group►In place of
Marshallian concept of industry, Chamberlin
introduced the concept of Group under monopolistic
competition. An industry means a number of firms
producing identical product. A group (product group)
means a number of firms producing differentiated
products which are closely related.}
156-Under monopolistic competition, the products
sold by the firms are:
(a) Economic substitutes
(b) Technical substitutes
(c) Both a and b
Ans. c
157-The demand curve of a firm in monopolistic
competition is:
(b) Vertical
(c) Horizontal
(d) Positively sloped
Ans. a
158-Under monopolistic competition, in long-run
there is:
(a) Ban on exit
(b) Ban on entry
(c) Free entry
(d) Free entry and exit
Ans. d
159-In monopolistic competition, the aim of the firm
is to:
(a) Maximize output
(b) Minimize output
(c) Minimize cost
(d) Maximize profit
Ans. d
160-The short-run periods in monopolistic
competition are:
(a) Parallel to each other
(b) Dependent upon each other
(c) Independent of each other
(d) Zero
Ans. c
161-In monopolistic competition, because of
difference in choices, the firm charges:
(a) Different prices
(b) Similar prices
(c) High prices
(d) Low prices
Ans. a
162-In monopolistic competition, the firms face:
(a) Horizontal demand curve
(b) Vertical demand curve
(c) Similar demand curve
(d) Differential demand curve
Ans. c
163-The concept of product differentiation was
firstly introduced by:
(a) Smith
(b) Kaldor
(c) Sraffa
(d) Marshal
Ans. c
164-In monopolistic competition, the real
differentiation in products is due to difference in:
(a) Style
(b) Consumer
(c) Cost
(d) Material
Ans. d
165-The imaginary differentiation is attributed to
difference in:
(a) Style
(b) Salesmanship
(c) Locality
(d) All of these
Ans. d
166-Two policy variables, “ product and selling
activities” in the theory of firm was introduced by:
(a) Chamberline
(b) Sraffa
(c) Carl marx
(d) Robinson
Ans. a
167-The products, under monopolistic competition are
differentiated, yet they are:
(a) Complements
(b) Close substitutes
(c) Both a and b
Ans. b
168-The goods sold by firms under monopolistic
competition are technological as well as:
(a) Economic complements
(b) Economic substitutes
(c) Economic inferiors
Ans. b
169-In monopolistic competition, if a firm lowers
its price, the rival firms will:
(a) Also lower their prices
(b) Increase their prices
(c) Show no reaction
Ans. a
170-In monopolistic competition, the individual
demand curve is also known as:
(a) Planned products curve
(b) Planned material curve
(c) Planned costs curve
(d) Planned sales curve
Ans. d
171-Under monopolistic competition, the firms
compete alongwith:
(a) Supreme powers
(b) Discretionary powers
(c) Low powers
Ans. b
172-In monopolistic competition, the firm take
advantage due to customers:
(a) Similar choices
(b) Unlimited choices
(c) Differential choices
(d) Few choices
Ans. c
173-In monopolistic competition, the firms have to
face:
(a) Same cost conditions
(b) Different cost conditions
(c) Same price conditions
(d) Same products conditions
Ans. b
174-According to Chamberline, in monopolistic
competition, differentiation is determined by:
(a) Choices
(b) Preferences
(c) Both a and b
Ans. c
175- The demand curve in monopolistic competition
(also in kinked demand curve model), which shows
the share of a firm in market is called:
(a) Relative demand curve
(b) Proportional demand curve
(c) Productive demand curve
(d) Differential demand curve
Ans. b
176-The proportional demand curve in monopolistic
competition (also in kinked demand curve model), is
like industry demand curve in:
(a) Monopolistic competition
(b) Imperfect competition
(c) Monopoly
Ans. d
177- In monopolistic competition (also in kinked
demand curve model), a firm sells the amount where:
(a) Individual demand curve (IDC) is equal to
proportional demand curve (PDC)
(b) Individual demand curve (IDC) is greater
than proportional demand curve (PDC)
(c) Individual demand curve (IDC) is less than
proportional demand curve (PDC)
Ans. a
178-In short-run, in monopolistic competition, a
firm earns:
(a) Normal profits
(b) Abnormal profits
(c) No profits
Ans. b
179-In monopolistic competition, the firm compete on
the basis of:
(a) Price
(b) Entry
(c) Both a and b
Ans. c
180-In monopolistic competition, the firms follow:
(a) Exotic behavior
(b) Sympathetic behavior
(c) Myopia behavior
(d) Regular behavior
Ans. c
181-The advertisement and other selling activities:
(a) Lessen the differentiation
(b) Widen the differentiation
(c) Does not effect the differentiation
Ans. b
182-Because of selling costs, the demand curve of a
firm shifts:
(a) Downward
(b) Upward
(c) Horizontal
(d) Straight line
Ans. b
183-In real life, brand loyalty is a barrier to:
(a) Enter the new firms
(b) Exit the new firms
(c) Both a and b
Ans. a
184-In the theory of firm, Chamberline presented the
idea of:
(a) Rising cost
(b) Falling cost
(c) Rising input
(d) Falling input
Ans. b
185-Chamberline introduces the concept of:
(a) V-shaped selling cost
(b) U-shaped selling cost
(c) V-shaped purchasing material
(d) U-shaped purchasing material
Ans. b
186-In real life firms:
(a) Loss because of past
(b) Learn from past
(c) Destroy because of past
Ans. b
187- A firm’s profit is equal to:
(a) R-C
(b) R>C
(c) R<C
(d) R=C
Ans. a
188- The firm is said to be in equilibrium when the
difference between revenue and cost is:
(a) Maximum
(b) Minimum
(c) Zero
(d) One
Ans. a
189- Which is the other name that is given to the
average revenue curve?
(a) Profit curve
(b) Demand curve
(c) Average cost curve
(d) Indifference curve
Ans. b
190- In perfectly competitive markets, the profit
maximization rule can be represented by:
(a) MR=ATC
(b) P=ATC
(c) P=MC
(d) P=AC
Ans. c
191- The act of producing the output from more than
one plant is concerned with:
(a) Monopoly
(b) Multi-plant monopoly
(c) Bilateral monopoly
(d) Price discrimination
Ans. b {Explanation: Multi-plant Monopoly ►When a
monopolist produces output in more than one plant
then it is called multi-plant monopoly. From each
plant he produces that level of output where MCs of
all plants will equalize and each plant should
produce the amount where MC=MR.}
192- The difference between accounting profits and
economic profits is:
(a) Implicit costs
(b) Explicit costs
(c) Fixed costs
(d) Variable costs
Ans. a
193- Which of the following is not characteristic of
perfect competition?
(a) Freedom of entry and exit
(b) Each seller is a price taker
(c) Perfect information about prices
(d) Heterogeneous products
Ans. d
194- In case of monopoly, both AR and MR fall, but
MR falls:
(a) Double to that of AR
(b) 1/2 to that of AR
(c) 2/3 to that of AR
(d) Four times to that of AR
Ans. a
195- In case of monopoly, the slope of MR is:
(a) Always three times than the slope of AR
(b) Always double than the slope of AR
(c) Always equal to the slope of AR
Ans. b {Explanation: Both MR and AR in monopoly are
negatively sloped .The MR curve lies bellow the AR
curve and the slope of MR is always double than the
slope of AR. We can also say that the MR is twice as
steeper as the AR.}
196- According to marginalistic rule, the profit
maximization hypothesis requires:
(a) MC<MR
(b) MC>MR
(c) MC=AP
(d) MC=MR
Ans. d
197-Who finalized the model of monopolistic
competition?
(a) Ricardo
(b) Marshal
(c) Chamberlin
(d) Mrs. Robinson
Ans. c
198- Who finalized the model of imperfect
competition?
(a) Ricardo
(b) Marshal
(c) Chamberlin
(d) Mrs. Robinson
Ans. d
199- In monopolistic competition, the cost curves of
all firms are:
(a) Uniform
(b) Different
(c) Dependent
(d) Independent
Ans. a {Explanation: In monopolistic competition,
demand and cost curves for all the products and for
all the firms of the group are uniform i.e., firms
face identical demand and cost curves.}
200- In case of perfect competition, TR curve rises

at a:
(a) Constant rate
(b) Decreasing rate
(c) Increasing rate
Ans. a {Explanation: The TR curve in perfect
competition increases at constant rate b/c price
remains constant at given period and when we get
total revenue(TR) by multiplying each unit of output
by price(p) then each next unit shows equal increase
in TR. Because of rising at a constant rate , the
slope of TR curve is also constant in perfect
competition}
201- In case of monopoly, TR curve rises at a:
(a) Constant rate
(b) Decreasing rate
(c) Increasing rate
Ans. b {Explanation: In monopoly, TR curve increases
at decreasing rate because monopolist or a producer
under monopolistic competition can sell more of the
commodity only by lowering its price and hence
facing downward sloping AR(demand curve). So as sale
increases, price or AR tends to reduce. If AR is
reducing then MR must also reduce, hence it follows
that TR under monopoly increases at a decreasing
rate. So TR has no longer constant slope here.}
202- According to M.Kalecki, the true measure of the
degree of monopoly power is the:
(a) Ratio between price and marginal cost
(b) Extent of monopolistic profit enjoyed by
him
(c) Cross-elasticity of demand for the product
of the monopolist
(d) Price charged by the monopolist minus
marginal cost of production
Ans. a
203-The alternative of profit maximization theory
is:
(a) Cost maximization
(b) Product maximization
(c) Revenue maximization
Ans. c
204- In monopoly and perfect competition, TC curves
are:
(a) Different
(b) Similar
(c) Opposite
Ans. b {Explanation: The cost curve of the
monopolist will be of the usual shape as under
perfect competition. But MR and AR curves under
monopoly are downward sloping while under perfect
competition they are perfectly elastic and
horizontal to x-axis.}
205-In perfect competition, the slope of the total
revenue curve of a firm is equal to the:
(a) Market price
(b) AVC
(c) TFC
(d) AFC
Ans. a {Explanation: A competitive firm faces a
perfectly elastic demand curve meaning that total
revenue is proportional to output. A competitive
firm can sell all the output it desires at the
market price. The total revenue curve for a
competitive firm is a ray with a slope equal to the
market price.}
The slope of the TR = MC= P}
206- The total revenue curve for monopolist is the
shape of:
(a) Circle
(b) Rectangle
(c) Parabola
Ans. c {Explanation: For monopolist, to increase
sales it must reduce price. Thus the total revenue
curve for a monopolist is a parabola that begins at
the origin and reaches a maximum value then
continuously falls until total revenue is again
zero. Total revenue reaches its maximum value when
the slope of the total revenue function is zero. The
slope of the total revenue function is marginal
revenue.}
207-In monopoly, new firms:
(a) Can enter and exit
(b) Partially can enter and exit
(c) Cannot enter
Ans. c
208-A monopolist:
(a) Can not influence the market
(b) Can influence the market
(c) Is a price taker
Ans. b
209-By saying that monopolist create a contrived
scarcity, economist mean that monopolist:
(a) Restrict output to increase price
(b) Produce where MC > P
(c) Create a gap b/w quantity demanded and
supplied
Ans. a
210-Which industries spend a relatively large share
of their revenue on research and development in
order to keep up with their competitors?
(a) Grocery stores
(b) High-Tech industries
(c) Automobiles
(d) Construction
Ans. b {Explanation: High-Tech Industry► A High
technology (Hi-tech) industry is one that produces
sophisticated products. There is a significant
emphasis on research and development. Often the 'raw
materials'
are electrical components. Examples of Hi-tech
industries include:
Computers
Telecommunications
Aerospace and military equipment
211-The monopolist firm is price setter. The price

setter firm is one which:
(a) Can influence the market price
(b) Cannot influence the market price
(c) Can sell at zero price
Ans. a
212-A monopolist is:
(a) Price winner
(b) Price searcher
(c) Price taker
(d) Price leaver
Ans. b {Explanation: Unlike a perfectly competitive
firm, the monopolist does not have to simply take
the market price as given. Instead, the monopolist
is a price searcher; it searches the market demand
curve for the profit maximizing price. The
monopolist's search for the profit maximizing price
involves comparing the marginal revenue and marginal
cost associated with each possible price-output
combination on the market demand curve.}
213- In case of monopoly, when total revenue is
maximum:
(a) MR is positive
(b) MR falls
(c) MR rises
(d) MR is zero
Ans. d
214- When total revenue is maximum in monopoly,
elasticity of demand is:
(a) E =1
(b) E >1
(c) E <1
(d) E =0
Ans. a
215-When total revenue (TR) falls in monopoly then
elasticity of demand is:
(a) E =1
(b) E >1
(c) E <1
(d) E =0
Ans. c
216- When elasticity of demand is one (e=1), then
following the formula MR=P[1-1/e], the MR will:
(a) Positive
(b) Negative
(c) Zero
Ans. c
217-When elasticity of demand is greater than one (e
>1), then following the formula MR=P[1-1/e], the MR
will:
(a) Positive
(b) Negative
(c) Zero
Ans. a
218- When elasticity of demand is less than one
(e<1), then following the formula MR=P[1-1/e], the
MR will:
(a) Positive
(b) Negative
(c) Zero
Ans. b
219- In case of monopoly, the price charged against
the additional unit is:
(a) Not different
(b) Same
(c) Not same
(d) Zero
Ans. c {Explanation: The monopolist's marginal
revenue from each unit sold does not remain constant
as in the case of the perfectly competitive firm.
The monopolist faces the downward-sloping market
demand curve, so the price that the monopolist can
get for each additional unit of output must fall as
the monopolist increases its output. Consequently,
the monopolist's marginal revenue will also be
falling as the monopolist increases its output. Now
if we assume here that the monopolist is not a price
discriminate then the monopolist's marginal revenue
from each additional unit produced will not equal
the price that the monopolist charges. In fact, the
marginal revenue that the monopolist receives from
producing an additional unit of output will always
be less than the price that the monopolist can
charge for the additional unit.}
220-The general markets results from the imposition
of price ceilings has been:
(a) Higher prices
(b) Increased prices
(c) Increased consumption
(d) Shortage of products
Ans. d
221-Compared to perfect competition, a monopolist
will charge:
(a) Charges a high price
(b) Produce more output
(c) Increase economic efficiency
Ans. a
222-The output where TC = TR & AC = AR:
(a) Break-even point
(b) Load point
(c) Shut-down point
(d) Revenue cost point
Ans. a {Explanation: Break-even point►In economics &
business, specifically cost accounting, the break-
even point (BEP) is the point at which cost or
expenses and revenue are equal: there is no net loss
or gain, and one has "broken even". A profit or a
loss has not been made, although opportunity costs
have been paid, and capital has received the risk-
adjusted, expected return.
Break even point is the level of sales at which

profit is zero. According to this definition, at
break even point sales are equal to fixed cost plus
variable cost (b/c total cost is the sum of fixed
cost and variable cost). This concept is further
explained by the the following equation:
[Break even sales = fixed cost + variable cost]
The main advantages of break even point analysis is
that it explains the relationship between cost,
production, volume and returns. It can be extended
to show how changes in fixed cost, variable cost,
commodity prices, revenues will effect profit levels
and break even points. Break even analysis is most
useful when used with partial budgeting, capital
budgeting techniques. The major benefits to use
break even analysis is that it indicates the lowest
amount of business activity necessary to prevent
losses. Break-even price analysis calculates the
price necessary at a given level of production to
cover all costs.
Break-even Point calculation »
Calculation of the BEP can be done using the
following formula:
BEP = TFC / (SUP - VCUP)
where:
BEP = break-even point (units of production)
TFC = total fixed costs,
VCUP = variable costs per unit of production,
SUP = selling price per unit of production. }
223-When sales tax is imposed on monopolist, its:
(a) Output is effected
(b) Equilibrium is effected
(c) Input is effected
(d) Reputation is effected
Ans. b
224-Under price discrimination, the buyers must:
(a) Be similar
(b) Not be similar
(c) Equal
Ans. b
225-Dumping is international discriminating:
(a) Monopoly
(b) Oligopoly
(c) Duopoly
Ans. a
226-In discriminating monopoly (price
discrimination), the elasticity of demand of product
in two markets are:
(a) Different
(b) Same
(c) Zero
Ans. a
227- In discriminating monopoly (price
discrimination), the cost of production in two
markets are:
(a) Different
(b) Same
(c) Zero
Ans. b
228-The monopolist who is producing the same output
from two (or more than two) plants is concerned
with:
(a) Single-plant monopolist
(b) Multi-plant monopolist
(c) Two-plant monopolist
(d) Some-plant monopolist
Ans. b
229-The monopolist often lead to exploitation of:
(a) Producers
(b) Workers
(c) Managers
(d) Consumers
Ans. d
230-In monopoly:
(a) The producer will often produce a volume
that is less than the amount which would
maximize the social welfare.
(b) The producer will often produce a volume
that is more than the amount which would
(c) The consumers will often consume a volume
that is more than the amount which would
Ans. a
231- When total revenues equal to total opportunity
cost then the firm will earn:
(a) Abnormal profit
(b) Zero profit
(c) Normal profit
(d) Negative profit
Ans. c
232- In the real world, some competitive firms owns
specialized resources that earn a return called:
(a) Economic profit
(b) Rent
(c) Accounting profit
(d) Normal profit
Ans. b
233- The marginal revenues are derivatives of:
(a) TR function
(b) AR function
(c) MR function
(d) AP function
Ans. a
234- In monopoly, when average revenue curve falls:
(a) MR constant
(b) MR rises
(c) MR falls
(d) MR is zero
Ans. c
235- Equilibrium of a firm represents maximization
of profits as well as:
(a) Maximization of losses
(b) Minimization of losses
(c) Minimization of profits
Ans. b
236- The necessary condition of firm’s equilibrium
requires:
(a) dR/dQ + dC/dQ = 0
(b) dR/dQ - dC/dQ = 0
(c) dC/dQ - dR/dQ = 0
(d) dR/dQ > dC/dQ > 0
Ans. b
237- The sufficient condition of firm’s equilibrium
requires:
(a) d2R/dQ2 < d2C/dQ2
(b) d2R/dQ2 > d2C/dQ2
(c) d2R/dQ2=d2C/dQ2
Ans. a
238- In case of short-run, the supply curve of an
industry is the horizontal summation of:
(a) Marginal cost curves
(b) Average cost curves
(c) Total cost curves
Ans. a
239- Which is the first-order condition for the
profit of a firm to be maximum?
(a) AC=MR
(b) MC=MR
(c) MR=AR
(d) AC=AR
Ans. b
240-In joint-profit maximization cartel, central
agency sets the:
(a) Output
(b) Input
(c) Demand
(d) Price
Ans. d
241- In joint-profit maximization cartel, the
distribution of profit is:
(a) Made by agency
(b) Not made by agency
(c) Made by people
Ans. a
242-In perfect cartel, the:
(a) Perfect competition price is charged
(b) Monopoly price is charged
(c) Monopoly price is not charged
Ans. b
243-In centralized cartel, the firms are like:
(a) Price takers
(b) Price setters
(c) Price discriminators
Ans. a
244-In market sharing cartel model, cartel
determines the shares of:
(a) the individuals
(b) industry
(c) firms
(d) associations
Ans. c
245-The non-price competition cartel is a:
(a) stable cartel
(b) unstable cartel
(c) prominent cartel
(d) special cartel
Ans. b
246-In dominant price leadership model, the dominant
firm set the:
(a) price
(b) output
(c) both a and b
Ans. a
247-In dominant price leadership model, the small
firms are like:
(a) monopolistic firms
(b) monopoly
(c) competitive firms
Ans. c
248-In price leadership, like leader, the follower
firm may:
(a) also maximize its profits
(b) not maximize its profits
(c) maximize its costs
Ans. b
249-The low cost price leader will charge:
(a) higher prices
(b) zero prices
(c) lower prices
(d) specific prices
Ans. c
250-In Bertrand model, the entry of new firms is:
(a) banned
(b) allowed
(c) partially allowed
Ans. a
UNIT
5: GAME THEORY
1- The game theory was basically presented by:

(a) Ricardo
(b) Marshal
(c) Neomann and Morgenstern
(d) Karl Marx
Ans. c
2- The game theory is concerned with:
(a) Perfect competition
(b) Imperfect competition
(c) Price discrimination
(d) Duopoly and oligopoly
Ans. d
3-The game theory takes into consideration:
(a) Reaction of rival firms
(b) Reactions of people
(c) No reaction of rival firms
Ans. a
4-The game theory concentrates on:
(a) Gaming
(b) Strategic decisions
(c) Both a and b
Ans. c
5-Contracts made by firms in cooperative games are:
(a) Biased
(b) Binding
(c) Not binding
(d) Conditional
Ans. b{Explanation: Cooperative Game► There are two
main branches of game theory i.e. cooperative games
and non-cooperative games. ‘A game in which players
can enforce contracts through third parties is a
cooperative game’. ‘A game is cooperative if the
players are able to form binding commitments. For
instance the legal system requires them to adhere to
their promises’. A cooperative game is a game where
groups of players ("coalitions") may enforce
cooperative behavior, hence the game is a
competition between coalitions of players, rather
than between individual players. An example is a
‘coordination game’, when players choose the
strategies by a consensus decision-making process.}
6-The firms in non-cooperative games:
(a) Enforce contracts
(b) Make contracts
(c) Make negotiations
(d) Do not make negotiations
Ans. d {Explanation: Non-cooperative Games► A non-
cooperative game is one in which players make
decisions independently. In this type of game, the
players do not make negotiations or binding
commitments. The most famous example of non-
cooperative games is ‘Nash Equilibrium’.}
7- In constant sum game (zero sum game), if there
are two parties then:
(a) Both parties make better-off
(b) Both parties make worse-off
(c) Both parties become Neutral
(d) One party can become better off only if
another is made worse off
Ans. d {Explanation: Constant Sum Game (Zero Sum
Game)► A constant sum game is one in which the total
pay-offs are the same for all possible combinations
of players’ strategies. This means that each player
can only gain at the expense of others; any player’s
loss is balanced by an equal gain (or gains) made by
the other players. A real life example of a constant
sum game is gambling. If one player wins, other
players must have lost the same amount. It is also
called ‘zero sum game’ b/c the sum of gains/losses
of all players become zero .For example if there are
two players then:
Gains of one player + Losses of other player = 0}
8- In non-constant sum game (non-zero sum game), if
there are two parties then:
(a) Both parties make better-off
(b) Both parties make worse-off
(c) Both parties become Neutral
(d) Both parties can become better off or worse
off
Ans. d {Explanation: Non-constant Sum Game (Non-zero
Sum Game)► A non-constant sum game describes a
situation in which the interacting parties’
aggregate gains and losses is either less than zero
or more than zero. Situations where participants can
all gain or suffer together are referred to as non-
zero sum game. Thus, a country with an excess of
bananas trading with another country for their
excess of apples, were both benefit from the
transaction. The sum of the payoffs to the players
varies according to the strategies chosen.}
9- The pay-off matrix shows:
(a) Possible outcomes
(b) Possible benefits
(c) Possible losses
(d) None of them
Ans. a
10-The optimal strategy for a player is termed as:
(a) Recessive strategy
(b) Dormant strategy
(c) Dominant strategy
(d) Hidden strategy
Ans. c
11-In dominant strategies ‘I am doing the best, I
can no matter:
(a) What you do
(b) What you are doing
(c) What you not do
(d) None of them
Ans. a {Explanation: Dominant Strategy► A strategy
is dominant if regardless of what any other players
do, the strategy earns a player a larger payoff than
any other. If one strategy is dominant then all
others are dominated. For example, in prisoner’s
dilemma, each player has a dominant strategy.}
12-A dominant strategy can best be described as:
(a) A strategy taken by a dominant firm
(b) A strategy taken by a firm in order to
dominate its rivals
(c) A strategy that is optimal for a player no
matter an opponent does
(d) A strategy that leaves every player in a
game better off
Ans. c
13-A maximin strategy:
(a) Maximizes the minimum gain that can be
earned
(b) Maximizes the gain of one player, but
minimizes the gain of the opponent
(c) Minimizes the maximum gain that can be
earned
Ans. a
14- Nash equilibrium says:
(a) I am doing the best, I can given what you
are doing
(b) You are doing the best, you can given what
I am doing
(c) Both a and b
Ans. c {Explanation: : Nash equilibrium► Nash
equilibrium (named after John Forbes Nash, who
proposed it) is a term used in game theory to
describe equilibrium where each player’s strategy is
optimal given the strategies of all other players.
There is no unilateral profitable deviation from any
of the players involved. In other words, no player
in the game would take a different action as long as
every other player remains the same. Nash
equilibrium is self-enforcing b/c when players are
at a Nash equilibrium, they have no desire to move
b/c if they do, then they will be worse off.}
15-In Nash equilibrium, a player:
(a) Deviates from his strategy
(b) Does not deviate from his strategy
(c) Does not think in a good way
Ans. b
16-Nash equilibrium is applicable in case of:
(a) Cournot model
(b) Edgeworth model
(c) Chamberline model
(d) Sweezy model
Ans. a
17-In Nash Equilibrium:
(a) Each player has a dominant strategy
(b) No players have a dominant strategy
(c) At least one player has a dominant strategy
(d) Players may or may not have dominant
strategies
Ans. d
18-‘Nash Equilibrium’ is stable:
(a) They involve dominant strategies
(b) They involves constant-sum games
(c) Once the strategies are chosen, no player
has an incentive to deviate unilaterally from
them
Ans. c
19-The games which played by players again and again
are called:
(a) Repeated games
(b) Cooperative games
(c) Non-cooperative games
(d) Constant games
Ans. a {Explanation: Repeated Game► When players
interact by playing a similar stage game (such as
prisoner’s dilemma) numerous times, the game is
called repeated game. Unlike a game played once, a
repeated game allows for a strategy to be contingent
on past moves, thus allowing for reputation
effects.}
20-Repetition of a game (Repeated Game):
(a) Yields the same outcome over and over
(b) Can result in behavior that is different
from what it would be if the game were played
once
(c) Is not possible
(d) Makes cooperative games into non-
cooperative games
Ans. b
21-The Prisoner’s Dilemma was presented by
A.W.Tucker in:
(a) 1910
(b) 1945
(c) 1900
(d) 1940
Ans. d
22-In Prisoner’s Dillemma, the players are:
(a) Industrialists
(b) Prisoners
(c) Common men
(d) Workers
Ans. b
23-In repeated game, the Prisoner’s Dillemma can
have a:
(a) Non-cooperative outcome
(b) Cooperative outcome
(c) Dominant behavior
(d) Recessive behavior
Ans. b
24-In Prisoner Dilemma, the best choice of strategy
is:
(a) Stable
(b) Unstable
(c) Negative
(d) Neutral
Ans. b
25-In Prisoner’s Dilemma, both the prisoners are
interrogated:
(a) Separately in different cells
(b) Collectively in different cells
(c) Collectively in same cell
(d) Separately in same cell
Ans. a
26-The ‘Tit for Tat’ strategy means cooperation by
the 2nd firm if:
(a) 1st firm does not cooperate
(b) 1st firm cooperates
(c) 1st firm collapses
Ans. b
UNIT 6:
GENERAL EQUILIBRIUM
1-The general equilibrium shows equilibrium in:

(a) Single market
(b) All markets
(c) Money market
Ans. b
2-The partial equilibrium shows equilibrium in:
(a) Single market
(b) All markets
(c) Money market
Ans. a
3-The general equilibrium of consumption deals with
overall:
(a) Consumption
(b) Production
(c) Allocation
(d) All the above
Ans. a
4-In general equilibrium, contract curve is obtained
by joining the points where MRS are:
(a) Same
(b) Different
(c) Zero
Ans. a
5-The utility possible curve shows level of
satisfaction of:
(a) One consumer
(b) Two consumers
(c) Three consumers
Ans. b
6-the general equilibrium of production is deals
with overall:
(a) Consumption
(b) Production
(c) Allocation
(d) All the above
Ans. b
7-the producer who uses more of factor K, the
MRTSKL:
(a) Same
(b) Zero
(c) Rises
(d) Falls
Ans. d
8-The contract curve in consumption is obtained by
joining the points where MRS of consumers are:
(a) Zero
(b) Equal
(c) Falls
(d) Rises
Ans. b {Explanation: Contract Curve in Consumption►
The Contract Curve highlights all points within an
Edgeworth Box that can serve as Exchange
Equilibria, i.e., all points for which the MRS of
both people are equal or all points for which the
indifference curves of both people are tangent to
one another. Exchange equilibrium where there is
equality in the Marginal Rates of Substitution,
i.e., MRS of consumer 1 = MRS of consumer 2.}
9- The contract curve in production is obtained by
joining the points where MRTS in the production of
both goods are:
(a) Zero
(b) Equal
(c) Falls
(d) Rises
Ans. b {Explanation: Contract Curve in Production►
The Contract Curve in a Production Edgeworth Box
highlights all points that can serve as Exchange
Equilibria between the production of two goods,
i.e., all points for which the MRTS in the
production of both goods are equal or all points
for which the isoquants of both goods are tangent to
one another. }
10-General equilibrium is demonstrated with the help
of:
(a) Edgeworth box diagram
(b) Two dimentional figure
(c) Cost curves
Ans. a {Explanation: Edgeworth Box for consumption
reflects allocation of fixed supplies of goods
between consumers. Exchange between consumers
represented by movement within Edgeworth Box.
Edgeworth Boxes for production illustrates
allocation of fixed supplies of inputs between the
production of two types of goods. Equilibrium in
Production is achieved when the Marginal Rates of
Technical Substitution in the production of the
goods are equal.}
11-In general equilibrium of consumption it is
assumed that quantities of X and Y are:
(a) Changed
(b) Fixed
(c) Same
(d) Different
Ans. b
12-The general equilibrium in consumption takes
place where indifference curves of two consumers:
(a) Intersect to each other
(b) Overlap with each other
(c) Are parallel
(d) Tangent to each other
Ans. d {Explanation: When indifference curves of two
consumers are tangent to each other then it means
that the MRS of both indifference curves are equal
which is necessary for general equilibrium in
consumption.}
13- The general equilibrium in production takes
place where isoquants of the two goods are:
(a) Intersect to each other
(b) Overlap with each other
(c) Are parallel
(d) Tangent to each other
Ans. d{ Explanation: When the isoquant of two goods
are tangent to each other then it means that the
MRTS of both isoquants are equal which is necessary
for general equilibrium in production.}
14-In general equilibrium of production it is
assumed that quantities of labor (L) and capital (K)
are:
(a) Changed
(b) Fixed
(c) Same
(d) Different
Ans. b
15-In general equilibrium of production:
(a) Factors are substituted
(b) Land is substituted
(c) Population is substituted
Ans. a
16-In general equilibrium of production, the numbers
of goods produced in economy are:
(a) Four
(b) Three
(c) Two
(d) One
Ans. c
17-Equilibrium in production is achieved when
marginal rate of technical substitution (MRTS) in
the production of the goods are
(a) Equal
(b) Different
(c) Zero
Ans. a
18-The general equilibrium in production is
furnished with Pareto Optimality in:
(a) Consumption
(b) Production
(c) Substitution
Ans. b
19-In general equilibrium of production, both
producers move up to:
(a) Consumption hill
(b) Production hill
(c) Strong hill
(d) Substitution hill
Ans. b
20-The marginal rate of technical substitution
(MRTS) is the slope of:
(a) Indifference curve (IC)
(b) Iso-quant (IQ)
(c) TC
(d) All the above
Ans. b
21-The marginal rate of substitution (MRS) is the
slope of:
(a) Indifference curve (IC)
(b) Iso-quant (IQ)
(c) TC
(d) All the above
Ans. a
22-In general equilibrium, both the consumers in
economy are in equilibrium when MRS:
(a) Are differ
(b) Are same
(c) Falls
(d) Rises
Ans. b
23-The firm which employs more capital, the MRTSKL :
(a) Rises
(b) Falls
(c) Remains unaffected
Ans. b
24-The consumer who uses more of good X, the MRSXY :
(a) Rises
(b) Falls
(c) Remains unaffected
Ans. b
25-Every point on contract curve shows Pareto’s
Optimality in:
(a) Substitution
(b) Distribution
(c) Consumption
(d) Allocation
Ans. c
26-By drawing contract curve from factor space to
production space, we get:
(a) Marginal rate of substitution
(b) Production possibility curve
(c) Substitute curve
Ans. b
27-The production possibility curve also shows:
(a) Consumption frontiers of the economy
(b) Production frontiers of the economy
(c) Distribution frontier of the economy
(d) Substitution frontier of the economy
Ans. b
28-The Marginal Rate of Product Transformation
(MRPT) is the slope of:
(a) Production Possibility Curve (PPC)
(b) Indifference Curve
(c) Isoquant
(d) Contract curve
Ans. a {Explanation: Marginal Rate of Product
Transformation (MRPT)► MRPT reflects the rate at
which an economy can transform one good into another
by reallocating inputs along a contract curve. The
MRPT is the slope of a production possibility curve
(PPC) at a specific point.}
29-At simultaneous equilibrium of consumption and
production:
(a) MRPTXY = MRSXY of A = MRSXY of B
(b) MRPTXY > MRSXY of A > MRSXY of B
(c) MRPTXY < MRSXY of A < MRSXY of B
Ans. a
30-The PPC is attained by shifting the output from:
(a) Factor space to output space
(b) Output space to factor space
(c) Both a and b
Ans. a
31-If supply of labor increases more than increase
in demand for labor, the price of labor will:
(a) Rise
(b) Fall
(c) Remain constant
Ans. b
32-In general equilibrium, where slopes of
indifference curves differ, consumers have:
(a) No tendency to deviate
(b) Tendency to deviate
(c) No choice to deviate
Ans. b
UNIT 7: FACTOR
PRICING
1-The theory of distribution analysis the principles

which explain:
(a) The distribution of goods among consumers
(b) The allocation of resources in different
sectors of the economy
(c) The distribution of the income among
(d) The distribution of profits among
shareholders
Ans. c
2-The theory of distribution is based on principles:
(a) Similar to those applicable to commodity
pricing
(b) Different from those applicable to
commodity prices
(c) Which are applicable to any field
Ans. a
3-The theory of distribution deals with:
(a) Personal distribution of income
(b) Functional distribution of income
(c) Sectoral distribution of income
Ans. b {Explanation: Functional Distribution of
Income► is a theory explaining how income is divided
b/w different groups involved in production
process.}
4-The demand for factor of production is:
(a) A direct demand
(b) A cross demand
(c) A derived demand
Ans. c {Explanation: The demand for each of the
factors of production is often referred to as a
‘derived’ demand to emphasize the fact that the
relationship b/w the factor’s price and the quantity
of factor demanded by firms employing it in
production is directly dependent on consumer demand
for the final product the factor is used to
produce.}
5-Demand for productive resource by a firm depends
on:
(a) The physical quantity it produces
(b) The physical quantity it produces and the
price at which the resource can be sold
(c) The amount which the resource can get
elsewhere
Ans. b {Explanation: Demand for Productive Resource►
In factor market, the productive resource and
services are bought and sold. There are two broad
classes of productive resource – nonhuman capital
(things that satisfy human needs and also helpful in
production of goods, i.e. money, food, pen, pencil,
vehicle, tools, etc) and human capital (include
people and their skills that are used to produce
goods and services). Both are durable in the sense
that they will last in the future, thereby enhancing
future productive capabilities. The demand for
resources is derived from demand for products that
the resource helps to produce. The quantity of
resource demanded is inversely related to its
price.}
6-A firm produces with a view to:
(a) Maximize output
(b) Maximize profit
(c) Optimize plant use
(d) Optimize labor welfare
Ans. b
7-The increase in output as a result of one unit
increase in a factor is known as:
(a) Marginal revenue product (MRP)
(b) Marginal physical product (MPP)
(c) Marginal revenue
Ans. b
8-Increase in total revenue, resulting from the
employment of an additional unit of the variable
factor, is known as:
(a) Marginal revenue product (MRP)
(b) Marginal physical product (MPP)
(c) Marginal revenue
Ans. a
9-The marginal physical product factor:
(a) Falls, remains constant and then rises
(b) Rises, falls and become constant
(c) Rises, may remain constant then fall and
become negative
(d) Varies in an irregular manner
Ans. c
10-Marginal physical product (MPP), multiplied by
price, gives:
(a) Marginal revenue (MR)
(b) Marginal output
(c) Marginal revenue product (MRP)
(d) Marginal income
Ans. c
11-In perfect competition for a firm, the demand for
labor curve is:
(a) MRPL curve
(b) Horizontal curve
(c) VMPL curve
(d) Vertical curve
Ans. c
12-Which of the statements is correct for a firm
facing perfect competition in both commodity and
factor markets?
(a) Its MR curve is always horizontal while MRP
curve rises, falls and becomes negative
(b) Its MR curve and MRP curve both show
similar changes
(c) Its MR curve and MRP curve are the same
Ans. a
13-A profit maximizing firm will employ additional
units of a variable resource up to a point where:
(a) Its marginal revenue product equals
marginal cost
(b) Its marginal revenue product equals
marginal physical product
(c) Its marginal revenue product equals price
Ans. a
14-Under purely competitive conditions a firm’s
marginal revenue product ( MRP) is:
(a) MPP×P
(b) MPP×MRS
(c) MPP×MR
(d) MR×P
Ans. a {Explanation: MRP=MPP×P, here P (Price) is
the ‘price per unit of output’ and MPP is ‘marginal
physical product of the factor’.}
15-A firm is in equilibrium where:
(a) Its marginal revenue product (MRP) is equal
to marginal cost (MC)
(b) Its marginal physical product (MPP) is
equal to marginal cost (MC)
(c) Its marginal revenue product (MRP) is equal
to average revenue (AR)
(d) Its average revenue product(ARP) is equal
to average revenue(AR)
Ans. a
16-A fall in the wage rate, ceteris paribus will
induce a firm to employ:
(a) Great number of workers
(b) Small number of workers
(c) The same number of workers
Ans. a
17-In pure competition, fall in the wage rate
induces all firms to employ more workers. This steps
up the output rate of the product as a result of
which:
(a) The resulting MRP shifts to the right
(b) The resulting MRP shifts inwards to the
left
(c) The resulting MRP remains at the same level
(d) The relation can not be predicted
Ans. b
18-Under perfect competition in long-run:
(a) Wage rate is equal to MRP
(b) Wage rate is equal to ARP
(c) Wage rate is equal to both MRP and ARP
Ans. c {Explanation: Marginal Productivity Theory►
explains that under perfect competition, a workers
wage is equal to marginal as well as average revenue
productivity. In long run firm will earn normal
profit, so firm will be in equilibrium when average
wage (AW), marginal wage (MW), marginal revenue
productivity (MRP), and average revenue productivity
(ARP) are equal to one another. So in long run;
MRP=ARP=AW=MW}
19-Under perfect competition, in short run, if
average revenue product is greater than wage rate
(ARP>AW), then the firm will:
(a) Earn super normal profits
(b) Earn normal profit
(c) Incur loss
Ans. a {Explanation: According to marginal
productivity theory, under perfect competition, in
short run if ARP>AW then the firm will get super
normal profits. If ARP=AW then firm will earn normal
profits and if ARP<AW then firm will incur loss.}
20-Under perfect competition in the long run, the
wage rate of a firm will:
(a) Be higher than that for the industry
(b) Be lower than that for industry
(c) Be same as for the industry
Ans. c
21-Under perfect competition, in the long run, the
wage rate of labor is determined by:
(a) The interaction of labor supply curve with
the market
(b) The interaction of the labor supply curve
with the firm’s demand curve
(c) The interaction of the labor supply curve
with the firm’s MRP curve
Ans. b
22-For a firm, the demand curve for a factor is:
(a) Its ARP curve
(b) Its MRP curve
(c) Both ARP and MRP curves
Ans. b
23-Under perfect competition, in the long run, the
firm’s equilibrium is at the point where:
(a) MC=ARP=MRP
(b) MC=ARP<MRP
(c) MC=ARP>MRP
(d) MC=MRS
Ans. a
24-The theory of rent deals with:
(a) Contractual rent
(b) Economic rent
(c) Both economic and contractual rent
Ans. b{Explanation: Economic Rent► Difference b/w
what a factor of production(capital, land, labor) is
earning and what it could earn in the next best-paid
employment.}
25-The Ricardian theory considers rent as:
(a) A gross surplus
(b) A net surplus
(c) A differential surplus
Ans. c
26-According to the Ricardian theory, rent is:
(a) Difference of produce of superior land and
inferior land
(b) Difference of income b/w smaller farmers
and bigger farmers
(c) Surplus of produce of all categories of
land above the marginal land
Ans. c
27-According to Ricardian theory, the receipt from
produce and its cost will be equal for:
(a) The sub-marginal land
(b) The marginal land
(c) The super-marginal land
Ans. b {Explanation: Marginal Land► The land which
has zero rent.}
28-The Ricardian theory and the modern theory of
rent are:
(a) Similar
(b) Same
(c) Altogether different
(d) Slightly different
Ans. c
29-According to modern theory, rent may arise:
(a) Only from land
(b) From all factors of production
(c) Only from labor
(d) None of then above
Ans. b
30-According to modern theory, rent is the
difference b/w:
(a) Actual earning and transfer earning
(b) A land’s produce and B land’s produce
(c) Reward of marginal and sub-marginal units
of a factor
Ans. a
31-A factor’s transfer earning is:
(a) What it gets in its present use
(b) What it can get in a better use
(c) What it expects to get in the next
alternative use
Ans. c
32- A factor will continue to work in the present
use:
(a) Only if it gets a reward at least equal to
its transfer earning
(b) Up to a point when its reward comes
slightly lower than transfer earning
(c) Even when its reward falls much below
transfer earning
Ans. a
33-a factor will not earn rent if:
(a) Its supply is elastic
(b) Its supply is inelastic
(c) Its supply cannot be varied
(d) Its supply is perfectly elastic for all
amounts
Ans. d
34-Rent arises on a factor when its:
(a) Total supply is inelastic
(b) Total supply is elastic
(c) Supply for a particular purpose is elastic
(d) Supply for a particular purpose is
inelastic
Ans. c
35-Non-specic factors, which can be put to numerous
uses earn:
(a) A large amount of rent
(b) A small amount of rent
(c) No rent
Ans. b
36-Quasi-Rent has been popularized by:
(a) Alfred Marshal
(b) Pigou
(c) Adam smith
(d) Robinson
Ans. a
37-Quasi-Rent is return on account of:
(a) Prime costs
(b) Secondary costs
(c) Both primary and secondary costs
Ans. b
38-quasi-rent is:
(a) Price – AVC
(b) Price – AFC
(c) Price – (AVC +AFC)
Ans. a
39-According to Marshal, the relation between rent
and price is as follows:
(a) Rent is price determined, not price
determining
(b) Rent determines price
(c) There is no relation between rent and price
Ans. a {Explanation: According to Marshal, price
determines the rent and rent does not determine the
price. If the price of corn is high then the rent
for land is high in that area where corn is
cultivated.}
40-If a seller sells his product in a monopoly
market, his MRP for labor will change because of:
(a) Change in MRP of labor
(b) Change in price of the product
(c) Change in MRP and price both
Ans. c
41-Marginal physical product multiplied by the price
per unit is equal to marginal revenue product (MRP×
Price) is relevant for:
(a) Perfectly competitive market for the
product
(b) Monopoly market for the product
(c) Imperfectly competitive market for the
product
Ans. a
42-For monopoly market for the product:
(a) MRP declines faster than under competitive
market
(b) MRP declines at the same rate as in
competitive market
(c) MRP declines slower than competitive market
Ans. a
43-In monopoly, the equality of MRP and wage rate
will be reached at:
(a) A lower point of employment of labor
(b) A higher point of employment of labor
(c) The same point in both
Ans. a
44-differences of wages in an economy are:
(a) Competitive differences and therefore
justified
(b) Non-competitive differences and therefore
not justified
(c) Competitive and justified in some cases and
non-competitive and not justified in some others
Ans. c
45-The difference in wages of man and woman are:
(a) Because of differences of efficiency and
are justified
(b) Because of no difference of efficiency and
are not justified
(c) Sometimes because of differences of
efficiency and sometimes not so
Ans. c
46-Differences of interest rate in a country show
that:
(a) Both pure and gross interest rates are
different for different purposes
(b) Only gross interest rate is different but
pure interest rate is similar
(c) Only pure interest rate is different but
gross interest rate is similar
(d) Non of the above
Ans. b {Explanation: Pure Rate of Interest ►This is
a theoretical interest rate that emerges in market
of loanable funds where conditions of perfect
competition and certainty (zero risk) prevail.
Gross Interest Rate ►The annual rate of interest to
be paid on an investment, security or deposit
account before taxes or other charges deducted. This
is opposite of ‘net interest’.}
47-“Interest is a reward for parting with
liquidity”, according to:
(a) Keynes
(b) Alfred Marshal
(c) Adam Smith
Ans. a
48-The classical theory explained interest as a:
(a) Reward for saving
(b) Reward for parting with liquidity
(c) Reward for abstinence
(d) Reward for inconvenience
Ans. a
49-The most liquid asset is:
(a) Money
(b) Time deposits
(c) Shares
(d) Bonds
Ans. a
50-Which of the following motive refers to holding
money is interest-elastic?
(a) The transaction motive
(b) The precautionary motive
(c) The speculative motive
Ans. c
51-Changes in rate of interest do not very much
affect the amount of money held for:
(a) The transaction motive
(b) The precautionary motive
(c) The speculative motive
Ans. a
52-Which of the following statements describes best
the content of the theory of distribution?
(a) The distribution of income b/w different
individuals
(b) The distribution of income b/w economic
groups
(c) The principles of just distribution of
wealth and income
(d) The distribution of income b/w the owners
of factor resources
Ans. d
53-Where one factor is fixed, the MRP of various
factors will decline as:
(a) Output expands, provided the price of the
product does not rise
(b) Output contracts, provided the price of the
product does not fall
(c) Output remains constant, provided the price
of the product does not fall
(d) Output contracts, provided the price of the
product does not rise
Ans. a
54-Which of the following is the most acceptable
statement?
(a) An employer will continue to hire units of
a variable factor until its MRP equals its MW
(b) An employer hires a variable factor up to
the point where diminishing returns operate
(c) An employers hires a variable factor until
its MRP becomes zero
Ans. a
55-Under perfect competition, a factor will be
demanded up to the point:
(a) Where its MRP is more than its price
(b) Where its ARP equals its price
(c) Where MRP equals its price
(d) Where MRP increases and price falls
Ans. a
56-An imperfectly competitive seller’s resource-
demand curve (MRP curve) slopes downwards b/c:
(a) Marginal product diminishes and product
price falls as output increases
(b) Marginal product increases and product
price falls as output increases
(c) Marginal product diminishes and product
price rises as output increases
(d) Marginal product remains constant and
product price falls as output increases
Ans. a {Explanation: We know that MRP=MPP× Price
,so in monopoly marginal physical product (MPP)
diminishes and product price falls as output
increases and due to these reasons the MRP curve is
downward sloping.}
57-Other things being equal, more of a factor will
be supplied to an industry at:
(a) A lower reward than at higher reward
(b) A higher reward than at a lower reward
(c) Lower taxes than at higher taxes
(d) Higher taxes than at lower taxes
Ans. c
58-The marginal revenue product (MRP) of any factor
of production is:
(a) The marginal physical product of factor ×
the price per unit of the factor
(b) The marginal physical product of the
factor× the price per unit of output
(c) The marginal physical product of the
factor× marginal cost
Ans. b
MACRO ECONOMICS
UNIT 1: NATIONAL INCOME

ACCOUNTING
1-Which of the following is not one of the problems

before the calculation of national income?
(a) Double counting
(b) Improper records
(c) Differences in the incomes of the
individuals
(d) Problem of exclusion and inclusion
Ans. c
2-The national income is equal to:
(a) Net national product - Subsidies +Taxis
(b) Net national product - Indirect taxes
+Subsidies
(c) Net national product - Direct taxes
+Subsidies
(d) Gross national product - Subsidies +Taxis
Ans. b
3-One of the following statements explains personal
income. Which is that?
(a) National income – income taxes-
undistributed corporate profits- social security
contributions+ transfer payments
(b) Net national income- undistributed profit+
foreign income- imports
(c) N.N.P- depreciation+ transfer earnings-
taxes
Ans. a
4-per capita real income stands for:
(a) Real national income/ size of population
(b) Real national income/ working population
(c) Real population/adult population
Ans. a
5-A year is used as the common length of time for
national income estimation because it:
(a) Incorporates the effects of policy measure
(b) Is neither too long nor too short
(c) Accounts for all seasonal ups and downs of
output
(d) Every country conventionally adopts it
Ans. d
6-Which of the following is not necessarily a final
product?
(a) Finished product
(b) Product sold to consumers
(c) Product laying with shopkeepers stock
(d) Product used for self consumption
Ans. a
7-Double counting means:
(a) Counting a product more than one
(b) Counting a product at the final stage of
the output process
(c) Counting both as product and as factor
payment
(d) Counting both as ‘real goods’ and as ‘money
flow’
Ans. a
8-Double counting has the effect of:
(a) Underestimating national product
(b) Overestimating national product
(c) Distorting national product
(d) Misleading conclusions about national
product
Ans. b
9-Firm A produces and sells cotton to B for Rs.
400.B makes yarn out of it and sells to C for Rs.
600 and C makes cloth and sell to consumers for Rs.
1000. Which figure has to be used for finding the
economy’s product?
(a) Rs. 400 of firm A
(b) Rs. 600 of firm B
(c) Rs. 1000 of firm C
(d) Total of all the three Rs. 2000
Ans. c
10-In the light of the ‘final product’ concept,
goods produced by firm A and sold to firm B for
further processing:
(a) Is to be included in product
(b) Is not to be included in product
(c) Is to be included to the extent of value
added by A
(d) Is to be included at a lower value
Ans. b
11-If value added at different stages is added, the
total will:
(a) Equal the value of the final product
(b) Overestimate the value of the final product
(c) Underestimate the value of the final
product
(d) Misrepresent the value of final product
Ans. a
12-Firm A produces cotton worth Rs. 1000 and sells
it to B; from this B makes yarn worth Rs. 1500 and
sells to C who manufactures cloth from it of worth
Rs. 2500. The value added is:
(a) A-Rs. 1000;B-Rs. 1500;C-Rs. 2500;Total Rs.
5000
(b) A-Rs. 1000;B-Rs. 500;C-Rs. 2500;Total Rs.
4000
(c) A-Rs. 1000;B-Rs. 500;C-Rs. 1000;Total Rs.
2500
(d) A-Rs. 1000;B-Rs. 1500;C-Rs. 1000;Total Rs.
3500
Ans. c
13-National Income is:
(a) Income of the government
(b) Budget of the government
(c) Sum total of the factor incomes
(d) Profits of the public undertakings
Ans. c
14-National Income does not include:
(a) Profits and rents
(b) Wages and salaries
(c) Interest on capital
(d) Transfer incomes
Ans. d
15-NNP at factor cost equals to:
(a) GNP – Depreciation
(b) NNP at market price + Depreciation
(c) NNP at market price – Indirect taxes +
Subsidies
(d) NNP at market price – Indirect taxes
Ans. d
16-Transfer income is:
(a) Income accruing to the capitalists
(b) Income earned in transferable jobs
(c) Income of the business enterprises
(d) Income received by not doing any economic
activity
Ans. d
17-Saving refers to:
(a) The part of income which is not consumed
(b) The part of income which is not produced
(c) The part of income which is paid out to
others
(d) The part of income which is hoarded
Ans. a
18-Subsidies means:
(a) Payment by government for purchase of goods
and services
(b) Payment by business enterprises to factors
of production
(c) Payment by companies to share-holders
(d) Payment by government to business
enterprises without buying any goods and
services
Ans. d
19-Net foreign investment is equal to:
(a) Total amount of foreign investment in a
country
(b) Investment by foreigners during a
particular year
(c) Investment by local residents in a foreign
country
(d) Investment by the foreigners in this
country minus investment by residents of this
country in foreign countries during a given time
period
Ans. d
20-The sum of all factor incomes is equal to:
(a) National Income
(b) Gross National Product
(c) Personal Income
(d) Disposable Income
Ans. a
21-Which of the following is not investment?
(a) Expenditure on purchase of capital goods
(b) Expenditure on purchase of food grains
(c) Expenditure on expansion of the plant
(d) Expenditure on setting up a new plant
Ans. b
22-Which of the following is not transfer payment?
(a) Pocket money to child
(b) Pension to retired employees
(c) Social security contributions
(d) Payment to a domestic servant
Ans. d
23-Which of the following is a transfer payment?
(a) Payment made to housewife
(b) Pocket allowance to children
(c) Maintenance allowance to old parents
Ans. d
24-Depreciation means:
(a) Destruction of a plant in a fire accident
(b) Loss of equipment over time due to wear and
tear
(c) Closure of the plant due to labor trouble
(d) Closure of the plant due to lockout
Ans. b
25-The difference between Gross National Product
(GNP) and Gross Domestic Product (GDP) is equal to:
(a) Gross foreign investment
(b) Net foreign investment
(c) Net exports
(d) Net factor income from abroad
Ans. d
26-Gross Domestic Product (GDP) is a measure of:
(a) A country’s domestic economic activities
(b) A country’s foreign trade relation
(c) A country’s internal trade
(d) A country’s financial position
Ans. a
27-Which of the following formula could be used for
calculating the per-capita income of a country?
(a) Total family income / number of family
members
(b) National Income / total population
(c) Total government revenue / total population
Ans. b
28-National Income is a total of:
(a) All profits
(b) The net value of all goods and services
produced in a economy in a year
(c) Payments for raw material
(d) Value of goods exchanged in perfect
competition
Ans. b
29-National Product includes goods:
(a) Exchanged in markets but not those consumed
by producers
(b) Both exchanged in markets and retained by
producers for self-consumption
(c) Only exchanged in markets
(d) All final goods whether exchanged or not
Ans. d {Explanation: National Product► ‘The total
value of all the goods and services produced by a
country during a year’. All final goods produced in
an economy whether exchanged or not is also include
in National Product.}
30-Which of the following is not to be included in
national product?
(a) Wheat produced by the farmer and consumed
by him
(b) House built by the owner himself
(c) Old house sold by its owner X to Y
(d) Machines made by firm A
Ans. c
31-The difference between gross national product and
net national product equals to:
(a) Consumer expenditure on durable goods
(b) Indirect business taxes
(c) Savings
(d) Depreciation
Ans. d
32-Which of the following will not affect national
product?
(a) Sale of a second hand automobile by A to B
(b) Sale of a new car by an automobile company
(c) Sale of a new car by an automobile dealer
(d) Sale of a new car on hire purchase
Ans. a
33-Transaction in financial assets (shares, stocks,
etc.) cause:
(a) An increase in national income
(b) A decrease in national income
(c) Keep national income unaffected
(d) Increase national income in the future
Ans. c
34-Which of the following is a financial
transaction?
(a) Sale and purchase of a plot
(b) Sale and purchase of food grains
(c) Sale and purchase of building
(d) Sale and purchase of shares
Ans. d
35-Transfer payments, because they increase the
income of the recipient:
(a) Are included in national product
(b) Are excluded from national product
(c) Contribute to national product
(d) Are partly included in national product
Ans. b
36-The gap b/w domestic product and national product
is significant for a country with:
(a) Practically no foreign investment
(b) Large foreign investment
(c) Small foreign investment
Ans. b
37-Domestic Product is produced:
(a) Within the domestic territory by residents
(b) Within the domestic territory by residents
and others
(c) By the residents whether within the
domestic territory or not
Ans. b {Explanation: GDP includes only goods and
services produced within the geographical boundaries
of a country regardless of the producer’s
nationality. In other hand GNP includes only that
goods and services which are produced by residents
(nationality holders) of a country and does not
include goods and service produced by foreign
producers, but does include goods and services
produced by country’s firms operating in foreign
countries. So we can say that in ‘Domestic Product’,
the concept ‘geographical boundary of a country’ is
involved while in ‘National Product’, the concept of
‘nationality’ is involved.}
38-National Product is produced:
(a) Within the domestic territory by residents
(b) Within the domestic territory by residents
and others
(c) By the residents whether within the
domestic territory or not
Ans. c
39-The formula for National Product at Market Price
is:
(a) National Product at Market Price = National
Product at Factor Cost +Indirect Taxes –
Subsidies
(b) National Product at Market Price = National
Product at Factor Cost +Direct taxes
(c) National Product at Market Price = GNP +
NNP – Taxes
Ans. a
40-GNP at factor cost refers to:
(a) Income which the factors of production
receive in return for their service alone
(b) Income which the factors of production
receive in return for their service and savings
(c) Cost of factors +Cost of production
Ans. a
41-National Product at market price is higher than
national product at factor cost by the amount of:
(a) Indirect taxes
(b) Subsidies
(c) Indirect taxes plus subsidies
(d) Indirect taxes minus subsidies
Ans. d
42-Usually, for a country:
(a) National product at market prices is higher
than national product at factor cost
(b) National product at market prices is equal
to national product at factor cost
(c) National product at market prices is
smaller than national product at factor cost
Ans. a (Explanation: National product at market
prices is higher than national product at factor
cost because in ‘national product at market price
‘the indirect taxes minus subsidies are also
included. The national product at market price is
; National Product at Market Price = National
Product at factor cost + Indirect taxes –
Subsidies, so according to this, the national
product at factor cost will be; National
Product at Factor Cost = National Product at
market Price – Indirect taxes + Subsidies}
43-National product at factor cost is used for
studying the:
(a) Final product by industrial organization
(b) Expenditures by commodities groups
(c) Payments to factor owners
(d) Output of consumer goods and capital goods
Ans. d
44-This year, if national product at factor cost is
Rs. 400 billion, indirect taxes Rs. 125 billion and
subsidies Rs. 25 billion, national product at market
prices is:
(a) Rs.550 billion
(b) Rs.525 billion
(c) Rs. 500 billion
(d) Rs. 250 billion
Ans. c {Explanation: National Product at Market
Price = National Product at factor cost + Indirect
taxes – Subsidies. So putting values in this formula
we get the answer.}
45-National product at current prices is higher than
national product at constant prices during a period
of:
(a) Rising prices
(b) Falling prices
(c) Stable prices
(d) Changing costs
Ans. a
46-A growing country is one with:
(a) Rising GNP at constant prices
(b) Rising GNP at current prices
(c) Constant GNP at constant prices
Ans. a {Explanation: GNP at Current Price (Nominal
GNP)► The value of goods and services produced in
any given year at market price (current price). It
is also called Nominal GNP.
GNP at Constant Price (Real GNP)► The value of goods
and services produced in any given year at constant
prices (a calculation that eliminates price
increases or inflation to arrive at a truer
valuation of what actually is being produced). It is
also called Real GNP.
GNP at Constant Prices is a best indicator for the
economic growth of a country because it eliminates
the effects of inflation and defines true or real
level of GNP.}
47-A major part of a country’s output is normally
used for:
(a) Private consumption
(b) Public consumption
(c) Investment
(d) Exports
Ans. a
48-A durable-use goods is presumed to be consumed:
(a) Gradually over life time
(b) In the year when it remains no more useful
(c) In the year it manufactured
(d) In the year it is purchased by the consumer
Ans. d
49-Purchase of a new dwelling (place or house for
residence) is an act of:
(a) Instant consumption
(b) Gradual consumption
(c) Investment
Ans. c
50-Expenditure of defense is an item of:
(a) Public investment
(b) Private investment
(c) Private consumption
(d) Public consumption
Ans. a
51-Which of the following is not an item of public
consumption?
(a) Expenditure on health
(b) Expenditure on education
(c) Expenditure on general administration
(d) Expenditure for transfer payments
Ans. d
52-Which of the following is not an act of
investment?
(a) Construction of a factory building
(b) Work in progress
(c) Increase in stocks
(d) Issue of new shares
Ans. d
53-Depreciation is loss of value of:
(a) Capital assets
(b) Stocks
(c) Consumer goods
(d) Final goods
Ans. a {Explanation: Capital Asset► Fixed asset
employed as a means of generating income and
investment purposes, generally the one on which
depreciation is claimed. For example land and
building, equipments, automobiles, machinery used
for manufacturing, etc. Capital Assets includes all
tangible property which can not easily be converted
into cash and not purchased or sold in the normal
course of business.}
54-If depreciation of capital assets is ignored from
national income, it will result in:
(a) Depletion of capital assets
(b) Double counting
(c) Underestimating the value of output
(d) Exaggerating the value of capital goods
Ans. b
55-Increase in stock is a part of investment because
it:
(a) Adds to productive capacity
(b) Reduces strain on machines etc
(c) Means more finished goods available in the
following years
(d) Means the corresponding income has not been
spent for consumption
Ans. d
56-Changes in stocks are a result of keeper’s:
(a) Deliberate decisions by shopkeepers
(b) Deliberate decisions by manufacturers
(c) Failure of sellers to sell goods
(d) Deviations b/w supply and demand
Ans. d
57-Exports surplus refers to:
(a) Supply of and demand for foreign goods
(b) Supply of and demand for indigenous
products meant for exports
(c) Exports minus imports
(d) Imports plus exports
Ans. c
58-Imports into a country generate income for:
(a) Domestic manufacturers
(b) Government
(c) Traders
(d) Foreign producers
Ans. d
59-Total national consumption consists of:
(a) Private consumption
(b) Public consumption
(c) Exports
(d) Private and public consumption
Ans. d
60-Total national investment consists of:
(a) Gross domestic fixed capital formation
(b) Change in stocks
(c) Export less imports
(d) All the three
Ans. d
61-For finding out GNP total, we:
(a) Deduct depreciation
(b) Ignore depreciation
(c) Add depreciation
(d) Increase depreciation
Ans. b
62-Which of the following is a correct statement
about economic ‘bads’?
(a) All economic bads are illegal
(b) Economic bads are excluded from the new
concept
(c) The pollution created by business firms is
an economic bad
(d) Economic bads can contribute to society’s
well-being
Ans. c {Explanation: Economic Bad► In economics, a
bad is the opposite of a good. A ‘bad’ is anything
with a negative value to the consumer, or a negative
price in the marketplace. Garbage is an example of a
bad. Consumption or presence of a bad lowers the
utility of the consumer. Economic good is anything
that has a positive demand when sold at price zero,
if a good has a negative demand or negative effect
at buyers when sold at zero price then it’s an
economic bad.
In above question, option (c) is a right answer.
Pollution is a bad good b/c it has negative effect
and negative utility to consumers.}
63-NNP is equal to:
(a) GNP + depreciation
(b) GNP +exports
(c) GNP – depreciation
(d) GNP – exports
Ans. c
64-National product at factor cost is also known as:
(a) Net national product
(b) Gross national product
(c) National income
(d) Personal income
Ans. c
65-National Income total reveals:
(a) The production side
(b) The spending side
(c) The distributive side
(d) The investment side
Ans. c
66-For knowing the spending capacity of the
household sector we have to use the concept of:
(a) National income
(b) Personal income
(c) Private income
(d) Personal disposable income
Ans. d
67-The flow of expenditure method of measuring
domestic product implies that:
(a) If anything is purchased, it should be
counted in the GDP
(b) Only expenditures for final goods and
services should be counted in GDP
(c) Only money spent on goods and services
which are used up within a year should be
counted in GDP
Ans. b
68-In calculating national income which of the
following is not included?
(a) Wages and salaries
(b) Interest and profits
(c) Retirement pensions
(d) Rental incomes
Ans. c
69-The actual demand by persons in an economy is
determined by:
(a) GNP
(b) NNP
(c) National income
(d) Personal disposable income
Ans. d
70-The largest contribution in value terms to
Pakistan GNP is made by:
(a) Construction
(b) Organized industries
(c) Unorganized industries
(d) Agriculture
Ans. d
71-Industry A sells to B for Rs. 600; Industry B
sells to C for Rs.1000;Industry C sells to final
users for Rs.1500, therefore, final sales are:
(a) Rs. 600
(b) Rs.1000
(c) Rs.1500
(d) Rs.3100
Ans. c
72-Per capita income rises when:
(a) GNP and population both increase at the
same rate
(b) GNP and population both decrease
(c) GNP increase faster than population
(d) GNP increases slower than population
Ans. c
73-When the IBA Computer firm increases its stock of
computers to meet an expected sales increase, this
is associated with:
(a) Depreciation of the firm’s capital
(b) A government requirement that prohibits
shortages
(c) Inventory investment
(d) No change in GDP since only geographic
location has been changed
Ans. c {Explanation: Inventory Investment► Inventory
investment is a component of GDP. What is produced
in a certain country is naturally also sold
eventually, but some of the goods produced in a
given year may be sold in a later year rather than
in the year they were produced. The difference b/w
goods produced (production) and goods sold (sales)
in a given year is called inventory investment.
Inventory investment is the change in the stocks of
inventories that businesses have on hand. The term
can be applied to the economy as a whole or to an
individual firm.
●Inventory Investment = Production – Sale
Thus, if production per unit time exceeds sales per
unit of time, then inventory investment per unit
time is positive and vice versa.}
74-“A money flow arises out of a real flow”. Which
of the following does not correspond to it?
(a) Payment of wages
(b) Payment of price for goods
(c) Payment of rent
(d) Payment of pension
Ans. d
75-For finding the net increase in production, we
use:
(a) GNP total
(b) NNP total
(c) National income
(d) Personal income
Ans. b
76-Private saving is composed of:
(a) Net foreign saving
(b) Government saving
(c) Both business and net foreign saving
(d) Both personal and business saving
Ans. d{Explanation: Private sector saving is
composed of saving by both households and
businesses.}
77-For a study of the long-term growth of the
economy, we use:
(a) Real GNP
(b) Money GNP
(c) Personal income
(d) Disposable income
Ans. a
78-a deflator is a technique of:
(a) Adjusting for change in commodity
(b) Accounting for higher increase of GNP
(c) Accounting for decline of GNP
(d) Adjusting for changes in price level
Ans. d
79-If real GDP is a larger number than nominal GDP,
then:
(a) Prices are higher today than in the base
year
(b) The GDP deflator is greater than one
(c) The GDP deflator is greater than hundred
(d) Prices are lower today than in the base
year
Ans. d
80-Though a good help, the use of money as a common
denominator is not free from problems, because:
(a) Its value rises
(b) Its value falls
(c) Its value changes
(d) Its value remains constant
Ans. c
81-In an economy with no depreciation, investment is
equal to:
(a) Private saving
(b) Private saving plus the government deficit
(c) Private saving plus the government surplus
(d) Private saving plus the government deficit
plus the foreign-trade surplus
(e) Private saving plus the government surplus
plus the foreign-trade deficit
Ans. e {Explanation: We know that ; NNP = GNP –
Depreciation. So if an economy there is no
depreciation then NNP=GNP. In this economy, the
formula for investment is; I = S + (T-G) + (M-X)
Here, I = Investment, S = Saving, T = Taxes, G =
Government expenditures, M = Imports, X = Exports}
82-NNP at market price and NNP at factor costs will
be equal when there is:
(a) No direct tax
(b) No indirect tax
(c) No subsidy
(d) No indirect tax and no subsidy
Ans. d
83-Which of the following is part of the difference
between personal income and personal disposable
income?
(a) Personal income taxes
(b) Transfer payments
(c) Depreciation
(d) Saving
Ans. a
84-Double counting means counting the same value:
(a) Twice
(b) Three times
(c) Four times
(d) More than one time
Ans. d
85-which of the following is an intermediate good?
(a) A car purchased by an individual
(b) A car purchased by the federal government
(c) Wool purchased by a ready-made garments
firm
Ans. c {Explanation: Intermediate Goods► also called
as producer goods or capital goods, are used as
inputs in the production of other goods, such as
partly finished goods. Also they are used in
production of final goods.
In above question, option (c) is right answer. Wool
(intermediate good) purchased by a ready-made
garments firm will be used as an input for the
production of sweater (final good).}
86-GNP is Rs.500 billion and NNP is Rs.450 billion,
therefore depreciation is:
(a) Rs.100 billion
(b) Rs.75 billion
(c) Rs.50 billion
(d) Rs.25 billion
Ans. c {Explanation: As we know that; NNP = GNP –
depreciation. So putting values of GNP and NNP in
this formula we can get the value of depreciation.}
87-Deflation technique is used for adjusting:
(a) Price rise only
(b) Price fall only
(c) Price rise and fall only
(d) Price rise and fall together
Ans. c
88-The three methods of calculating national income
measure:
(a) The same thing from different angles
(b) Different things from different angles
(c) Different things at the same angles
(d) The same thing from the same angle
Ans. a
89-The value added of a firm is the total value of
its:
(a) Output
(b) Output less its payments to factors of
production
(c) Output less its payments for intermediate
goods
(d) Intermediate goods
Ans. c
90-National income figures are:
(a) Very exact
(b) Practically exact
(c) Only estimates
(d) Wrong
Ans. c
91-National income data suffer from greater
inadequacies and inaccuracies in:
(a) Developed countries
(b) Underdeveloped countries
(c) In both kinds of countries
(d) In none of these countries
Ans. b
92-Gross domestic income equals gross domestic
product:
(a) Only when supply equals demand
(b) Only when there is no government
(c) Only when there is no government or foreign
trade
(d) Always
Ans. d
93-Over time in a country, changes in the average
standard of living are measured by:
(a) Real per capita income
(b) Real wage rates
(c) Money incomes
(d) Share of labor in income
Ans. a
94-Welfare as measured by rising per capita income
will be better appreciated if it is achieved by
working:
(a) For longer hours and less leisure
(b) For shorter hours and more leisure
(c) For shorter hours and harder work
(d) For longer hours and less hard work
Ans. b
95-A rising per capita income will indicate a better
welfare if it is accompanied by:
(a) Unchanged income distribution overall
(b) Changed income distribution in favor of the
rich
(c) Changed income distribution in favor of the
poor
Ans. c
96-Gross domestic product includes all of the
following except:
(a) Personal consumption expenditures
(b) Investment expenditures
(c) Government purchases
(d) Government transfer payments
Ans. d
97-A criticism on gross national production as a
criteria of economic measurement is that:
(a) It is impossible to express it in terms of
constant rupees
(b) Does not include the value of services
(c) Does not include the unpaid services of
housewives
(d) Does not include import and exports
Ans. c
UNIT 2: INCOME
DETERMINATION
1-Say’s law of market is concerned with:

(a) Agriculture sector
(b) Monetary sector
(c) Real sector
(d) Services sector
Ans. c {Explanation: Real Sector► The real sector is
associated to the activities related to aggregate
demand and aggregate supply in an economy.}
2-Classical economists believed in:
(a) Open economy
(b) Regulated economy
(c) Communist economy
(d) Laissez-faire economy
Ans. d {Explanation: Laissez-faire Economy► An
economy where there is no interference by the
government in economic activities.}
3-Classical economists believed in:
(a) Open economy
(b) Regulated economy
(c) Communist economy
(d) Closed economy
Ans. d {Explanation: Closed Economy► An economy who
do not export or import with other countries of the
world.}
4-Quantity theory of money is concerned with:
(a) Monetary sector
(b) Real sector
(c) Industrial sector
(d) Agriculture sector
Ans. a
5-According to classical model, money supply is:
(a) Stable
(b) Fixed
(c) Variable
(d) Unstable
Ans. a
6-Credit market deals with:
(a) Savings
(b) Investments
(c) Savings and investments
(d) Goods and services
Ans. c
7-Labor market is attached with:
(a) Demand for labor
(b) Supply of labor
(c) Both a and b
Ans. c
8-The supply of labor curve:
(a) Slopes negatively
(b) Slopes positively
(c) Is horizontal
(d) Is vertical
Ans. b
9-The wages under perfect competition are determined
through:
(a) Rigidity of wages
(b) Stickiness of prices
(c) Flexibility of wages
Ans. c
10-The short-run aggregate production is subject to:
(a) Decreasing return
(b) Increasing return
(c) Constant return
Ans. a
11- In short-run aggregate production function is:
(a) Y = f(L)Ќ
(b) Y = f(L,K)
(c) Y = f(L)
(d) Y = f(K)
Ans. a
12-In classical system, when prices rise:
(a) Wages will fall
(b) Wages will also rise
(c) Wages will remain same
(d) Wages will become zero
Ans. b
13-When wages increase more than increase in prices,
real wages will:
(a) Rise
(b) Fall
(c) Remain same
(d) Be zero
Ans. a {Explanation: We know that ; real wage (ẁ) =
wage /price = W /P, When wage(nominal wage)
increases more than increase in price then real wage
will rise.}
14-Aggregate demand (AD) in two sector economy is
composed of:
(a) C +I +S
(b) C +S
(c) C +I
(d) I +S
Ans. c
15-Aggregate supply in two sector economy is:
(a) C +I +S
(b) C +S
(c) C +I
(d) I +S
Ans. b
16- Aggregate demand (AD) in three sector economy is
composed of:
(a) C +S +G
(b) C +I +S
(c) C +I +G
(d) C +S +T
Ans. c
17- Aggregate supply in three sector economy is:
(a) C +S +G
(b) C +I +S
(c) C +I +G
(d) C +S +T
Ans. d
18- Aggregate demand (AD) in four sector economy is
composed of:
(a) C +I +G +X
(b) C +I +G
(c) C +I +M
(d) C +I +S
Ans. a
19- Aggregate supply in four sector economy is:
(a) C +I +G +X
(b) C +I +G
(c) C +S +T +M
(d) C +S +T
Ans. c
20-The formula for marginal propensity to consume
(MPC) is:
(a) ∆C /∆Y
(b) ∆S /∆Y
(c) ∆Y/∆C
(d) ∆Y /∆S
Ans. a
21- The formula for marginal propensity to save
(MPS) is:
(a) ∆C /∆Y
(b) ∆S /∆Y
(c) ∆Y/∆C
(d) ∆Y /∆S
Ans. b
22-In a two sector economy, the value of multiplier
(K) is:
(a) 1 /MPC
(b) 1 /(1-MPC)
(c) 1 /(1-MC)
(d) 1 /(1+MPC)
Ans. b
23-The value of investment multiplier depends upon:
(a) MVP
(b) MPT
(c) CPM
(d) MPC
Ans. d
24-According to Keynes, money supply is determined:
(a) Endogenously
(b) Exogenously
(c) Both a and b
Ans. b
25-The rate of interest and present value of bond
is:
(a) Directly related
(b) Not related at all
(c) Inversely related
Ans. c
26-Whenever the current rate of interest is lower
than normal rate of interest, the future rate of
interest will:
(a) Increase
(b) Decrease
(c) Remain same
(d) Become zero
Ans. a
27-The rate of interest is determined, where demand
for money is:
(a) Equal to supply of money
(b) Greater than supply of money
(c) Less than supply of money
(d) Zero
Ans. a
28-The increase in demand for money will have the
effect of:
(a) Decreasing rate of interest
(b) Constant rate of interest
(c) Increasing rate of interest
Ans. c
29-According to Say’s law of market:
(a) Supply creates its own demand
(b) Demand creates its own supply
(c) Both a and b
Ans. a
30-Value of marginal productivity of labor (VMPL) is
attained by:
(a) MPL –P
(b) MPL +P
(c) MPL×P
(d) MPL /P
Ans. c
31-The increase in government expenditure in
classical model will:
(a) Increase the level of income and employment
(b) Decrease the level of income and employment
(c) Not effect the level of income and
employment
Ans. c
32-In QTM, in equation of exchange, MV =PY:
(a) M remains same
(b) P remains same
(c) M and P remain same
(d) V and Y remain same
Ans. d
33-According to classical economists, there may be:
(a) Overproduction
(b) No overproduction
(c) Overproduction in sometime and sometime not
Ans. b
34-The classical model of full employment is brought
through flexibility of:
(a) Wages
(b) Interest
(c) Prices
Ans. d
35-The change in money supply in classical model
will:
(a) Affect interest rate
(b) No effect
(c) Greatly effect
(d) Effect slowly
Ans. b
36-In three sector economy, the value of tax
multiplier when taxes are lump sum taxes is:
(a) KT = -MPC / (1-MPC)
(b) KT = 1-MPC /MPC
(c) KTi = -MPC /{1-MPC+MPC(MPT)}
Ans. a
37-In three-sector economy, the value of tax
multiplier in the presence of induce taxes is:
(a) KT = -MPC / (1-MPC)
(b) KT = 1-MPC /MPC
(c) KTi = -MPC /{1-MPC+MPC(MPT)}
Ans. c
38-The value of transfer payment multiplier in a
three sector economy is:
(a) KR =MPC /(1+MPC)
(b) KR =-MPC/(1-MPC)
(c) KR =MPC/(1-MPC)
Ans. c {Explanation: Transfer Payment Multiplier► It
shows how much aggregate demand will increase when
there is increase in transfer payments (e.g. welfare
spending, unemployment allowances etc).
39-The value of balance budget multiplier is always:
(a) Equal to one
(b) Equal to zero
(c) Equal to two
Ans. a {Explanation: Balance Budget Multiplier (BBM)
►When the government adopts a balance budget policy,
it spends as much as it collects through taxation.
In balance budget policy; T=G and ∆G=∆T.
Balance budget multiplier=BBM=∆Y /∆G = ∆Y /∆T = 1}
40-The value of Foreign Trade Multiplier is:
(a) 1 /(1-MPC+MPM)
(b) 1 /(1+MPC+MPM)
(c) 1 /1-MPC-MPM
Ans. a {Explanation: Here, MPM= Marginal propensity
to imports and it is also shown by ‘m’. MPC =
Marginal propensity to consume and it is also shown
by ‘b’.}
41-The wage-price flexibility brings in the economy:
(a) Unemployment
(b) Poverty
(c) Full employment
(d) Inflation
Ans. c
42-The profit maximization condition requires:
(a) VMPL=W
(b) VMPL>W
(c) VMPL<W
Ans. a
43-When wages do not increase as a result of
increase in prices, real wages will:
(a) Rise
(b) Fall
(c) Remain same
Ans. b
44-The speculative demand for money is:
(a) Inversely affected by rate of interest
(b) Directly affected by rate of interest
(c) Unaffected by rate of interest
Ans. a
45-When demand for money is decreased, rate of
interest will:
(a) Rise
(b) Remain same
(c) Fall
(d) Zero
Ans. c
UNIT 3: THEORIES OF
CONSUMPTION
1-Consumption function represents the relationship

between:
(a) Saving and consumption
(b) Consumption and income
(c) Consumption and price
(d) Saving and income
Ans. b
2-As the income increases, the consumption
expenditures will:
(a) Increases
(b) Decreases
(c) Remain same
Ans. a
3-In short run, the relation between income and
consumption is:
(a) Vertical
(b) Proportional
(c) Non-proportional
Ans. c
4-If even the income is zero, the consumption
expenditures are:
(a) Unstable
(b) Stable
(c) Induced
(d) Autonomous
Ans. d
5-According to Keynes, if income increases, savings
will:
(a) Remain same
(b) Decreases
(c) Increases
(d) Become zero
Ans. c
6-The average consumption function is:
(a) APS
(b) MPS
(c) MPC
(d) APC
Ans. d
7-The marginal saving function is:
(a) APS
(b) MPS
(c) MPC
(d) APC
Ans. b
8-According to Keynes, with the rise in income, APC
and MPC both will:
(a) Fall
(b) Rise
(c) Remain same
(d) Become zero
Ans. a
9- According to Keynes, with the rise in income, APS
will:
(a) Fall
(b) Rise
(c) Remain same
(d) Become zero
Ans. b
10-As income rises then:
(a) Both APC and MPC will decline but decline
in MPC is more than decline in APC
(b) Both APC and MPC will decline but decline
in MPC is less than decline in APC
(c) Both APC and MPC will decline in the same
ratio
Ans. a
11-When income falls then:
(a) Both APC and MPC rises but APC rises slower
than that of MPC
(b) Both APC and MPC falls but APC falls slower
than that of MPC
(c) Both APC and MPC rises but APC rises faster
than that of MPC
Ans. a
12-The value of MPC is always:
(a) Less than zero
(b) Greater than zero but less than one
(c) Equal to one
(d) Equal to zero
Ans. b
13-In short period:
(a) There is no change in MPC
(b) MPC will change
(c) MPC will zero
(d) MPC will greater than one
Ans. a {Explanation: In short-run there is no change
in MPC and value of MPC is stable in short-run b/c
the psychological and institutional factors on which
the propensity to consume depends do not change in
the short period.}
14-In short period, there is no change in MPC and:
(a) MPC<APC
(b) MPC>APC
(c) MPC=APC
Ans. a
15-In the long period:
(a) APC>MPC
(b) APC<MPC
(c) APC=MPC
Ans. c
16-The relationship b/w MPC and MPS is such that:
(a) MPC +MPS = 1
(b) MPC – MPS =1
(c) MPC +MPS >1
(d) MPC + MPS<1
Ans. a
17-When MPC<1, the economy may move to:
(a) Over-investment economy
(b) Over-production economy
(c) Over-consumption economy
(d) Over-saving economy
Ans. d
18-The society having the motive of foresight may:
(a) Consume more
(b) Save more
(c) Import more
(d) Export more
Ans. b
19-The society indulged in ostentation may:
(a) Export more
(b) Save more
(c) Consume more
(d) Produce more
Ans. c
20-The society may consume more where the people are
more:
(a) Generous
(b) Rejoicing
(c) Believe in ostentation
Ans. d
21-The consumption will increase with the:
(a) Fall in price
(b) Rise in price
(c) Constant price
Ans. a
22-A fair distribution of income in the society will
increase:
(a) Savings
(b) Investment
(c) Taxes
(d) Consumption
Ans. d
23-The absolute income hypothesis (theory) was
presented by:
(a) J.M.Keynes
(b) Ricardo
(c) Adam Smith
(d) Sarafa
Ans. a
24-permanent income hypothesis (PIH) was presented
by:
(a) J.M.Keynes
(b) Ricardo
(c) Adam Smith
(d) Milton Friedman
Ans. d
25-Relative income hypothesis (RIH) was presented
by:
(a) J.M.Keynes
(b) Ricardo
(c) Dusenberry
(d) Milton Friedman
Ans. c
26-Life cycle income hypothesis (LCH) was presented
by:
(a) Modigiliani brumberg
(b) Ando Albert
(c) Both a and b
Ans. c
27-If in a society, urbanization takes place, the
consumption will:
(a) Decrease
(b) Increase
(c) Remain same
(d) Become zero
Ans. b
28-In case of absolute income theory, if income
doubled, the consumption will:
(a) Also doubled
(b) Remain same
(c) Less than doubled
(d) More than doubled
Ans. c
29-The concept of multiplier has been presented by:
(a) Arnold
(b) Keynes
(c) Ricardo
(d) Chamberlin
Ans. b
30-When consumption does not increase in the same
proportion to increase in income, the MPC is:
(a) Equal to one
(b) Less than one
(c) More than one
(d) Equal to zero
Ans. b
31-The long-run consumption function is also known
as:
(a) Secular consumption function
(b) Cyclical consumption function
(c) Spectral consumption function
Ans. a
32-According to Kuznets, in the long-run, APC
showed:
(a) Falling trend
(b) No falling trend
(c) Both a and b
Ans. b
33-The increase in accumulated wealth will have the
effect of shifting consumption function:
(a) Upward
(b) Downward
(c) To left side
(d) To right side
Ans. a
34-The long-run consumption function lies below the:
(a) 900 line
(b) 600 line
(c) 450 line
(d) 300 line
Ans. c
35-According to Dusenberry, consumption depends
upon:
(a) Relative production
(b) Relative price
(c) Relative income
Ans. c
36-According to Dusenberry, consumption is affected
by:
(a) Price
(b) Locality
(c) Income
(d) Production
Ans. b
37-If relative income remains same even absolute
income rises, the APC will:
(a) Rise
(b) Fall
(c) Remain same
(d) Become zero
Ans. c
38-If current income is more than previous peak
income, MPC is:
(a) Less than APC
(b) Greater than APC
(c) Equal to APC
Ans. b
39-When the consumption does not fall in the same
proportion to fall in the income, the situation is
known as:
(a) Substitution effect
(b) Income effect
(c) Price effect
(d) Ratchet effect
Ans. d
40-The measured income is the sum of:
(a) Permanent income and transitory income
(b) Permanent income and relative income
(c) Relative income and transitory income
Ans. a
41-In the long-run, the positive transitory
consumption is:
(a) Equal to negative transitory consumption
(b) Less than negative transitory consumption
(c) Greater than negative transitory
consumption
Ans. a
42-According to Friedman, permanent consumption is
proportional to:
(a) Temporary income
(b) Temporary price
(c) Permanent price
(d) Permanent income
Ans. d
43-If permanent incomes of all families change, the
consumption will:
(a) Not change
(b) Also change
(c) Become zero
(d) Vary
Ans. b
44-According to life cycle hypothesis, a person
through his life wishes to have an optional level
of:
(a) Income
(b) Property
(c) Price
(d) Consumption
Ans. d
45- According to life cycle hypothesis, the savings
of the working period are equal to the consumption
of the:
(a) Young age
(b) Childhood
(c) Old age
Ans. c
46- According to life cycle hypothesis, there is a
proportional relationship between consumption and:
(a) Price
(b) Wealth
(c) Health
(d) Income
Ans. d
47-The fiscal and monetary policies affect the
expected income as well:
(a) Consumption of a person
(b) Wealth of a person
(c) Both a and b
Ans. c
48-According to permanent income hypothesis,
consumption also depends upon the:
(a) Wealth of the people
(b) Price of the commodity
(c) Expenditure of the people
(d) Expectations of the people
Ans. d
49-The attachment of rational expectations with
consumption is a:
(a) Classical idea
(b) Keynsian idea
(c) Modern idea
(d) New classical idea
Ans. d{Explanation: theory of rational
expectations (TRE): Economic-behavior observation
according to which: (1) On average, people can quite
correctly predict future conditions and
take actions accordingly, even if they do not fully
understand the cause-and-effect (causal)
relationships underlying the events and their own
thinking. Thus, while they do not
have perfect foresights,
theyconstruct their expectations in
a rational manner that, more often than not, turn
out to be correct. Any error that creeps in is
usually due to random (non-systemic) and
unforeseeable causes. (2) In efficient markets with
perfect or near perfect information (such as in
modern open-market economies) people will anticipate
government's actions to stimulate or restrain the
economy, and will adjust their response accordingly.
For example, if the government attempts to increase
the money supply, people will raise
their prices and wage demands to compensate for the
inflationary impact of the increase. Similarly,
during periods of accelerating inflation, they will
anticipate stricter credit controls accompanied
by high interest rates. Therefore they will attempt
to borrow up to their credit capability, thus
largely nullifying the controls. This theory was
proposed not as a plausible explanation of human
behavior, but to serve as a model against which
extreme forms of behavior could be compared. It
was developed by the US economist Robert Lucas (born
1937) who won the 1955 Nobel Prize for this insight.
Not to be confused with rational choice theory.
Also called rational expectations hypothesis.
50-The fall in interest rate will increase:

(a) Saving
(b) Consumption
(c) Imports
(d) Exports
Ans. b
UNIT 4:
SAVING AND INVESTMENT
1-The goods having the ability to produce further

goods are called:
(a) Consumer goods
(b) Producer goods
(c) Consumer durables
(d) Capital goods
Ans. d
2-In the presence of real investment, the productive
capacity of an economy:
(a) Decreases
(b) Increases
(c) Become very low
Ans. b
3-The investment which does not increase the
productive capacity of the economy is called:
(a) Real investment
(b) Gross investment
(c) Financial investment
(d) Actual investment
Ans. c
4-At all levels of income, the autonomous
investment:
(a) Remains same
(b) Increases
(c) Decreases
(d) Becomes zero
Ans. a
5-In an economy, investment is determined by:
(a) Rate of interest
(b) Rate of profit
(c) Both a and b
Ans. c
6-In an economy, by external and internal rate of
return, we can determine:
(a) Consumption
(b) Production
(c) Profits
(d) Investment
Ans. d
7-In an economy, the decision to make investment is
influenced by:
(a) Prospective yield
(b) Supply price of capital goods
(c) Both a and b
Ans. c
8-The present value of capital goods is calculated
by:
(a) PV = R /(1+i)
(b) PV = R /(1-i)
(c) PV = (1+i) /R
Ans. a
9-The equation of rate of return is:
(a) i = R /(PV+1)
(b) i = R /(PV - 1)
(c) i = R /PV > 1
(d) i = R /PV < 1
Ans. b
10-MEC (Marginal Efficiency of Capital) curve is
also known as:
(a) supply curve
(b) demand for capital curve
(c) demand curve
(d) stock of capital curve
Ans. b
11-MEC is the rate of discount which equalizes the
present value of annual incomes with:
(a) demand price
(b) supply price
(c) profit earned
(d) losses beard
Ans. b
12-If the stock of capital increases, the MEC:
(a) falls
(b) rises
(c) remains same
(d) becomes zero
Ans. a
13-MEI is the rate associated with:
(a) existing investment
(b) new investment
(c) existing capital
(d) existing prices
Ans. b
14-If there are good business expectations, the MEC
curve will shift:
(a) inward
(b) downward
(c) outward
(d) upward
Ans. c
15-The investment which is influenced by level of
income is called:
(a) real investment
(b) gross investment
(c) financial investment
(d) induced investment
Ans. d
16-The rate of discount which equalizes the present
value of annuities with purchase price of machine is
called:
(a) MEI
(b) MEC
(c) MIE
(d) MCE
Ans. b
17-At the optimal stock of capital:
(a) MEI = i
(b) MEC > i
(c) MEC < i
(d) MEC = I
Ans. d
18-The capital output ratio (COR) in simple
accelerator theory of investment is:
(a) Variable
(b) Very low
(c) Fixed
Ans. c
19-The accelerator theory establishes a relationship
b/w:
(a) Output and investment
(b) Output and income
(c) Output and savings
(d) Savings and investment
Ans. a
20-The changes in output bring changes in capital
via changes in:
(a) Real investment
(b) Financial investment
(c) Net investment
(d) Gross investment
Ans. c
21-The theory of flexible accelerator has been
presented by:
(a) Clark
(b) Renaldo
(c) M.L Koyock
(d) Gibse
Ans. c {Explanation: Flexible-Accelerator Model: The
flexible-accelerator model is a macro model in which
there is a variable relationship between the growth
rate of output and the level of net investment. The
relation between the change in output and the level
of net investment is the accelerator principle.
Businesses are described as engaging in net
investment in fixed capital goods in order to close
the gap between the desired stock of capital goods
and the existing stock of capital goods left over
from the past. The desired stock of capital goods is
determined by such variables as the expected profit
rate, the expected level of output, the interest
rate (the cost of finance), and technology. Because
the expected level of output plays a role, this
model exhibits behavior described by the accelerator
effect but less extreme than that of the simple
accelerator. Because the existing capital stock
grows over time due to past net investment,
a slowing of the growth of output (GDP) can cause
the gap between the desired K and the existing K to
narrow, close, or even become negative, causing
current net investment to fall.
22-Firms while investing in real life follow the
policy of:
(a) Wait
(b) See
(c) Hurry
(d) Both a and b
(e) None of the above
Ans. d
23-The demand for capital goods depends upon:
(a) Current output
(b) Previous output
(c) Both a and b
Ans. c
24-The value of capital output ratio (COR),
according to modern accelerator theory can be made:
(a) Fixed
(b) Variable
(c) Flexible
Ans. c
25-‘q’ theory of investment was presented by:
(a) Clark
(b) James Tobin
(c) Adam Smith
(d) Marshal
Ans. b {Explanation: Tobin’s ‘q’ Theory of
Investment► This theory is presented by James Tobin.
It is also called general equilibrium theory. Here
‘q’ represents the ratio of the market value of a
firm’s existing shares (share capital) to the
replacement cost of the firm’s physical assets. It
states that if q (representing equilibrium) is
greater than one (q>1) then additional investment in
the firm would give benefits b/c the profits
generated would exceed the cost of firm’s assets. If
‘q’ is less than one (q<1) then firm should sell its
assets instead of trying to put them to use. The
ideal state is where ‘q’ is approximately equal to
one denoting that the firm is in equilibrium.}
26-Tobin’s q theory of investment establishes a
relationship between:
(a) Stock market and investment
(b) Investment and output
(c) Stock market and savings
(d) Investment and savings
Ans. a
27-If the price of installed capital is greater than
replacement cost, and then the value of ‘q’ will be:
(a) Equal to one
(b) Less than one
(c) Equal to zero
(d) Greater than one
Ans. d
28- If the price of installed capital is less than
replacement cost, then the value of ‘q’ will be:
(a) Equal to one
(b) Less than one
(c) Equal to zero
(d) Greater than one
Ans. b
29-In Tobin’s q theory, the ‘q’ represents the
measure of inducement to:
(a) Save
(b) Produce
(c) Invest
Ans. c
30-According to q theory, fluctuations in stock
market lead to bring fluctuations in:
(a) Output
(b) Employment
(c) Both a and b
Ans. c
31-IS curve was presented by:
(a) Hawkins
(b) Carnot
(c) Chamberlin
(d) Hicks
Ans. d
32-IS curve shows negative relationship b/w:
(a) Rate of interest and investment
(b) Rate of interest and level of income
(c) Rate of interest and savings
(d) Rate of interest and output
Ans. b
33-IS curve’s mathematical slope is:
(a) ∆Y/∆X
(b) ∆Y/∆i
(c) ∆i/∆Y
(d) ∆i/∆S
Ans. b
34-IS curve will be vertical, if the slope of the
coefficient of rate of interest (v) :
(a) v =1
(b) v =2
(c) v =o
(d) v >1
Ans. c
35- IS curve will be horizontal, if the slope of the
coefficient of rate of interest (v):
(a) v =1
(b) v =∞
(c) v =o
(d) v >1
Ans. b
36-As a result of increase in government
expenditure, IS curve will shift:
(a) to right (upward)
(b) to left (downward)
(c) both a and b
Ans. a
37-If taxes increase, the IS will shift:
(c) both a and b
Ans. b
38-When saving increase because of increase in
wealth, the IS will shift:
(c) both a and b
Ans. b
39-When savings are decreased, the IS curve will
shift:
(c) both a and b
Ans. a
40-The IS curve is concerned with general
equilibrium in:
(a) money market
(b) goods market
(c) both a and b
Ans. b
41-The graphical slope of IS curve is:
(a) ∆Y/∆X
(b) ∆Y/∆i
(c) ∆i/∆Y
(d) ∆i/∆S
Ans. c
UNIT5: THE DEMAND AND

SUPPLY OF MONEY
1-According to classicals, money is demanded for:

(a) Speculative purpose
(b) Transaction purpose
(c) Precautionary purpose
(d) Both a and b
Ans. b
2-According to Keynes, money is demanded for:
(a) Speculative purpose
(b) Transaction purpose
(c) Precautionary purpose
(d) Both a and b
Ans. d
3-According to Cambridge economists, money demanded
depends upon:
(a) Level of income
(b) Rate of interest
(c) Both a and b
Ans. c
4-According to portfolio theories, people in their
portfolios keep:
(a) Cash
(b) Bonds
(c) Cheque books
(d) Both a and b
Ans. d
5-The portfolio of a wealthy person will be:
(a) Small
(b) Medium
(c) Large
(d) Zero
Ans. c
6-According to Baumol-Tobin cash Management Model,
money gives:
(a) Convenience
(b) Interest foregone
(c) Both a and b
Ans. c
7- According to Baumol-Tobin cash Management Model,
a person will hold more money if fixed cost of going
to bank is:
(a) Higher
(b) Lower
(c) Medium
(d) Same
Ans. a
if interest rate is lower then demand for money will
be:
(a) Higher
(b) Same
(c) Medium
(d) Lower
Ans. a
if level of income is higher then the demand for
money will be:
(a) Lower
(b) Higher
(c) Medium
(d) Same
Ans. b
10-When the critical rate of interest is lower than
actual rate of interest , the bond holder will keep
all wealth in the form of:
(a) Cash
(b) Cheques
(c) Bonds
(d) Gold
Ans. c
11-When interest rates go down, aggregate wealth
increases due to:
(a) Increase in bond prices
(b) Decrease in bond prices
(c) Constant bond prices
Ans. a
12-The regressive expectations model is presented
by:
(a) Keynes
(b) Hicks
(c) Tobin
(d) Cournot
Ans. c
13-The income elasticity of money demand is the
percentage change in money demand as a result of 1%
increase in:
(a) Gross income
(b) Real income
(c) Gross price
(d) Real price
Ans. b
14-The interest elasticity of money demand is the
percentage change in money demand as a result of 1%
increase in:
(a) Rate of returns
(c) Level of output
Ans. b
15-Slope of LM is determined by sensitivity of money
demand to:
(a) Real income
(c) Both a and b
Ans. c
16-The money supply in an economy consists of:
(a) Currency
(b) Demand deposits
(c) Reserves
(d) Both a and b
Ans. d
17-The deposits which the banks receive but do not
lend out are called:
(a) Demand deposits
(b) Currency deposits
(c) Reserves
(d) Real deposits
Ans. c
18-The reserve-deposit ratio is determined by:
(a) Statistical policies of banks
(b) Fractional policies of banks
(c) Business policies of bank
Ans. c
19-The money supply may change due to change in:
(a) Reserve ratio
(b) Cash ratio
(c) Profit ratio
(d) Both a and b
Ans. d
20-The simplest definition of money supply is:
(a) M1 = C- D
(b) M1 = C+ D
(c) M1 > C+ D
(d) M1 >C+ D
Ans. b
21-With increase in reserve requirements, the value
of money multiplier:
(a) Also increases
(b) Decreases
(c) Remains same
(d) Becomes zero
Ans. b
22-The interest rate in monetary term is called:
(a) Gross interest rate
(b) Real interest rate
(c) Nominal interest rate
Ans. c {Explanation: Nominal Interest Rate► The
interest rate that is unadjusted for inflation .This
rate of interest is in monetary terms and do not
tell about the effects of inflation on interest
rate.}
23-The interest rate which is measured on the basis
of purchasing power is called:
(a) Gross interest rate
(b) Real interest rate
(c) Nominal interest rate
Ans. b {Explanation: Real Interest rate► The real
interest rate is the nominal rate of interest minus
inflation. This rate of interest includes the
expected changes in price level and is adjusted for
price change (inflation etc). This is measured on
the basis of purchasing power. In the case of a
loan, it is this real interest that the lender
receives as income. If the lender is receiving 8
percent from a loan and inflation is 8 percent, then
the real rate of interest is zero b/c nominal
interest and inflation are equal. A lender would
have no net benefit from such a loan b/c inflation
fully diminishes the value of the loan’s profit.}
24-The real rate of interest is equal to:
(a) Nominal i – inflation rate(π)
(b) Nominal i + inflation rate(π)
(c) inflation rate(π) – nominal i
(d) inflation rate(π) +nominal i
Ans. a
25-According to Quantity Theory of Money (QTM), rate
of money growth determines rate of:
(a) inflation
(b) employment
(c) overpopulation
(d) poverty
Ans. a
26-The fisher effect includes the effects of
inflation on:
(a) Real interest rate
(b) Gross interest rate
(c) Apparent interest rate
(d) Nominal interest rate
Ans. d
27-The LM curve deals with general equilibrium in:
(a) Labor market
(b) Goods market
(c) Money market
(d) Foreign market
Ans. c
28-When demand for money is more influenced by rate
of interest, LM will be:
(a) Vertical
(b) Horizontal
(c) Less elastic
(d) More elastic
Ans. d
29-If demand for money is completely influenced by
changes in the rate of interest, LM will be:
(b) Horizontal
(d) Vertical
Ans. b
30-The LM curve will be steeper if the value of k
is:
(a) Lower
(b) Greater
(c) Zero
(d) Very low
Ans. b {Explanation: k = 1/v = reciprocal of the
velocity of the money}
31-The classical LM curve is:
(a) Vertical
(b) Positive
(c) Horizontal
(d) Negative
Ans. a
32-In liquidity trap, the LM curve is:
(a) Vertical
(b) Positive
(c) Horizontal
(d) Negative
Ans. c
33-In extreme Keynesian case, the LM will be:
(a) Vertical
(b) Positive
(c) Horizontal
(d) Negative
Ans. c
34-If the demand for money increases, the LM curve
will shift:
(a) To left
(b) To right
(c) Upward
(d) Downward
Ans. a
35-Fiscal policy will be effective, when IS curve
is:
(a) Steep
(b) Flatter
(c) Vertical
Ans. a {Explanation: Fiscal policy is most effective
when investment is not sensitive to interest rate
(IS curve is steeper). The IS curve is steeper when
investment is less response to interest rate. That
is, when investment is relatively inelastic to
interest rate. So change in interest rate (monetary
policy) will have no significant effect on
investment. So here fiscal policy will better than
monetary policy.}
36- Fiscal policy will be effective, when LM curve
is:
(a) Steep
(b) Flatter
(c) Vertical
Ans. b {Explanation: Fiscal policy is most effective
for increasing output when money demand is sensitive
to interest rate (LM curve is flat).}
37- Monetary policy will be effective, when LM curve
is:
(a) Steep
(b) Flatter
(c) Vertical
Ans. a {Explanation: Monetary policy is most
effective for increasing output when money demand is
less sensitive to interest rate (LM curve is
steeper).}
38- Monetary policy will be effective, when IS curve
is:
(a) Steep
(b) Flatter
(c) Vertical
Ans. b {Explanation: Monetary policy is most
effective for increasing output when investment is
sensitive to interest rate (IS curve is flatter).}
39-LM curve is steep when:
(a) Money demand is less sensitive (less
response) to interest rate
(b) Money demand is more sensitive (more
(c) Both a and b
Ans. a
40- LM curve is flatter (flat) when:
(a) Money demand is less sensitive (less
(b) Money demand is more sensitive (more
(c) Both a and b
Ans. b
41- IS curve is steep (steeper) when:
(a) Investment is less sensitive (less
(b) Investment is more sensitive (more
(c) Both a and b
Ans. a
42- IS curve is flat (flatter) when:
(a) Investment is less sensitive (less
(b) Investment is more sensitive (more
(c) Both a and b
Ans. b
43-In IS-LM framework, when private investment is
increased, the rate of interest will increase along
with:
(a) Increase in level of income
(b) Decrease in level of income
(c) No change in level of income
Ans. a
44-When price of securities increases, rate of
interest will fall, yielding the liquidity effect of
increase in:
(a) Money demand
(b) Money supply
(c) Price of commodity
Ans. b
UNIT 6: AGGREGATE DEMAND

AND SUPPLY
1-Aggregate Demand is defined as:

(a) It is the total demand for final goods and
services (Y) in the economy at a given time and
price level (p)
(b) It is the total supply for final goods and
services (Y) in the economy at a given time and
price level (p).
(c) It is the total imports (M) for final goods
and services of the economy at a given time and
price level (p).
Ans. a
2- Aggregate Demand Curve (ADC) is defined as:
(a) The aggregate demand curve represents the
total quantity of all goods and services
demanded by the economy at different price
levels
(b) The aggregate demand curve represents the
supplied by the economy at different price
levels
(c) The aggregate demand curve represents the
total quantity of all goods and services imports
by the economy at different price levels
Ans. a
3-Aggregate demand curve is downward sloping
because:
(a) At lower price levels, a greater quantity
is demanded
(b) At lower price levels, a lower quantity is
demanded
(c) At higher price levels, a higher quantity
is demanded
Ans. a
4- Aggregate Supply is defined as:
(a) It is the total amount for final goods and
services (Y) in the economy that firms are
willing to produce at a given price level (p).
(b) It is the total amount for final goods and
services (Y) in the economy that firms are
willing to sell at a given price level (p).
(c) It is the total exports (X) for final goods
and services of the economy at a given time and
price level (p).
Ans. b
5-Aggregate Supply Curve (ASC) is defined as:
(a) The aggregate supply curve represents the
supplied by the firms in the economy at
different price levels
(b) The aggregate supply curve represents the
demanded by the firms in the economy at
different price levels
(c) The aggregate supply curve represents the
total quantity of all goods and services exports
by the firms in the economy at different price
levels
Ans. a
6-Aggregate supply curve is upward sloping in the
short-run because:
(a) The quantity of aggregate production
supplied (Qs) rises as the price level (P) rises
(b) The quantity of aggregate production
supplied (Qs) rises as the price level (P)
decreases
(c) Both of the above
Ans. a
7-When monetary wages increase in classical
aggregate supply system, prices will:
(a) Rise
(b) Fall
(c) Become zero
(d) Remain same
Ans. a
8-In classical system, when wages increase equal to
increase in prices, real wages:
(a) Rise
(b) Fall
(c) Become zero
(d) Remain same
Ans. d
9-The classical supply curve is:
(a) Horizontal
(b) Vertical
(c) Positive
(d) Negative
Ans. b
10-When real wages remain same, the employment will:
(a) Rise
(b) Fall
(c) Remain same
(d) Become zero
Ans. c
11-Demand for labor will increase due to increase in
prices, as a result profit of the firm will:
(a) Decrease
(b) Remain same
(c) Increase
Ans. c
12-Due to new technology, production function:
(a) Shifts upward
(b) Shifts downward
(c) Remains same
Ans. a
13-When output and employment increase because of
increase in demand for labor, the vertical aggregate
supply curve (ASC) will:
(a) Shift to left
(b) Shift to right
(c) Remain same
(d) Vanish
Ans. b
14-The wages are rigid downward because of:
(a) Minimum wages laws
(b) Trade unions
(c) Money illusions
Ans. d
15-The Keynesian aggregate supply curve:
(a) Falls downward
(b) Is vertical
(c) Rises upward
(d) Is horizontal
Ans. c
16-When real wages increase, the employment in
Keynesian system is determined by:
(a) Demand for labor
(b) Supply of labor
(c) Efficiency of labor
Ans. a
17-Aggregate supply curve is horizontal, when wages
and prices in short-run are:
(a) Variable
(b) Very high
(c) Fixed
(d) Zero
Ans. c
18-Because of downward sticky wages, there is less
than full employment, when real wages:
(a) Decrease
(b) Increase
(c) Remain same
Ans. b
19-The aggregate supply curve shows the pairs of P
and Y consistent with profit:
(a) Maximization condition of the firm
(b) Minimization condition of the firm
(c) Both (a) and (b)
Ans. a
20-If the productivity of labor falls less, as
additional workers are employed, the short-run
aggregate supply curve will be:
(a) Steeper
(b) Flatter
(c) Less steeper
Ans. b
21-When taxes are decreased on laboring class,
short-run aggregate supply curve (SASC) will shift:
(a) Horizontal
(b) Downward
(c) To left
(d) To right
Ans. c
22-If technological changes shift production
function upward, the short-run aggregate supply
curve will shift:
(a) Upward
(b) To left
(c) To right
Ans. c
23-On the basis of more investment, if stock of
capital grows, the short-run aggregate supply curve
will shift:
(a) To right
(b) To left
(c) Upward
Ans. a
24-The long-run aggregate supply curve (LAS) is
vertical as it represents the level of real GDP
supplied at different level of prices, while there
exists:
(a) Nominal rate of unemployment
(b) Gross rate of unemployment
(c) Real rate of unemployment
(d) Natural rate of unemployment
Ans. d
25-The potential level of GDP represents full
employment of:
(a) Labor
(b) Capital
(c) Technology
Ans. d
26-The movement along on short-run aggregate supply
curve will take place, if real wages will:
(a) Rise
(b) Fall
(c) Remain same
Ans. b
27-The long-run aggregate supply curve will be
vertical when monetary wages increase as a result
of:
(a) Increase in prices
(b) Decrease in prices
(c) Increase in income
(d) Decrease in income
Ans. a
28-When the real GDP of the economy increases, both
short-run aggregate supply curve (SAS) and long-run
aggregate supply curve (LAS) will shift right
because of increase in:
(a) Labor
(b) Capital
(c) Technology
Ans. d
29-The aggregate demand curve shows the pairs of P
and Y where real money supply is equal to:
(a) Demand for commodity
(b) Demand for labor
(c) Demand for money
Ans. c
30-Normally, aggregate demand curve slopes:
(a) Positively
(b) Negatively
(c) Upward
Ans. b
31-Keynes effect is the effect of lower price on:
(a) Real money supply
(b) Interest rate
(c) Investment
Ans. d {Explanation: Keynes Effect: The Keynes
effect is the effect that changes in the price
level have upon goods market spending via changes
in interest rates. As prices fall, a
given nominal money supply will be associated with a
larger real money supply, causing interest rates to
fall and in turn causing investment spending
on physical capital to increase. This implies that
insufficient demand in the product market cannot
exist forever, because insufficient demand will
cause a lower price level, resulting in increased
demand. There are two cases in which the Keynes
effect does not occur: in the liquidity trap (when
the LM curve is horizontal and thus changes in the
real money supply do not affect interest rates), and
when expenditure is inelastic with respect to
(unresponsive to) interest rates (when the IS
curve is vertical).
32-The aggregate demand curve (ADC) shows the amount

of national output which will be purchased at each
possible:
(a) Price level
(b) Income level
(c) Wealth level
Ans. a
33-Because of rise in price level, the producers
fail to purchase capital goods which is called
inter-temporal:
(a) Price effect
(b) Income effect
Ans. c
34- Due to rise in prices, the real value of
financial assets falls which induces people to
reduce expenditures is called:
(a) Inter-temporal effect
(b) Pigou effect
(c) Income effect
(d) Keynes effect
Ans. b
35-The aggregate demand curve shows how expenditures
of an economy change as a result of change in price
level while there are given:
(a) Autonomous individual expenditures
(b) Money supply
(c) Fiscal policy
Ans. d
36-If LM is less elastic (steeper) and IS is more
elastic (flatter), then the resulting aggregate
demand curve (ADC) will be:
(a) More steeper (relatively steeper)
(b) More flatter (relatively flatter)
(c) Less steeper
(d) Less flatter
Ans. b
37- If LM is more elastic (flatter) and IS is less
elastic (steeper), then the resulting aggregate
demand curve (ADC) will be:
(a) More steeper (relatively steeper)
(b) More flatter (relatively flatter)
(c) Less steeper
(d) Less flatter
Ans. a
38-If value of ‘k’ is low and demand for money is
more sensitive to change in income, the aggregate
demand (AD) will be:
(a) More rigid
(b) Less rigid
(c) Less elastic
(d) More elastic
Ans. d {Explanation: ‘k’ is called reciprocal of
velocity of money. k = 1/v, where ‘v’ is velocity of
money.}
39-The classical aggregate demand curve is a
function of:
(a) Money supply
(b) Money demand
(c) Money distributed
(d) Money saved
Ans. a
40- The Keynesian aggregate demand curve is a
function of:
(a) Money supply
(b) Government expenditure
(c) Traces and autonomous investment
Ans. d
41-The macroeconomic equilibrium takes place when:
(a) SAS = LAS = AD
(b) SAS > LAS > AD
(c) SAS < LAS > AD
(d) SAS > LAS < AD
Ans. a
42-In classical model, if the supply of labor is
increased, real wages will:
(a) Fall
(b) Increase
(c) Remain same
Ans. a
43- In classical model, if the supply of money is
increased, real wages will:
(a) Fall
(b) Increase
(c) Remain same
Ans. c
44-In classical model, if the price of necessary raw
material decreases, the demand for labor will:
(a) Decrease
(b) Increase
(c) Remain same
Ans. b
45- In classical model, if demand for money balances
increases, the real output will:
(a) Fall
(b) Rise
(c) Remain same
(d) Become zero
Ans. c
46-The monetary wages in Keynesian model are:
(a) Flexible
(b) Variable
(c) Fixed
Ans. c
47-The real wages will increase in Keynesian model,
when prices fall due to:
(a) Excess demand
(b) Excess supply
(c) Low income
(d) High income
Ans. b
48-In Keynesian model, the level of income will move
to above full employment due to:
(a) Increase in government expenditures
(b) Decrease in government expenditures
(c) Increase in taxes
(d) Decrease in taxes
Ans. a
49-In Keynesian model, due to rise in demand for
labor, real wages will:
(a) Decrease
(b) Increase
(c) Become zero
(d) Remain same
Ans. b
50-Due to decrease in price of raw material in
Keynesian model, real wages will:
(a) Decrease
(b) Increase
(c) Remain same
Ans. b
51-In liquidity trap, when prices fall due to cut in
monetary wages, economy will attain:
(a) Inflation
(b) Poverty
(c) Unemployment
(d) Deflation
Ans. c
52-When the nominal money supply is fixed and due to
fall in prices, the real money supply increases.
Then the rate of interest will:
(a) Increase
(b) Decrease
(c) Become zero
(d) Remain same
Ans. b
UNIT 7: OPEN ECONOMY &

MACROECONOMIC
STABILIZATION
1-In open economy, the aggregate demand is:

(a) Y = C+I+G+X
(b) Y = C+S+T
(c) Y = C+I+S
(d) Y =C+I+T
Ans. a
2- In open economy, the aggregate supply is:
(a) Y = C+I+G+X
(b) Y = C+S+T+M
(c) Y = C+I+S
(d) Y =C+I+T
Ans. b
3-The foreign trade multiplier is:
(a) K = 1 /(1-c-m)
(b) K = 1 /(1+c+m
(c) K = 1 /(1-c+m)
(d) K = 1 /(1+c-m)
Ans. c
4-National income equation in an open economy is:
(a) Y = C+I+G
(b) Y = C+I+(X-M)
(c) Y = I+G+(X-M)
(d) Y = C+I+G+(X-M)
Ans. d
5-Exchange rate under flexible exchange rate system
is determined by the forces of:
(a) Demand
(b) Supply
(c) Both a and b
Ans. c
6-Under fixed exchange rate system, exchange rate is
determined by:
(a) Commercial banks
(b) Central bank
(c) IMF
(d) WHO
Ans. b
7-Foreign goods become cheaper when exchange rate:
(a) Rises
(b) Falls
(c) Remains same
Ans. a
8-When exchange rate rises, exports will:
(a) Increase
(b) Decrease
(c) Remain same
Ans. b
9-In Mundell-Fleming model of open economy under
flexible exchange rate system, price level is:
(a) Exogenous
(b) Endogenous
(c) Variable
(d) Continuous variable
Ans. a
10-Exchange rate in Mundell-Fleming model is
determined, where:
(a) IS*> LM*
(b) IS*< LM*
(c) IS*+ LM*
(d) IS*= LM*
Ans. d {Explanation: The Mundell–Fleming model, also
known as the IS-LM-BoP model (or IS-LM-BP model), is
an economic model first set forth (independently)
by Robert Mundell and Marcus Fleming. The model is
an extension of the IS-LM Model. Whereas the
traditional IS-LM Model deals with economy
under autarky (or a closed economy), the Mundell–
Fleming model describes a small open economy.
Mundell's paper suggests that the model can be
applied to Zurich, Brussels and so on.The Mundell–
Fleming model portrays the short-run relationship
between an economy's nominal exchange rate, interest
rate, and output (in contrast to the closed-
economy IS-LM model, which focuses only on the
relationship between the interest rate and output).
The Mundell–Fleming model has been used to argue
that an economy cannot simultaneously maintain
a fixed exchange rate, free capital movement, and an
independent monetary policy. This principle is
frequently called the "impossible trinity," "unholy
trinity," "irreconcilable trinity," "inconsistent
trinity" or the "Mundell–Fleming trilemma.
11-In Mundell-Fleming model, LM slopes:

(a) Vertical
(b) Horizontal
(c) Positively
(d) Negatively
Ans. a
12-The AD curve shifts downward when net exports:
(a) Rise
(b) Fall
(c) Remain same
(d) Become zero
Ans. b
13- The AD curve shifts downward when exchange rate:
(a) Rises
(b) Falls
(c) Remains same
(d) Becomes very low
Ans. a
14-Exchange rate increases under Mundell-Fleming
model due to fiscal:
(a) Contraction
(b) Relaxation
(c) Expansion
Ans. c
15-The buying of foreign currency by central bank
will equate equilibrium exchange rate with:
(a) Variable exchange rate
(b) Fixed exchange rate
(c) Fluctuating exchange rate
Ans. b
16-Due to fiscal expansion under fixed exchange rate
system when exchange rate rises, money supply will
be increased to bring equal to:
(a) Fluctuating exchange rate
(b) Floating exchange rate
(c) Fixed exchange rate
Ans. c
17-The fiscal expansion under floating exchange rate
has:
(a) Positive impact on income
(b) Negative impact on income
(c) Very high impact on income
(d) No impact on income
Ans. d
18-The impact of fiscal expansion under fixed
exchange rate on exchange rate is:
(a) Positive
(b) Negative
(c) Very high
(d) Zero
Ans. d
19-Due to trade policy when imports are cut, the
exchange rate will go up to keep it at the fixed
level, the money supply will have to be:
(a) Decreased
(b) Increased
(c) Remained same
(d) Zero
Ans. b
20-Under fixed exchange rate, the impact of monetary
expansion on income is:
(a) Zero
(b) Positive
(c) Negative
Ans. a
21-Under Mundell-Fleming model, the monetary
expansion leads to:
(a) Increase exchange rate
(b) Decrease exchange rate
(c) No effect on exchange rate
Ans. b
22-The Mundell-Fleming model with changing exchange
rate states that fall in price level and increase in
real money supply will lead to:
(a) Decrease income
(b) No impact on income
(c) Increase income
Ans. c
23-In case of large open economy by world financial
markets, the interest rate is:
(a) Fixed
(b) Not fixed
(c) Zero
(d) Lower
Ans. b
24-The net foreign investment is negatively related
to:
(a) Foreign interest rate
(b) Regional interest rate
(c) World interest rate
(d) Domestic interest rate
Ans. d
UNIT8: LABOR MARKET, PRICE EXPECTATION &
UNEMPLOYMENT
1-According to sticky wage model, the behavior of

nominal wages in real life is:
(a) Quick
(b) Rapid
(c) Beneficial
(d) Sluggish
Ans. d {Explanation:Sticky Wages Theory: wages are
said to be "sticky-down" since they can move up
easily but move down only with difficulty. it is
difficult for workers to accept pay cuts; some
workers are union members with long-term contracts
or a company may not want to expose itself to the
bad press associated with wage cuts. By contrast,
the prices of goods tend not to be sticky; their
prices change easily and frequently in response to
changes in supply and demand. In his The General
Theory of Employment, Interest and Money, John
Maynard Keynes argued that nominal wages display
downward rigidity or the wages are sticky (or
sluggish), in the sense that workers are reluctant
to accept cuts in nominal wages. This can lead
to involuntary unemployment as it takes time for
wages to adjust to equilibrium, a situation he
thought applied to the Great Depression that he
sought to understand.
2-The changes in wages are sluggish because wage
contracts are for:
(a) Shorter period
(b) Longer period
(c) Medium period
Ans. b
3-The nominal wages, according to sticky wage model
are based upon:
(a) Expected price level
(b) Targeted real wage
(c) Both a and b
Ans. c
4-According to sticky wage model, aggregate supply
curve slopes:
(a) To right
(b) To left
(c) Upward
(d) Downward
Ans. c {Explanation: The sticky-wage model of the
upward sloping short run aggregate supply curve is
based on the labor market. In many industries, short
run wages are set by contracts. That is, workers are
paid based on relatively permanent pay schedules
that are decided upon by management or unions or
both. When the economy changes, the wage the workers
receive cannot adjust immediately.Given that wages
are sticky, the chain of events leading from an
increase in the price level to an increase in output
is fairly straightforward. When the price level
rises, the nominal wage remains fixed because this
is solely based on the dollar amount of the wage.
The real wage, on the other hand, falls because this
is based on the purchasing power of the wage. A
higher price level means that a given wage is able
to purchase fewer goods and services. When the real
wage that firms pay employees falls, labor becomes
cheaper. However, since the amount of output
produced for each unit of labor is still the same,
firms choose to hire more workers and increase
revenues and profits. When firms hire more labor,
output increases. Thus, when the price level rises,
output increases because of sticky wages.
5-The workers’ misperception model is concerned

with:
(a) Money market
(b) Goods market
(c) Labor market
(d) Business market
Ans. c {Explanation: Workers’ Misperception Model:
The worker-misperception model of the upward sloping
short- run aggregate supply curve is again based on
the labor market. This time, unlike in the sticky-
wage model, wages are free to move as the economy
changes. The amount of work that an employee is
willing to supply is based on the expected real
wage. That is, workers know how many dollars they
are being paid, the nominal wage, but workers can
only guess at how much goods and services they can
purchase with this wage, the real wage. In general,
the higher the real wage, the more work that workers
are willing to supply. Now let's say that the price
level increases. Because we assume that firms have
more information than workers do, firms will give
workers a raise so that their nominal wage increases
with the price level. But since the workers do not
realize that the price level increased, they will
believe that their real wage increased, not just
their nominal wage. At a higher real wage, workers
are induced to work more. When workers work more,
output increases. Thus, when the price level
increases, output also increases because of worker-
misperception. Let's summarize the chain of events
that leads from an increase in the price level to an
increase in output in the worker-misperception
model. When the price level rises, firms increase
nominal wages. When nominal wages increase, workers-
-due to misperceptions--believe that real wages also
increase. When workers believe that real wages
increase, workers provide more labor. When workers
provide more labor, output increases.}
6-According to workers’ misperception model, the
workers supply more labor when they misperceive
regarding:
(a) Prices
(b) Real wages
(c) Both a and b
Ans. c
7-The firm’s information regarding prices and real
wages, according to workers’ misperception model
are:
(a) Inferior
(b) Giffin
(c) Normal
(d) Superior
Ans. d
8-According to imperfect information model, each
supplier of the economy produces:
(a) Two goods
(b) Many goods
(c) One good
(d) A few goods
Ans. c {Explanation: The imperfect-information
model: The imperfect-information model of the upward
sloping short- run aggregate supply curve is again
based on the labor market. In this model, unlike
either the sticky-wage model or the worker-
misperception model, neither the worker nor the firm
has complete information. That is, neither is better
informed than the other is about the real wage, the
nominal wage, or the price level. In this model,
producers are considered to be really only aware of
the price of the goods and services that they
produce. That is, producers are unable to recognize
overall increases in the price level because they
are focused on their products only. Instead,
producers only recognize changes in the prices of
the goods and services that they produce. Given that
producers are unable to recognize changes in the
overall price level, they are likely to confuse
changes in the goods and services they produce
(relative changes in the price level) with changes
in the overall price level (absolute changes in the
price level). It is important to understand the
implications of both relative changes in the price
level and absolute changes in the price level. When
a relative change in the price level occurs,
producers of some goods and services are better off
because the price of their output increases to a
greater extent than the overall price level. Both
the real wage and the nominal wage earned by these
producers increase. When an absolute change in the
price level occurs, all producers are affected
equally and the nominal wage increases while the
real wage remains constant. Recall that producers
are willing to provide more labor when the wage is
high. That is, they will work harder when they are
getting paid more for their work. Also recall that
producers cannot differentiate between relative
changes in the price level and absolute changes in
the price level. Thus, when a producer sees a change
in the price level, she will likely believe that it
is a relative change in the price level, even if it
is an absolute change in the price level. Because of
this, the producer will work more and produce more
output when the price level rises. Thus, an increase
in the price level causes output to rise. Let's
summarize the chain of events that leads from an
increase in the price level to an increase in output
in the imperfect-information model. When the overall
price level rises, producers mistake it for a
relative increase in the price level. When the
relative price level rises, the real wage earned by
producers rises. When the real wage earned by
producers rises, the amount of labor supplied by
producers increases. When the amount of labor
supplied by producers increases, output increases.}
9-Each supplier of the economy according to

imperfect information model uses:
(a) Two goods
(b) Many goods
(c) One good
(d) A few goods
Ans. b
10- According to imperfect information model, when
prices exceed the expected prices, the producers
will:
(a) Increase output
(b) Decrease output
(c) Halt output
Ans. a
11- Imperfect information model deals with:
(a) Labor market
(b) Goods market
(c) Money market
(d) Financial market
Ans. b
12-It is not easy to change the prices according to:
(a) Imperfect information model
(b) Sticky price level model
(c) Keynesian model
(d) Cournot model
Ans. b
13-According to sticky price model, because of
excess demand for firm’s product, the expected price
charged by the firm will:
(a) Move to right
(b) Remain same
(c) Go up
(d) Go down
Ans. c
14-The workers who are employed in the firm are
given the name of:
(a) Outsiders
(b) Insiders
(c) Strangers
(d) Guests
Ans. b
15-The workers who are unemployed are called:
(a) Outsiders
(b) Insiders
(c) Strangers
(d) Guests
Ans. a
16-The outsiders desire that the firm should:
(a) Increase wages
(b) Not effect wages
(c) Decrease wages
(d) Maximize wages
Ans. c
17-The burden of higher wages given to insiders is
also borne by:
(a) Outsiders
(b) Insiders
(c) Strangers
(d) Guests
Ans. b
18-The insiders desire that the government should:
(a) Increase wages
(b) Decrease wages
(c) Not effect wages
Ans. a
19-The firms are bound to higher wages to insiders
even if there exists:
(a) Full employment
(b) Unemployment
(c) Inflation
(d) Poverty
Ans. b
20-If wages are reduced, the productivity of
insiders will fall leading to reduction of:
(a) Total input
(b) Total prices
(c) Total income
(d) Total output
Ans. d
21-According to insider and outsider model, economy
will not attain full employment rapidly once it
experiences:
(a) Depression
(b) Expansion
(c) Recession
(d) Contraction
Ans. a (Explanation: Insider-Outsider Mode: In this
model the insiders are the incumbent employees and
the outsiders are the unemployed workers. Whereas in
efficiency wage models it is firms that decide to
pay a wage higher than the market-clearing wage, in
the insider–outsider approach the focus shifts to
the power of the insiders
who at least partially determine wage and employment
decisions. No direct effects of wages on
productivity are assumed. Where does the insider
power come from? According to Lindbeck and Snower,
insider power arises as a result of turnover costs.
These include hiring and firing costs such as those
associated with costs of searching the labour
market, advertising and screening, negotiating
conditions of employment, mandatory severance pay
and litigation costs. Other important costs are
production-related and arise from the need to train
new employees. When some external shock reduces
employment, so that some insiders become outsiders,
the number of insiders decreases. This incentivizes
the insiders to set even higher wages when the
economy again gets better, as there are not as many
insiders remaining as before, instead of letting the
outsiders to again get jobs at earlier wages. This
causeshysteresis, i.e., the unemployment becomes
permanently higher after negative shocks.}
22-The adaptive expectations are based upon the fact

that the rise in prices are followed by:
(a) Fall in wages
(b) Rise in labor
(c) Rise in wages
(d) Fall in labor
Ans. c {Explanation: Adaptive Expressions: . The
theory of adaptive expectations states that
individuals will form future expectations based on
past events. For example, if inflation was lower
than expected in the past, individuals will change
their expectations and anticipate future inflation
to be lower than expected.
To connect this to the Phillips curve, consider .
Assume the economy starts at point A at the natural
rate of unemployment with an initial inflation rate
of 2%, which has been constant for the past few
years. Accordingly, because of the adaptive
expectations theory, workers will expect the 2%
inflation rate to continue, so they will incorporate
this expected increase into future labor bargaining
agreements. This way, their nominal wages will keep
up with inflation, and their real wages will stay
the same. Now assume that the government wants to
lower the unemployment rate. To do so, it engages in
expansionary economic activities and
increases aggregate demand. As aggregate
demand increases, inflation increases. Because of
the higher inflation, the real wages workers receive
have decreased. For example, assume each worker
receives $100, plus the 2% inflation adjustment.
Each worker will make $102 in nominal wages, but
$100 in real wages. Now, if the inflation level has
risen to 6%. Workers will make $102 in nominal
wages, but this is only $96.23 in real wages.
Although the workers' real purchasing
power declines, employers are now able to hire labor
for a cheaper real cost. Consequently, employers
hire more workers to produce more output, lowering
the unemployment rate and increasing real GDP.
However, workers eventually realize that inflation
has grown faster than expected, their nominal wages
have not kept pace, and their real wages have been
diminished. They demand a 4% increase in wages to
increase their real purchasing power to previous
levels, which raises labor costs for employers. As
labor costs increase, profits decrease, and some
workers are let go, increasing the unemployment
rate. This example highlights how the theory of
adaptive expectations predicts that there are
no long-run trade-offs between unemployment and
inflation. In the short run, it is possible to lower
unemployment at the cost of higher inflation, but,
eventually, worker expectations will catch up, and
the economy will correct itself to the natural rate
of unemployment with higher inflation.
}
23-According to Monetarist, fiscal policy results
in:
(a) Crowding-in
(b) Crowding-out
(c) Both a and b
Ans. b
24-The Rational Expectation Theory is presented by:
(a) Classical economists
(b) Neo-Classical economists
(c) Keynesians
(d) Modern economists
Ans. b {Explanation: Rational Expectation Theory:
The theory of rational expectations states that
individuals will form future expectations based on
all available information, with the result that
future predictions will be very close to the
market equilibrium. For example, assume that
inflation was lower than expected in the past.
Individuals will take this past information and
current information, such as the current inflation
rate and current economic policies, to predict
future inflation rates.
As an example of how this applies to the Phillips
curve, consider again. Assume the economy starts at
point A, with an initial inflation rate of 2% and
the natural rate of unemployment. However,
under rational expectations theory, workers are
intelligent and fully aware of past and present
economic variables and change their expectations
accordingly. They will be able to anticipate
increases in aggregate demand and the accompanying
increases in inflation. As such, they will raise
their nominal wage demands to match the forecasted
inflation, and they will not have an adjustment
period when their real wages are lower than their
nominal wages.
In essence, rational expectations theory predicts
that attempts to change the unemployment rate will
be automatically undermined by rational workers.
They can act rationally to protect their interests,
which cancels out the intended economic policy
effects. Efforts to lower unemployment only raise
inflation.
It was developed by the US economist Robert Lucas
(born 1937) who won the 1955 Nobel Prize for
this insight. Not to be confused with rational
choice theory. Also called rational
expectations hypothesis.
25-According to Rational Expectation Theory,

business cycles occur due to expectational error or:
(a) Price surprises
(b) Income surprises
(c) Wage surprises
(d) Output surprises
Ans. a
26-According to Rational Expectations school,
economy may attain natural rate of unemployment in:
(a) Short-run
(b) Long-run
(c) Both a and b
Ans. c
27-According to Adoptive Expectations, the sacrifice
ratio is:
(a) Very low
(b) Very high
(c) Zero
(d) Equal to one
Ans. b {Explanation: Sacrifice Ratio: Sacrifice
ratio is the accumulated output loss due to a given
permanent reduction in inflation. To reduce
inflation, policymakers can contract Aggregate
Demand, causing unemployment to rise above the
natural rate.The sacrifice ratio measures the
percentage of a year’s real GDP that must be
foregone to reduce inflation by 1 percentage point.A
typical estimate of the ratio is 5 in the US.For UK,
a 1% reduction in output for one year lowers
inflation by about ¼% point. Example: To reduce
inflation from 6 to 2 percent, mustsacrifice 20
percent of one year’s GDP: GDP loss = (inflation
reduction) x (sacrifice ratio)= 4 x 5.This loss
could be incurred in one year or spread over several
years, e.g., 5% loss for each of four years.The cost
of disinflation is lost GDP. One could use Okun’s
law to translate this cost into unemployment.}
UNIT 9: MACROECONOMIC POLICY
DEBATE
1-An economy, according to Keynesians, is

inherently:
(a) Stagnant
(b) Stable
(c) Unstable
(d) Fixed
Ans. c
2-According to Monetarists, an economy is
inherently:
(a) Stagnant
(b) Stable
(c) Unstable
(d) Fixed
Ans. b
3-The Keynesians support:
(a) Active fiscal policy
(b) Active monetary policy
(c) Passive fiscal policy
(d) Both a and b
Ans. a{Keynes and his followers which are known as
‘Keynesians’ are the supporters of fiscal policy and
they say that fiscal policy is more effective than
monetary policy. Keynes is also called ‘fiscalist’}
4-The outside lag represents time period between:
(a) Shock received and policy action taken
(b) Production and consumption
(c) Policy implementation and impact
(d) Forces applied and taken back
Ans. c
5-The outside lag attached with monetary policy is
longer because interest response of investment is:
(a) Strong
(b) Zero
(c) Neutral
(d) Poor
Ans. d
6-When economists are attached with the situation of
ignorance they will have to be much more careful
while advising to:
(a) Policy breakers
(b) Bankers
(c) Policy makers
(d) Policy holders
Ans. c
7-According to Lucas, expectations play an important
role as they influence the:
(a) Producers
(b) Consumers
(c) Other economic agents
Ans. d
8-Expectations also depend upon economic policies
followed by:
(a) Past government
(b) Bankers
(c) Industrialists
(d) Existing government
Ans. d
9-The percentage point fall in GDP in order to
control one percentage point inflation is called:
(a) Capital ratio
(b) Wage ratio
(c) Sacrifice ratio
(d) Economic ratio
Ans. c
10-Sacrifice ratio analyzed on the basis of
traditional method depends upon adaptive
expectations which fail to calculate costs of:
(a) Increasing inflation
(b) Constant inflation
(c) Reducing inflation
Ans. c
11-According to Robert Lucas critique, the
traditional estimates regarding sacrifice ratio are:
(a) Trustworthy
(b) Not trustworthy
(c) Adaptive
Ans. b
12-If policy makers in anticipation announce the
reaction of a policy about inflation and deflation,
it is called:
(a) Rule approach
(b) Real approach
(c) Rational approach
Ans. a
13-The discretionary policy, if given in the hands
of politicians will:
(a) Be beneficial
(b) Not be beneficial
(c) Be futile
Ans. b
14-If the level of real prices gets different from
targeted level, the FED will bring changes in:
(a) Money supply
(b) Prices
(c) Money demand
(d) Income
Ans. a
15-Under rule approach, main stress is made on:
(a) Monetary policy
(b) Fiscal policy
(c) Bankers policy
(d) Consumer policy
Ans. b
16-According to Keynes, the thinking of economists
and political philosophers are deemed superior to
those of common man as if:
(a) They are right
(b) They are wrong
(c) Whether right or wrong
Ans. c
17-The short-run aggregate supply curve of Keynes
is:
(b) Sloped downward
(d) Vertical
Ans. c
18-The long run Philips Curve (PC) and aggregate
supply curve of Keynesian and Monetarists are:
(b) Sloped downward
(d) Vertical
Ans. d
19-The monetarists are preferred to accept higher
unemployment in order to check:
(a) Lower poverty
(b) Lower inflation
(c) Higher inflation
(d) Lower unemployment
Ans. c
20-According to Monetarists, money supply determines
growth of:
(a) Real GDP
(b) Gross GDP
(c) Financial GDP
(d) Nominal GDP
Ans. d
21- According to Monetarists:
(a) Fiscal policies are destabilizing
(b) Monetary policies are destabilizing
(c) Both a and b
Ans. c {Explanation: The birth of monetarism took
place in the 1960s. The original proponent of
monetarism was Milton Friedman, now a Nobel
Laureate. The monetarists argue that while it is not
possible to have full employment of the labor force
all the time (as classical economists argued), it is
better to leave the macroeconomy to market forces.
Friedman modified some aspects of the classical
theory to provide the rationale for his
noninterventionist policy recommendation. In
essence, monetarism contends that use of fiscal
policy is largely ineffective in altering output and
employment levels. Moreover, it only leads to
crowding out. Monetary policy, on the other hand, is
effective. However, monetary authorities do not have
adequate knowledge to conduct a successful monetary
policy—manipulating the money supply to stabilize
the economy only leads to a greater instability.
Hence, monetarism advocates that neither monetary
nor fiscal policy should be used in an attempt to
stabilize the economy, and the money supply should
be allowed to grow at a constant rate. Friedman
contends that the government's use of active
monetary and fiscal policies to stabilize the
economy around full employment leads to greater
instability in the economy. He argues that while the
economy will not achieve a state of bliss in the
absence of the government intervention, it will be
far more tranquil. The monetarist policy
recommendations are similar to those of the
classical economists, even though the reasoning is
somewhat different.}
22-In case of stagflation, the short-run Philips
curve will:
(a) Shift upward
(b) Shift to downward
(c) Shift to left
Ans. a {Explanation: We know that Philips curve
shows the trade off between unemployment and
inflation and we also know that stagflation shows
high rate of inflation with high rate of
unemployment so in case of stagflation the Philips
curve shift upward where it shows higher values of
both unemployment and inflation (prices).}
23-According to short-run Philips Curve (LRPC),
there is a trade-off between:
(a) Inflation and poverty
(b) Poverty and unemployment
(c) Inflation and unemployment
(d) Poverty and overproduction
Ans. c {Explanation: In long run there is no trade
off between unemployment and inflation because long
run Philips curve is vertical}
24-According to rational expectation theory, there
is a trade-off between inflation and unemployment
in:
(a) Short-run
(b) Long-run
(c) Both a and b
Ans. c
25-The Philips curve shifts upward when the expected
inflation:
(a) Decreases
(b) Increases
(c) Remains same
(d) Becomes zero
Ans. b
26-When the level of natural rate of unemployment
increases, the Philips Curve will shift:
(a) Vertical
(b) To left
(c) Upward
(d) Downward
Ans. c
27-The cost push stagflation is furnished with:
(a) Rising prices
(b) Rising unemployment
(c) Both a and b
Ans. c
UNIT10: GOVT. DEBT AND

BUDGET DEFICIT
1-When government expenditures are more than tax

revenues, then budget deficit:
(a) Falls
(b) Remains same
(c) Rises
(d) Becomes minimum
Ans. c
2-The government borrowings in the past is called:
(a) Firm’s debt
(b) Government debt
(c) Public debt
(d) Private debt
Ans. c
3-The stock of capital will come down, because of
fall in taxes when savings:
(a) Decrease
(b) Increase
(c) Are nil
(d) Are very high
Ans. a
4-If government reduces taxes in first period
without changing government expenditures, it will
have to depend upon:
(a) Private debt
(b) Public debt
(c) Subsidies
(d) Public payments
Ans. b
5-According to traditional view of government debt,
the burden of budget deficit will be borne by:
(a) Future generation
(b) Past generation
(c) Present generation
Ans. a (Explanation: The increase in government
expenditures increases aggregate demand. In a fully
employed economy, in addition to raising prices, the
increase in demand will lead to a rise in interest
rates. The increase in interest rates is the means
by which the government obtains the additional
resources to fight the war for the increase will
discourage interest-sensitive spending by the
private sector. This is primarily business spending
for capital goods such as plant, equipment, and
structures and spending by households for homes,
automobiles, appliances and the like. Thus, the
budget deficit “crowds out” private capital and the
burden of the growing national debt represented by
the bonds issued to finance the war, is the decrease
in the private capital stock of the country. The
level of output is determined by the capital stock,
labor force, and productivity levels. Since the
private capital stock inherited by future
generations will be smaller, it implies that the
level of output enjoyed by them will be lower.7 The
lower level of output is thus the ultimate burden of
the debt and it is a burden that is largely shifted
forwarded to future generations.}
6- According to traditional theory of public debt,
the fall in taxes will lead to increase consumption
and decrease in:
(a) Investment
(b) Production
(c) Savings
(d) Income
Ans. c (Explanation: In the traditional view, a
debt-financed tax cut increases consumption and
reduces national saving. In a closed economy, this
leads to higher interest rates, lower investment,
and a lower long-run standard of living. In an open
economy, it causes an exchange rate appreciation, a
fall in net exports (or increase in the trade
deficit). On other hand The Ricardian view holds
that debt-financed tax cuts do not affect
consumption or national saving, and therefore do not
affect interest rates, investment, or net exports. }
7-The public debt forces the government that it will

have to make trade-off between decrease in its
expenditure and:
(a) Decrease in taxes
(b) Increase in taxes
(c) Constant taxes
Ans. b
8-The Ricardian theory of public debt assumes that
people have:
(a) Knowledge
(b) Forecasting sense
(c) Both a and b
Ans. c (Explanation: Ricardian theory of public debt
(Recardian Equivalence Theorem): The Ricardian view
holds that debt-financed tax cuts do not affect
consumption or national saving, and therefore do not
affect interest rates, investment, or net exports.
According to Ricardian equivalence, a debt-financed
tax cut has no effect on consumption, national
saving, the real interest rate, investment, net
exports, or real GDP, even in the short run. This
view is more advanced by Robert Barro. Consumers are
forward-looking, know that a debt-financed tax cut
today implies an increase in future taxes that is
equal in present value to the tax cut. Thus, the tax
cut does not make consumers better off, so they do
not raise consumption. They save the full tax cut in
order to repay the future tax liability. Result:
private saving rises by the amount public saving
falls, leaving national saving unchanged. Problems
with Ricardian Equivalence ?? Myopia ►Not all
consumers think that far ahead, so they see the tax
cut as a windfall. ?? Borrowing constraints► Some
consumers are not able to borrow enough to achieve
their optimal consumption, and would therefore spend
a tax cut. ?? Future generations► If consumers
expect that the burden of repaying a tax cut will
fall on future generations, then a tax cut now makes
them feel better off, so they increase spending.}
9-The traditional theory of public debt states that

people:
(a) Have forecasting sense
(b) Do not have forecasting sense
(c) Both a and b
Ans. b
10-According to traditional theory of public debt,
due to budget deficit, the consumption of present
generation will:
(a) Increase
(b) Decrease
(c) Be zero
(d) Remain constant
Ans. b
11-According to Ricardo, when taxes are reduced,
they increase the:
(a) Earned income
(b) Permanent income
(c) Both a and b
Ans. a
12- According to Ricardo, when permanent income does
not increase after taxes, the consumption will:
(a) Increase
(b) Decrease
(c) Zero
Ans. b
13-In the presence of liquidity constraints, the
consumption will not decrease even taxes are:
(a) Increased
(b) Decreased
(c) Constant
(d) Zero
Ans. b (Explanation►Liquidity Constraint: Inability
to make a purchase due to lack of cash. A liquidity
constraint in economic theory is a form of
imperfection in the capital market. It causes
difficulties for models based on intertemporal
consumption. Many economic models require
individuals to save or borrow money from time to
time. A liquidity constraint is an arbitrary limit
on the amount an individual can borrow, or an
arbitrary alteration in the interest rate they pay.
By raising the costs of borrowing, they prevent
individuals from fully optimising their behaviour
over time. Actually existing liquidity constraints
are mainly due to risk-based behaviour by lenders
such as banks. Mortgage lending is the cheapest way
of an individual borrowing money, but is only
available to people with enough savings to buy
property. Because the loan is secured on a house or
other property, it is only accessible to particular
individuals (those who have enough savings to put
down a deposit). Other forms of credit,
like unsecured loans, credit cards and loan sharks,
have progressively higher interest rates, and are
used more by poorer people.
Middle-class households usually hold liquid assets.

Since liquid wealth can be converted into current
consumption, it seems implausible that such
households could face liquidity constraints.
Nevertheless, existing evidence from consumption
dynamics following tax rebates suggests otherwise:
Households with financial assets spend no less, and
perhaps more, out of these temporary income changes
than do poorer and more obviously constrained
households. }
14- According to traditional theory of public debt,

people suffer from:
(a) Fever
(b) Headache
(c) Myopia
(d) Depression
Ans. c
UNIT11: ECONOMIC FLUCTUATIONS AND
ITS SOURCES
1-Business cycles come into because of operation of

multiplier and accelerator, according to:
(a) Richard
(b) Ricardo
(c) Keynes
(d) Samuelson
Ans. d
2-business cycles deal with:
(a) Producers
(b) Firms
(c) Whole economy
(d) Consumers
Ans. c
3-According to Keynesians, business cycles are
attributed to changes in:
(a) Aggregate demand
(b) Behavior of labor market
(c) Both a and b
Ans. c
4-According to Rational Expectation Theory, business
cycles are assigned to rational expectations
regarding:
(a) Income
(b) Labor
(c) Price
(d) Wage
Ans. c
5-According to Real Business Cycle (RBC) theory,
economic fluctuations occur because of random
fluctuations in:
(a) Money supply
(b) Productivity
(c) Taxes
(d) Consumption
Ans. b
6- According to Real Business Cycle (RBC) theory,
technical changes occur due to changes in:
(a) Research
(b) Development
(c) Production
(d) Population
Ans. d
technical changes which make the productivity of
labor lead to:
(a) Expansion
(b) Contraction
(c) Revival
(d) Recession
Ans. a {Explanation: Real Business Cycle Theory► The
real business cycle theory makes the fundamental
assumption that an economy witnesses all these
phases of business cycle due to technology shocks.
Definition: An economy witnesses a number of
business cycles in its life. These business cycles
involve phases of high or even low level of economic
activities. A business cycle involves periods of
economic expansion, recession, trough and recovery.
The duration of such stages may vary from case to
case.The real business cycle theory makes the
fundamental assumption that an economy witnesses all
these phases of business cycle due to technology
shocks. Technological shocks include innovations,
bad weather, stricter safety regulations, etc.
Description: According to the theory, monetary
shocks or expectation changes have no role to play
in a business cycle.}

the technical changes occur in the economy, some
part of installed capital becomes:
(a) Prominent
(b) Obsolete
(c) Cheap
Ans. b (Explanation: The first ingredient of RBC
theory is that economic fluctuations are driven by
changes in the growth rate of total factor
productivity that results from changes in
technological progress. All technological changes
eventually increase productivity growth. However, if
initially technological change makes most of the
existing capital obsolete, then capital and labour
productivity may go down initially and so output and
then will recover after new capital (more advanced)
is installed.}
9-Due to technical changes when demand for

investment decreases, the rate of interest will:
(a) Increase
(b) Decrease
(c) Remain same
(d) Fluctuate
Ans. b
10-Because of fall in interest rate, following the
concept of “when to work” the labor will:
(a) Increase their supply
(b) Decrease there supply
(c) Do not effect supply
(d) Finish their supply
Ans. b
11-The signs of beginning of recession are the fall
in:
(a) Real interest rate
(b) Real wage rate
(c) Level of employment
Ans. d
12-Due to fall in employment, aggregate supply:
(a) Decreases
(b) Increases
(c) Remains same
Ans. a
real factors are responsible for trade cycles as
they effect:
(a) Real investment
(b) Real GDP
(c) Real employment
Ans. d
14-Technical shock which generates trade cycles in
‘Real Business Cycle (RBC) theory’ is also
responsible for:
(a) Inflation
(b) Unemployment
(c) Overpopulation
(d) Economic growth
Ans. d
15-According to Nelson and Plosser, fluctuations in
aggregate demand (AD) are not very much important in
determining the fluctuation in:
(a) Input
(b) Price
(c) Output
(d) Wages
Ans. c (Explanation: In 1982, Nelson and Plosser
criticized the traditional approach to the business
cycle. They showed that monetary disturbances do not
explain much of the observed fluctuations in the
output. The primary source of output fluctuations is
stochastic variation due to real factors. The
majority of changes in output is permanent, not
temporary. After the shock, the economy does not
return to the previous trend path.}
16-The budget deficit leads to higher rates of
growth in money supply which in term becomes
responsible for:
(a) Unemployment
(b) Inflation
(c) Stagflation
(d) Poverty
Ans. b
17-The high rates of inflation are invariably linked
to high rates of:
(a) Money demand
(b) Money growth
(c) Price stabilization
(d) Price mechanism
Ans. b
18-The revenue that a government rises by printing
is called:
(a) High budget
(b) Sovereignty
(c) Seigniorage
(d) Revenue earning
Ans. c {Explanation: Seigniorage ►The amount of
goods and services that the government obtains by
printing new money in a given period. Often we
consider this in real terms, by dividing the new
money by the price level.}
19-The GDP of a country will increase if there is an
improvement in:
(a) Factors of production
(b) Technology
(c) Resources available
Ans. c
20-According to Keynesians, fluctuations occur due
to sticky prices and:
(a) Neutrality of prices
(b) Neutrality of money
(c) Non-neutrality of money
(d) Non-neutrality of prices
Ans. c
21-According to Hysteresis, the recession caused by
disinflationary policy could raise natural rate of:
(a) Deflation
(b) Inflation
(c) Unemployment
(d) Return
Ans. c {Explanation: Hysteresis► From the Greek term
meaning "a coming short, a deficiency." Hysteresis,
a term coined by Sir James Alfred Ewing, a Scottish
physicist and engineer (1855-1935), refers to
systems, organisms and fields that have memory. In
other words, the consequences of an input are
experienced with a certain lag time, or delay. One
example is seen with iron: iron maintains some
magnetization after it has been exposed to and
removed from a magnetic field.
In economics, hysteresis arises when a single
disturbance affects the course of the economy. An
example of hysteresis in economics is the delayed
effects of unemployment. As unemployment increases,
more people adjust to a lower standard of living. As
they become accustomed to the lower standard of
living, people may not be as determined to achieve
the previously desired higher living standard. In
addition, as more people become unemployed, it
becomes more socially acceptable to be or remain
unemployed. After the labor market returns to
normal, some unemployed people may be disinterested
in returning to the work force.}
22-According to Ricardian equivalence budget,
deficit is a substitution of increases in future
taxes for fall in:
(a) Past taxes
(b) Current taxes
(c) Low taxes
(d) High taxes
Ans. b
UNIT12: LONG TERM GROWTH AND

GROWTH MODELS
1-Warranted growth rate is the rate of growth where

economy has:
(a) No inflation
(b) No deflation
(c) Both a and b
Ans. c
2-According to neo-classical production function,
there is:
(a) Increasing return to scale
(b) Decreasing return to scale
(c) Constant return to scale
Ans. c
3-Investment is proportional to income according to:
(a) Random walk model
(b) Samuelson model
(c) Keynesian model
(d) Solow model
Ans. d
4-In Solow Model, stock of capital is determined by:
(a) Investment
(b) Depreciation
(c) Both a and b
Ans. c
5-When investment is less than depreciation, capital
stock and output will:
(a) Fall
(b) Rise
(c) Remain constant
Ans. a
6-In Solow Model, due to increase in savings, there
is increase in level of:
(a) Capital
(b) Output
(c) Both a and b
Ans. c
7- In Solow Model, due to population growth, the
output per worker will:
(a) Increase
(b) Decrease
(c) Remain same
(d) Become zero
Ans. b
8- In Solow Model, at steady state of capital, the
investment and depreciation are:
(a) Different
(b) Same
(c) Equal
(d) Zero
Ans. c {Explanation: Steady State Level of Capital
Stock► is the stock of capital at which investment
and depreciation just offset each other (dK=0), i.e.
where investment is equal to depreciation.}
9-Suppose two countries are identical in every way
with the following exception. Economy A has a higher
rate of depreciation than economy B. Given this
information, we know with certainty that:
(a) Steady state growth of output per worker is
higher in A than in B
(b) Steady state consumption in A is higher
than in B
(c) Steady state consumption in A is lower than
in B
(d) Steady state consumption in A and B are
equal
Ans. c {Explanation: Steady State Level of
Consumption► When the consumption per worker is at
its highest level then it is called steady state
level of consumption. If depreciation rate raises
then steady state consumption decreases.}
10-According to Solow Model when population grows,
the standard of living of the people will:
(a) Rise
(b) Fall
(c) Remain same
Ans. b
11-Golden Rule of capital accumulation is the steady
state which is furnished with highest level of:
(a) Production
(b) Output
(c) Consumption
Ans. c {Explanation: The Golden Rule Level of
Capital Accumulation► is the steady state with the
highest level of consumption. The idea behind the
Golden Rule is that if the government wants to move
the economy to a new steady state, where would they
move? The answer is that they would choose the
steady state at which consumption is maximized. To
alter the steady state, the government must change
the savings rate.}
12-Which of the following statement is always true?
(a) Any change in the capital stock is equal to
investment minus depreciation
(b) The increase in investment is equal to the
capital stock minus depreciation
(c) Investment equals the capital stock minus
depreciation
(d) Investment equals depreciation
Ans. a
13-In steady state when depreciation is equal to
investment, there will be:
(a) A change in capital stock
(b) No change in capital stock
(c) Both a and b
Ans. b
14-If the steady state of capital is below the
golden rule level, the increase in capital will:
(a) Increase production
(b) Increase consumption
(c) Decrease consumption
(d) Decrease production
Ans. b
15- According to golden rule condition, marginal
product of capital (MPK) is:
(a) Equal to rate of depreciation
(b) Less than rate of depreciation
(c) More than rate of depreciation
Ans. a
16-The Solow growth model (theory) is also known as:
(a) Exogenous growth model or neo-classical
growth model
(b) Endogenous growth model or classical growth
model
(c) New growth theory
Ans. a
17-The Endogenous Growth Theory (model) is also
known as:
(a) Exogenous growth model or neo-classical
growth model
(b) Domar growth model or classical growth
model
(c) New growth theory
Ans. c
18-In New Growth Theory (Endogenous Growth Theory),
MPK does not fall because of:
(a) Growth rate
(b) Human resource development
(c) Less economic growth
Ans. b
19-According to New Growth Theory, a country’s long-
run growth depends upon its:
(a) Savings
(b) Investment
(c) Both a and b
Ans. c
20-According to New Growth Theory (Endogenous Growth
Theory), rate of growth of productivity is
determined:
(a) Exogenously
(b) Endogenously
(c) Externally
(d) Internally
Ans. b {Explanation: New Growth Theory (Endogenous
Growth Theory► An economic theory which argues that
economic growth is generated from within a system or
endogenously as a direct result of internal process
by development of new forms of technology and
efficient and effective means of production. This
theory is called ‘new’ because unlike previous
attempts to model the phenomenon, the new theory
treats knowledge as at least partly endogenous. R&D
is one path. Halten (2000) says that the new growth
theory have the new assumption that the marginal
product of capital is constant rather than in
diminishing as in the neo-classical theories of
growth (i.e., Solow Model). Capital often in the new
growth models includes investment in knowledge,
research and development (R&D) of products, and
human capital. In new growth theory, the long-run
growth rate of output is dependent upon saving rate
and savings effect growth b/c they stimulate greater
investment in human capital and R&D.}
21-In endogenous growth theory, marginal product of
capital (MPK) does not fall because of human capital
i.e.:
(a) Knowledge
(b) Skills
(c) Training of individuals
Ans. d
22- In New Growth Theory, the long-run growth rate
of output is dependent upon:
(a) Investment rate
(b) Consumption rate
(c) Saving rate
(d) Production rate
Ans. c
23- In New Growth Theory (Endogenous Growth Theory),
savings effect growth because they stimulate greater
investment in:
(a) Human capital
(b) R&D
(c) Both a and b
Ans. c
24-When stock of capital grows, real GDP:
(a) Does not grow
(b) Grows
Ans. b
25-Technological progress means:
(a) An improvement in the ability to use the
factors in the production of goods and services
(b) Ability to produce more output with given
inputs
(c) A technological change that increases
output for any given input
Ans. d
26-Assume that technological progress does not
occur, then which of the following variable will not
change when the economy reaches steady state
equilibrium?
(a) Output per worker
(b) Investment per worker
(c) Capital per worker
Ans. d
27-When the economy is in the steady state then:
(a) Consumption per worker is maximized
(b) Output per worker is maximized
(c) The growth rate is maximized
(d) Investment per worker is equal to
depreciation per worker
Ans. d
28-Which of the following will likely cause an
increase in output per worker?
(a) An increase in on-the-job training
(b) An increase in education expenditures
(c) An increase in the saving rate
Ans. d
29-Which of the following represents the change in
the capital stock?
(a) Output minus depreciation
(b) Investment minus saving
(c) Consumption minus depreciation
(d) Investment minus depreciation
Ans. d
30-According to endogenous growth model, a lower
rate of growth in the long-run could occur as a
result of which of the following?
(a) A redefinition of the steady state
(b) A lower rate of saving
(c) A redefinition of depreciation
(d) A lower rate of depreciation
Ans. b
31-Assumethat technological progress does occur. For
such an economy, we know that the level of output
per worker will:
(a) Increase over time
(b) Remain constant
(c) Increase or decrease depending on the rate
of depreciation
(d) Decrease as a result of decreasing returns
to scale
Ans. a
32-Suppose an economy experiences a reduction in the
saving rate. We know with certainty that this
reduction in the saving rate will:
(a) Increase steady state consumption
(b) Increase steady state consumption only if
the decrease in saving exceeds the decrease in
depreciation
(c) Have no effect on steady state consumption
Ans. b
33-suppose that economy is initially in the steady
state. An increase in the depreciation rate will
cause:
(a) A reduction in consumption per worker (C/N)
(b) A reduction in output per worker (Y/N)
(c) A reduction in capital per worker (K/N)
Ans. d
34-According to Golden Rule, the marginal product of
capital (MPK):
(a) Is equal to sum of the population growth
rate, the efficiency of labor growth rate, and
the depreciation rate
(b) Is equal to sum of the income growth rate,
the efficiency of labor growth rate, and the
capital growth rate
(c) Is equal to sum of the population growth
rate and the depreciation rate
Ans. a
35-Which one of the following is not the assumptions
of Harrod-Domar Growth Model?
(a) The marginal propensity to save remains
constant
(b) There is only one type of product
(c) There are changes in interest rate
(d) Saving and investment relate to the income
of the same year
Ans. c
36- Harrod-Domar model is based upon:
(a) Two distinct rates of growth
(b) Three distinct rates of growth
(c) Four distinct rates of growth
Ans. b
37-Mrs.Joan Robinson’s model of economic growth is
based on:
(a) The capitalist rule of games
(b) An automatic convergence to a moving
equilibrium in a capitalist economy
(c) Both a and b
Ans. c
38- Mrs. Joan Robinson’s model is an elaboration of:
(a) Harrod’s growth model
(b) Kaldor’s growth model
(c) New growth model
Ans. a
DEVELOPMENT
ECONOMICS
1-Which of the following is not necessarily a

characteristic of an underdeveloped economy?
(a) Low per capita income
(b) Low rate of saving
(c) High density of population
(d) Chronic unemployment
Ans. c
2-For per capita income (y) grow, the relation b/w
increase in population (∆P) and increase in GNP
(∆Y) should be:
(a) ∆P < ∆Y
(b) ∆P = ∆Y
(c) ∆P > ∆Y
Ans. a
3-The theory of stages of growth is associated with:
(a) Simon Kuznets
(b) Colin Clark
(c) Keynes
(d) W.W.Rostow
Ans. d
4-Which of the following is not the barrier to
economic growth?
(a) A population growth
(b) Inefficient use of resources
(c) Inadequate human resource
(d) International trade
Ans. d
5-Which of the following defines the vicious circle
of poverty?
(a) People cannot save in their lives
(b) Increased GDP per capita relates to lower
population growth
(c) The GDP per capita must rise before people
can save and invest
(d) Poverty, saving and population are related
like a circle
Ans. c
6-Physical Quality of Life Index (PQLI) was
developed by:
(a) Morris
(b) Ricardo
(c) Adam Smith
(d) Keynes
Ans. a
7-The major difficulty in measuring economic growth
in least developed countries is:
(a) Lack of skilled workers
(b) Lack of supply of empirical data
(c) Uncooperative behavior of the people
Ans. d
8-Hirchman says, the industry with the highest
combined linkage is:
(a) Cement
(b) Sugar
(c) Iron and steel
(d) Paper industry
Ans. c
9-Unbalance growth is formulated on the assumption
that:
(a) Expansion can take place simultaneously on
several routes
(b) Supply of capital and labor is fixed
(c) Supply of labor is unlimited
(d) Active sector energizes the sluggish
sectors
Ans. d
10-PQLI stands for:
(a) Pre-quantity Live Index
(b) Post-quantity Live Index
(c) Post-quantity of Live Index
(d) Physical Quality of Life Index
Ans. d
11-HDI stands for:
(a) Highly Development Index
(b) Human Dominated Index
(c) Human Development Index
Ans. c
12-The value of PQLI statistic is lies:
(a) Between 0 and 1
(b) Between -1 and 0
(c) Between -1 and 1
Ans. a
13-Economic development of a country depends upon:
(a) Natural resources
(b) Capital formation
(c) Size of the market
Ans. d
14-Development is impossible without:
(a) Incentive to profit
(b) Foreign aid
(c) Foreign trade
(d) Domestic savings
Ans. d
15-Which of the following is the index of a
countries development?
(a) More and more expenses
(b) Higher standards of living
(c) Higher real per capita income
(d) Higher birth rate
Ans. c
16-In the underdeveloped countries death rate has
sharply declined due to:
(a) Increase in per capita income
(b) Improved means of transportation
(c) Improvement in the medical facilities
Ans. c
17-HDI is used as a alternative index by the :
(a) PQLI
(b) UNDP
(c) IMF
Ans. b
18-UNDP stands for:
(a) United Nations Development Program
(b) Underdeveloped Nation Development Program
(c) Union of Nations Development Program
Ans. a
19-Surplus labor theories assume that:
(a) Less developed countries are overpopulated
(b) Labor contributes nothing to output in less
developed countries
(c) The marginal product of labor is close to
zero in less developed countries
(d) There is too much inflation in less
developed countries
Ans. c
20-The Marginal Product of Labor (MPL) = 0 means
that in less developed countries:
(a) People are lazy and hence unproductive
(b) Labor is unskilled and hence unproductive
(c) Labor does not work efficiently
(d) Labor is utilized to the point where the
last worker(s) add nothing to the final output
Ans. d
21-The rapid population growth in today’s developing
nation is due to the:
(a) High birth rate only
(b) Low death rate only
(c) High birth rate and low death rate
(d) High inflation rate
Ans. c
22-Which of the following represents investment in
human capital?
(a) Formal education
(b) On the job training
(c) Better health care
Ans. d
23-The UNDP publishes the annual:
(a) Population statistics report
(b) Import Export Data Report
(c) Human Development Report
Ans. c
24-The HDI is closely related with:
(a) GNP
(b) GDP
(c) Both a and b
Ans. a
25-Enterpreneurship is most closely associated with:
(a) Inventions
(b) Innovations
(c) Exports
(d) Trade
Ans. b
26-Deficit financing means:
(a) Relying on foreign aid
(b) Spending by borrowing from abroad
(c) Spending in excess of revenues
Ans. c
27-The nation can close a saving gap by:
(a) Reduce its incremental capital output ratio
(b) Reduce domestic consumption
(c) Obtain more foreign aid
Ans. d
28-The vicious circle of poverty points out the
connection between:
(a) Income and population
(b) Education and output
(c) Income and profits
(d) Productivity and income
Ans. d
29-The governments of Least Developed Countries
(LDCs) have:
(a) More taxing capacity than industrialized
countries
(b) Less taxing capacity than industrialized
countries
(c) Equal taxing capacity like industrialized
countries
Ans. b
30-Social spending as a proportion of GNP is:
(a) Lower in rich countries than in poor
countries
(b) Higher in rich countries than in poor
countries
(c) Equal in rich and poor countries
Ans. b
31-The Balance Growth Theory defines that primary
cause of underdevelopment is:
(a) The small size of the market
(b) The lack of savings
(c) The low level of technology
(d) High burden of foreign debt
Ans. a
32-The economist who stressed the role of the
entrepreneur in development was:
(a) Hirschman
(b) Nurkse
(c) Rosenstien Rodan
(d) Karl Marx
Ans. a
33-In his theory of development, Schumpeter
stressed:
(a) The need for balance growth
(b) The need for education
(c) The role of innovation
Ans. c
34-In Rostow’s theory, the drive to maturity:
(a) Follows the take-off
(b) Comes before the take-off
(c) Starts the development process
Ans. a
35-The vicious circle of poverty:
(a) Refers to insufficient domestic savings
generated at low levels of income to raise the
capital stock
(b) Applies to countries who suffer from high
rate of inflation
(c) Applies to countries who suffer from high
rate of population growth
(d) The contribution of profit to entrepreneur
is realized in long run
Ans. a
36-Nurkse has put forward the doctrine of balance
growth in order to break the:
(a) Vicious circle of poverty on the supply
side
(b) Vicious circle of poverty on the demand
side of capital formation
(c) Both a and b
Ans. b
37-According to Nurkse, the vicious circle of
poverty can be broken by a:
(a) Unbalance economic growth
(b) Balance economic growth
(c) Both a and b
Ans. b
38-Neglect of agriculture in the development process
can lead to:
(a) Insufficient savings
(b) Shortages of foreign exchange
(c) Lower levels of production
Ans. d
39-All underdeveloped countries are:
(a) Not developing at all
(b) Developing at same rate
(c) Developing at different rates
Ans. c
40-Underdevelopment has been a result of:
(a) Economic factors
(b) Social factors
(c) Political factors
(d) Economic , social and political factors all
together
Ans. d
41-An outward shift to the production possibility
curve represents:
(a) Economic growth
(b) Population growth
(c) A decrease in human capital
(d) A decrease in efficiency
Ans. a
42-A major tenet of Ricardo was:
(a) The law of price elasticity
(b) The law of demand
(c) The law of supply
(d) The law of diminishing returns
Ans. d
43-The World Bank and International Monetary Fund
(IMF) are the two most powerful international
financial agencies in developing countries which are
dominated by:
(a) Neoclassical economists
(b) Classical economists
(c) Both a and b
Ans. a
44-“A circular constellation of forces tending to
act and react upon one another in such a way as to
keep a poor country in a state of poverty” is a
description about:
(a) Overpopulation
(b) Deep-rooted poverty
(c) Inflation
(d) Vicious circle of poverty
Ans. d
45-In a poor country:
(a) The supply of capital is low
(b) The demand for capital is low
(c) Both the supply of and demand for capital
are low
Ans. c
46-The neo-classical model predicts that incomes per
capita between rich and poor countries will:
(a) Diminish
(b) Increase
(c) Converge
(d) Diverge
Ans. c
47-Balance growth advocates argue that a big push is
needed to begin economic development because of:
(a) Indivisibilities in demand and
infrastructure
(b) Indivisibilities in supply and demand
(c) Indivisibilities in output and profit
Ans. a
48-Some economists criticize on balance growth
theory and say that most underdeveloped countries do
not have the resources essential for launching such
a:
(a) Small aid
(b) Export benefits
(c) Big push
Ans. c
49-The big push strategy is associated with the name
of:
(a) Rosenstein Rodan and Harvey Leibenstein
(b) David Ricardo
(c) Karl Marx
(d) Keynes
Ans. a
50-The inducement to invest is limited because of:
(a) Small size of population
(b) Small size of country
(c) Small size of the market
Ans. c
51-The real determinant of the size of market in a
country is:
(a) Its geographical area
(b) Size of its population
(c) Income of its population
(d) External debt of the economy
Ans. c
52-Hirschman and other economists like him plead
for:
(a) Balanced growth
(b) Unbalanced growth
(c) Population growth
(d) Labor growth
Ans. b
53-A country can meet its deficiency of capital
through:
(a) Internal savings
(b) Foreign capital
(c) Diversion of savings to productive uses
Ans. d
54-A closed economy that attempts to be completely
self-reliant is termed as:
(a) Autarchic
(b) Protectionist
(c) Capitalist
(d) Primitive
Ans. b
55-The debt service ratio is the ratio of:
(a) External debt to the size of the service
sector
(b) External debt to the total GNP
(c) Internal debt to the total GNP
Ans. b
56-Special Drawing Rights (SDRs) are financial
assets created by:
(a) The World Bank
(b) UNDP
(c) UN
(d) IMF
Ans. d
57-The ‘International Bank for Reconstruction and
Development’ is also called:
(a) IMF
(b) UNDP
(c) World Bank
(d) A.S.E.A.N
Ans. c
58-The developing countries have been pleading for:
(a) More aid only
(b) More trade only
(c) More trade and more aid
(d) More inflation
Ans. c
59-Once the initial difficulties of the take-off
stage are over, the progress rate in the developing
countries will:
(a) Decline
(b) Become slower
(c) Reach the level of the developed countries
(d) Become faster
Ans. d
60-External finance (both loans and grants) can play
a critical role in supplementing domestic resources
in order to relieve savings or foreign exchange
bottlenecks. This is so called:
(a) Debt cycle theory
(b) Foreign debt theory
(c) Two-gap analysis of foreign assistance
Ans. c
61-The basic argument of the two-gap model is:
(a) That most developing countries face a
shortage of domestic savings to match investment
opportunities
(b) That a shortage of foreign exchange to
finance needed imports of capital and
intermediate goods
(c) Both a and b
Ans. c
62-Most two-gap models assume that the saving gap
and the foreign exchange gap are:
(a) Equal in magnitude and they are dependent
(b) Unequal in magnitude and they are dependent
(c) Unequal in magnitude and they are
independent
Ans. c
63-The conjecture that equality first increases with
development, then decreases with further development
(known as the “inverted U hypothesis”) has been:
(a) Strongly supported by most studies
(b) Supported mainly by time-series, not cross-
section studies
(c) Supported mainly by cross-section, not
time-series studies
Ans. c
64-Which of the following determines country’s rate
of growth?
(a) The interaction of supply and demand
(b) The law of comparative advantages
(c) The rate of capital accumulation
(d) None of the following
Ans. c
65-Which of the following is not likely to be a
cause of economic growth?
(a) Improved rate of capital formation
(b) Increase in money supply
(c) Increase in investment in education and
training
(d) Rapid technical progress
Ans. b
66-Economic development can be defined simply as:
(a) An increase in the rate of real national
income over a longer time period
(b) An increase in real per capita income over
the previous year
(c) Increase in the real investment year after
year
(d) Increase in national income equal to rate
of population increases
Ans. a
67-As a definition of economic growth, an increase
in real capita income (or GNP per capita) is
preferable to an increase in simply real GNP,
because:
(a) Total GNP measures overall progress while
per capita GNP measures improvement in
productivity
(b) Total GNP measures goods and services
produced while per capita GNP shows improvement
in efficiency
(c) Total GNP figures estimate the value of a
country’s total output while per capita GNP
accounts for population growth and shows the
availability per person of goods and services
Ans. c
68-Kuznet’s preference for real GNP over real per
capita GNP as a measure of economic growth arises
from:
(a) The need to combine output-growth and
population-growth
(b) The desirability to concentrate on growth
of output alone
(c) The desirability to concentrate on the
factors speeding economic growth and to analyses
the population problem separately
Ans. c
69-An analysis of modern economic growth emphasis on
a sustained rise of GNP is particularly important
because it means:
(a) A shift in relative proportions of various
goods demanded and used
(b) It eliminates cyclical fluctuations in
national income
(c) The structural changes in labor
productivity
Ans. b
70-Which of the following is a necessary condition
for the high rate of modern economic growth?
(a) Continuous technological progress
(b) High rate of population growth
(c) Development of urban centers
(d) Expansion of railways
Ans. a
71-The time pattern of population growth during the
process of economic growth is generally:
(a) Rising rates followed by constant rates and
finally a period of retardation
(b) Constant rates followed by rising rates and
then sudden retardation
(c) Rising rates, retardation and constant
rates
Ans. a
72-The present phase of population growth in
underdeveloped countries is different from the one
gone through by the advanced countries during the
growth process because:
(a) Death rate has fallen steeply while the
fall in birth rate is only small
(b) Birth rate has fallen steeply while the
fall in death rate is only small
(c) Birth rate has gone up and population
growth has become faster
Ans. a
73-The time pattern and duration of stages of growth
are:
(a) The same for all countries
(b) Different for different countries
(c) Very short in nature
Ans. b
74-With economic growth, the share of secondary
sector in national product:
(a) Rises
(b) Falls
(d) Becomes zero
Ans. a {Explanation: Secondary Sector► involves the
transformation of raw materials into goods e.g.
manufacturing steel into cars. A builder and a
dressmaker would be workers in the secondary sector.
With economic growth, the share of secondary sector
in national product rises. }
75- With economic growth, the share of agricultural
sector in labor force:
(a) Declines
(b) Increases
(d) Becomes zero
Ans. a
76- With economic growth, the share of manufacturing
(a) Declines
(b) Increases
(d) Becomes zero
Ans. b
77- With economic growth, the share of services
(a) Declines
(b) Increases
(d) Becomes zero
Ans. b {Explanation: Services Sector (Tertiary
Sector)► involves the provision of services to
consumers and businesses, such as cinema and
banking. A shopkeeper and an accountant would be
workers in the services sector (tertiary sector).
With economic growth, the share of services sector
in labor force increases.}
78-As economic growth proceeds further, the gap of
incomes between the primary, secondary and tertiary
sectors:
(a) Increases further
(b) Remains unchanged
(c) Closes to a great extent
Ans. c {Explanation: Primary Sector► involves the
extraction and production of raw materials, such as
coal, wood and steel. A coal miner and a fisherman
would be workers in the primary sector.
Secondary Sector► involves the transformation of raw
materials into goods e.g. manufacturing steel into
cars. A builder and a dressmaker would be workers in
the secondary sector.
Services Sector (Tertiary Sector)► involves the
provision of services to consumers and businesses,
such as cinema and banking. A shopkeeper and an
accountant would be workers in the services sector
(tertiary sector).}
79-Inequalities in product per worker in
underdeveloped countries are perhaps:
(a) Less than in developed countries
(b) More than in developed countries
(c) The same as in developed countries
Ans. b
80-As economic growth takes place, inequalities of
product per worker:
(a) Are aggravated
(b) Are reduced
(d) Cannot be known
Ans. b
81-The large the proportion of capital formation in
a country:
(a) The higher is the rate of growth
(b) The lower is the rate of growth
(c) Both a and b
Ans. a
82-Capital-Output Ratio (COR) refers to:
(a) Units of labor required to produce one unit
of output
(b) Units of capital required to produce one
unit of output
(c) Units of capital required to produce
maximum profit
Ans. b
83-A decline of the Capital-Output Ratio (COR) shows
that:
(a) More units of capital are needed for the
given amount of output
(b) Less units of capital are needed for the
given amount of output
(c) No units of capital or labor are needed for
the given amount of output
Ans. b
84-Modern economic growth has been characterized by:
(a) High rate of growth of population but no
change in occupational structure
(b) Increased rates of capital formation but no
change in per capita product
(c) High growth rate of population and a
sustained rise in per capita product
(d) High growth rate of population with
continuous rise in birth rate
Ans. c
85-The underdeveloped countries that start growth
process later than others:
(a) Will always be lagging behind
(b) Will never be able to catch up with those
which started the growth process earlier
(c) May reach a position where their growth
rates are higher than those of the entrants
Ans. c
86-The concept of economic development is:
(a) Narrower than that of economic growth
(b) Wider than that of economic growth
(c) Same as economic growth
(d) Not related to economic growth
Ans. b
87-Economic development is taken to means:
(a) Economic growth plus social changes
(b) Economic growth with population growth
(c) Social change with exchange rate stability
(d) Political stability and high consumption
Ans. a
88-The concept of economic development encompasses:
(a) Rising GNP over a long period of time
(b) Reduction in poverty ratio
(c) Minimizing economic inequalities
Ans. d
89-‘Economic growth’ can also be defined as:
(a) An increase in productive capacity or an
outward shift in the production possibilities
frontiers (PPF) of the economy
(b) A decrease in productive capacity or an
inward shift in the production possibilities
frontiers (PPF) of the economy
(c) Constant productive capacity of the economy
Ans. a
MONETARY
ECONOMICS
1-The economic system which functions without the

use of money is called:
(a) Bank system
(b) Capital system
(c) Without money system
(d) Barter system
Ans. d
2-“Bad money drives out good money” is the law of:
(a) Karl Marx
(b) Keynes
(c) Adam Smith
(d) Gresham
Ans. d
3-Token coins means:
(a) The coin whose face value is more than the
value of the metal
(b) Coin issued as a token in different
transaction purpose
(c) Coins which are used as a token in
automobile parking stands
Ans. a
4-Which of the following statement best defines
‘banks’?
(a) Banks deal in money
(b) Banks deal in shares and assets
(c) Not only deal in money but also create
money
(d) Deal in money but do not create it
Ans. c
5-The special importance of banks among the
financial institutions arises from:
(a) Their large and heavy transactions
(b) Their position as suppliers of money
(c) Their power to create money
(d) Their influence on the economy
Ans. c
6-The biggest advantage of gold standard was
concerned with the stability in the value of
currencies at:
(a) Domestic level
(b) World level
(c) Both a and b
Ans. c
7-The money whose face value is more than its
intrinsic value is called:
(a) Cash money
(b) Commodity money
(c) Credit money
(d) Jumbo money
Ans. c
8-Gold remained in use as money till:
(a) 1940s
(b) 1920s
(c) 1990s
(d) 1930s
Ans. d
9-Banks create credit:
(a) On the basis of their buildings
(b) On the basis of their securities
(c) On the basis of their total assets
(d) On the basis of their cash deposits
Ans. d
10-Which of the following statement is correct?
(a) A single bank can multiply deposits
(b) Some banks can multiply deposits and others
cannot
(c) The banking system as a whole can multiply
deposits
Ans. c
11-“Money is what it does, not what it is”, is
written by:
(a) Prof.Sigwick
(b) Gresham
(c) Keynes
(d) Adam Smith
Ans. a
12-Good money is one whose all units are alike with
respect to their:
(a) Size
(b) Quality
(c) Design
Ans. d
13-Banks are in a position to re-lend their
customer’s money to others because:
(a) It is not withdrawn without written notice
(b) It is withdrawn with the help of counselor
(c) It is partly withdrawn at a time and some
more is also deposited at the same time
Ans. c
14-An initial deposit of Rs.1000 creates a total
money supply of Rs.10000 in the economy, the value
of money multiplier is:
(a) 10
(b) 7
(c) 5
(d) 4
Ans. a {Explanation: Money Multiplier (m) is the
coefficient which shows the ratio of change in
supply of money (∆M) to change in reserves (∆B).
Here change in reserves (∆B) or initial deposit is
Rs.1000 and change in money supply (∆M) is Rs.10000,
so value of money multiplier is m = ∆M /∆B = 10000 /
1000 = 10}
15-If ‘r’ is reserve ratio, the general formula for
money multiplier is:
(a) 1 ×r
(b) 1 / r
(c) 1 / (1-r)
(d) 1 / (1+r)
Ans. c {Explanation: Suppose if the value of “r” is
20% i.e. 0.20, then the value of money multiplier
(m) can be calculated by » m = 1 / r = 1/0.20 =
1/0.20 = 5.So value of money multiplier is 5 and we
can also say that money multiplier is equal to the
reciprocal of reserve ratio(1/r).}
16-In the context of deposit expansion:
(a) The lower the proportion of reserve ratio,
the higher is the money multiplier
(b) The lower the proportion of reserve ratio,
the lower is the money multiplier
(c) The higher the proportion of reserve ratio,
the higher is the money multiplier
(d) The reserve ratio has no relation with the
value of money multiplier
Ans. a
17- M1 definition of money is the simplest
definition of money. M1 is equal to:
(a) C +D
(b) C- D
(c) C×D
Ans. a {Explanation: M1 = C+ D, Here C means
currency (currency notes +coins) and D means demand
deposits of the commercial banks. M1 definition of
money is also called transaction approach.}
18- According to M2 definition of money, M2 is
defined as:
(a) M2 = M1 + Saving bank accounts+ Short period
time deposits+ Treasury bills+ Deposits of money
market+ Bonds+ Shares
(b) M2 = M1 + Saving bank accounts
(c) M2 = M1 + Currency
Ans. a {Explanation: In M1 definition of money the
near money is not included. Therefore, the need for
extending the definition of money was realized.
Hence, the concept of M2 was presented. In M2
definition of money, in addition to M1, all those
monetary units are included which have the property
of money as a store of value. M2 definition of money
is also called liquidity approach.}
19- According to M3 definition of money, M3 is
defined as:
(a) M3 = M2 + Long period time deposits + Mutual
funds balances
(b) M3 = M2 + Profits of the firm in monetary
terms
(c) M3 = M2 +Bonds
Ans. a {Explanation: With the passage of time
certain new monetary components became popular which
were representing money. To include them, M3
definition of money was presented. In M3, in
addition to M2, the long period time deposits and
balances of mutual funds with banks are included.}
20-The demand deposits are also known as:
(a) Cash transactions
(b) Deposited amounts
(c) Chequing accounts
(d) Fixed deposits
Ans. c
21-There is a very common practice in case of
developing country’s people that they make savings
in real commodities like:
(a) Gold
(b) Silver
(c) Lands
Ans. d
22-The central bank of the country:
(a) Can not influence credit creation
(b) Can influence credit creation
(c) Discourages credit creation
Ans. b
23-In the period of depression in the economy,
credit creation is:
(a) Small
(b) Heavy
(c) Unchanged
Ans. a
24- In the period of prosperity in the economy,
credit creation is:
(a) Small
(b) Heavy
(c) Unchanged
Ans. b
25-In classical system, because of increase in money
supply no changes occur in:
(a) Real wages
(b) Real employment
(c) Real output and real interest rate
Ans. d
26-The money which is kept by commercial banks in
the form of securities and bonds is called:
(a) Inside money
(b) Outside money
(c) Proper money
(d) Upper money
Ans. a {Explanation: Inside Money► is a term that
refers to any debt that is used as money, i.e.
securities and bonds. It is a liability to the
issuer.}
27- The money outside the monetary base is called:
(a) Inside money
(b) Outside money
(c) Proper money
(d) Upper money
Ans. b {Explanation: Outside Money► is money outside
the monetary base. Is not a liability of anyone’s
i.e. gold and cash. Contrast with inside money.}
28-In Keynesian system, normal rate of interest is
determined by:
(a) Supply of money
(b) Demand for money
(c) Both a and b
Ans. c
29-The IS curve is a curve which shows different
combinations of rate of interest and level of
national income where:
(a) Saving =Investment
(b) Saving <Investment
(c) Saving >1investment
Ans. a
30-The LM curve (liquidity of money curve) is the
curve which shows different combinations of rate of
interest and national income where:
(a) Saving =Investment
(b) Money demand= Money supply
(c) Labor demand =Labor supply
Ans. b
31-According to Hicks, the simultaneous equilibrium
in goods and money market takes place where:
(a) Money demand curve intersects money supply
curve
(b) LM curve intersects IS curve
(c) Demand curve intersects supply curve
Ans. b
32-The relative importance of cash money in total
money supply is:
(a) Higher in underdeveloped countries and
lower in developed countries
(b) lower in underdeveloped countries and
higher in developed countries
(c) the same in both developed and
underdeveloped countries
Ans. a {Explanation: The people of underdeveloped
countries keep the major portion of money in the
form of cash rather than in the form of bonds or
deposits in the banks etc and but in developed
countries people keep the major portion of money in
the form of bonds, bank deposits, securities etc.}
33-The relative importance of deposit money in total
money supply is:
(a) higher in underdeveloped countries
(b) lower in underdeveloped countries
(c) lower in developed countries
Ans. b
34-The major function of money is that of:
(a) a medium of exchange
(b) providing liquidity
(c) a reserve base for credit creation
Ans. a
35-‘Liquidity’ means:
(a) the usefulness of an asset
(b) the market value of an asset
(c) the preciousness of an asset
(d) easily convertibility of an asset into
money
Ans. d {Explanation: Liquidity refers to how quickly
and cheaply an asset can be converted into cash.
Assets that can be easily convertible into money
i.e. bought or sold are called ‘liquid assets’.
Assets that generally can only be sold after a long
exhaustive search for a buyer are known as ‘illiquid
assets’.}
36-Bills of exchange are sometimes known as:
(a) near money
(b) upper money
(c) convertible money
Ans. a
37-During depression when there are unused
resources, the AS curve becomes:
(a) vertical
(b) horizontal
(c) both a and b
Ans. c
38-In short-run, whenever price rises, the real
wages:
(a) rise
(b) fall
(c) remain constant
Ans. b
39-An increase in the public’s preference for cash
over deposits would lead to:
(a) an increase in money supply
(b) an increase in bank credit
(c) a decrease in bank credit
Ans. c
40-A rise in the cash reserve ratio will:
(a) decrease the supply of money
(b) increase the supply of money
(c) no effect on supply of money
Ans. a {Explanation: When cash reserve ratio of the
banks rises then the banks are in a position to lend
out less money on credit than before so due to less
credit creation the money supply also decreases.}
41-Commercial banks are regarded as creators of
money because:
(a) They buy securities from central bank
(b) Their loans create deposits
(c) They are bound to honor their obligations
Ans. b {Explanation: The loans issued by commercial
banks create deposits which further become cause of
‘money creation’. The loans issued by commercial
banks create deposits because the person who get
loan from the bank will deposit this loan in some
another bank and from that bank some other person
get this money as a loan and will deposit in some
other bank and so on.}
42-Which of the following best represents the way in
which the government increases the paper currency
component of the money supply?
(a) Household sell gold to the government in
returns for currency
(b) The government gives newly created currency
to households
(c) The government gives paper currency to the
banks
(d) The government exchanges paper currency for
government securities
Ans. d
43-According to Keynesian effect, when money supply
is increased the rate of interest will decrease,
this will:
(a) Discourage investment
(b) Encourage investment
(c) Encourage supply and demand
Ans. b
44-The Quantity Theory of Money (QTM) was presented
by:
(a) Adam Smith
(b) Irving Fisher
(c) David Ricardo
(d) Karl Marx
Ans. b
45-Equities are:
(a) Money
(b) Near money
(c) Machines
Ans. b {Explanation: Near Money► Highly liquid
assets that can be easily converted into cash
.Examples of near money are ; government treasury
securities( T-bills), bills of exchange, money
funds, bank’s time deposit certificates, equities
(common stocks or ordinary shares traded in
securities market)}
46-Liquidity preference means which one of the
following?
(a) The amount of wealth held in money forms
(b) The proportion of annual income held as
money
(c) The desire to hold ‘money’ rather than
‘near money’
Ans. c
47-The central bank can control money supply by:
(a) Changing in bank rate
(b) Changing in investment rate
(c) Changing in GDP growth rate
Ans. a {Explanation: Bank Rate► also referred to as
the discount rate, is the rate of interest which a
central bank charges on the loans and advances that
it extends to commercial banks and other financial
intermediaries. Changes in bank rate are often used
by central bank to control the money supply. To
increase money supply, the central bank will
decrease the bank rate and thus commercial banks now
can get more loans from central banks and thus the
power of commercial banks to credit creation will
increase and thus money supply will increase in the
economy.}
48-The velocity of money is:
(a) The average turnover of money in a given
period
(b) The ratio of money demand to money supply
(c) The total money supply in the economy
(d) The ratio of money demand to income
Ans. a {Explanation: Velocity of Money► Rate at
which money circulates, changes hands, or turnover
in an economy in a given period. Velocity of money
means the number of hands that one unit of money
changes during a given period of time. For example a
Rs.100 note changes 10 hands in a year, its velocity
will therefore be 10. It means that total payment
made by this note will be » M×V = 100×10 = 1000.
According to fisher ‘MV’ is called supply of money.
The velocity of money is also computed by dividing
the nation’s output of goods and services (GDP) by
the total money supply (circulating currency plus
checking account deposits). Velocity of money is
also influenced by interest rates. When interest
rate is low, people hold more money in cash so
velocity of money will high and vice versa.}
49-Who get benefits from deflation?
(a) Salary earners
(b) Pensioners
(c) Equity-holders
(d) Debtors
(e) a and b only
(f) c and d only
(g) None of the above
Ans. e {Explanation: during deflation, the prices
are low so salary earners and pensioners are in
benefits because they are fixed earners and when
prices are low , there purchasing power increases
due to increased value of money due to deflation.}
50- Who get benefits from inflation?
(a) Salary earners
(b) Pensioners
(c) Equity-holders
(d) Debtors
(e) a and b only
(f) c and d only
(g) None of the above
Ans. f {Explanation: during inflation, the prices
are high. The value of money is low in the
situation of inflation. Debtors and equity holders
will be in benefit due to inflation because due to
low value of money they have to pay less in real
sense now.}
51-Which of the following is the cause of ‘cost push
inflation’?
(a) Increased consumption expenditure
(b) Increase in wages and salaries
(c) Reduction in wages and salaries
(d) Decreased consumption expenditure
Ans. b {Explanation: Cost Push Inflation► ‘A
phenomenon in which general price level rise due to
increase in the cost of wages and raw materials
(cost of production)’. When wages and salaries rise
then cost of production also raises, this leads high
prices of products (inflation).}
52- Which of the following is the cause of ‘demand
pull inflation’?
(a) Increased consumption expenditure
(d) Decreased consumption expenditure
Ans. a
53- Which of the following is the cause of ‘demand
pull inflation’?
(a) Increase in aggregate demand
(d) Decrease in aggregate demand
Ans. a {Explanation: Demand Pull Inflation► ‘A
phenomenon in which general price level rises due to
exceeds of aggregate demand from aggregate supply
(AD>AS)’. This type of inflation is a result of
strong consumer demand. When many individuals are
trying to purchase the same good, the price will
inevitably increase. When this happens across the
entire economy for all goods, it is known as demand
pull inflation.}
54-Which would cause interest rate to rise?
(a) Increase in demand for money
(b) Increase in supply of money
(c) The rise in standard of living
(d) The rise in GNP
Ans. a
55-Which of the following is responsible for
differences in rates of interest?
(a) Difference in risk
(b) Difference in productivity
(c) Difference in the size of population
Ans. a
56-In classical monetary theory, people hold money
to bridge the time gap between known receipts and:
(a) Known expenditures
(b) Unknown expenditures
(c) Known income
(d) Unknown price
Ans. a
57-Choice between demand deposits and cash depends
on:
(a) Banking facilities
(b) Services charges
(c) The general acceptability of cheques
Ans. d
58-Velocity of money is determined by factors
including:
(a) Individual spending habits
(b) Expectations about future
(c) Population growth
Ans. d
59-Fisher’s version of the quantity theory of money
fails empirically because its assumptions are:
(a) Realistic
(b) Unrealistic
(c) Useful
(d) Organized
Ans. b
60-Pigou linked the demand for money to people’s:
(a) Expenditures
(b) Income
(c) Asset holdings
(d) Salaries
Ans. c
61-According to Keynes, Liquidity Preference is the
tendency or propensity of the people towards:
(a) Spending money
(b) Holding money
(c) Depositing money
(d) Showing money
Ans. b
62-According to Keynes, people hold money because
of:
(a) Transactions motive
(b) Speculative motive
(c) Precautionary motive
Ans. d
63-Demand for money depends upon two variables
namely:
(a) Consumption and production
(b) Income and investment
(c) Interest and income
Ans. c {Explanation: speculative demand for money
depends upon interest rate and transaction demand
for money depends upon income.}
64-If the margin between actual and expected rate of
interest will be greater, people will like to keep:
(a) Less cash
(b) More cash
(c) More investment
Ans. b
65-Which is very sensitive to changes in interest
rates?
(a) The transactions demand for money
(b) The speculative demand for money
(c) The precautionary demand for money
Ans. b
66-Which of the following is cause of Cost-push
inflation?
(a) An increase in the marginal propensity to
save
(b) World scarcity of basic raw material
(c) Increase in investment
Ans. b {Explanation: Cost Push Inflation► ‘A
phenomenon in which general price
level rise due to increase in the cost of wages and
raw materials’. When due to scarcity, the raw
material becomes costly then the cost of production
increases and this leads to high prices of products.
This type of inflation is called cost-push inflation
because this is due to the increased cost of
production which push-up the general level of
prices.}
67-Reduction in the reserve ratio, prescribed by the
central bank for commercial banks:
(a) Favorably affects credit creation of banks
(b) Adversely affects credit creation
(c) Do not affect on credit creation
Ans. a
68-At very low rates of interest, liquidity schedule
(LM curve) becomes almost perfectly elastic, this
situation is called:
(a) Liquidity sign
(b) Liquidity spot
(c) Liquidity trap
(d) Liquidity ratio
Ans. c
69-Major contribution of Keynes to monetary theory
is his introduction of the element of:
(a) Certainty regarding future
(b) Uncertainty regarding future
(c) Stability regarding future
Ans. b
70-According to Keynes, money is:
(a) Medium of exchange
(b) Store of value
(c) Both a and b
Ans. c
71-According to Keynes, the investment which is
independent of income is termed as:
(a) Autonomous investment
(b) Induced investment
(c) Independent investment
(d) Dependent investment
Ans. a
72-The basic IS-LM model was presented by:
(a) Adam Smith
(b) Keynes
(c) Hicks
(d) Pigou
Ans. c
73-The most significant point about IS schedule is
that it can be used to study the effects of fiscal
policy on:
(a) Level of income
(c) Both a and b
Ans. c
74-In Keynesian model, IS schedule is steeper and LM
schedule is:
(a) Also steeper
(b) Flatter
(c) Vertical
Ans. b
75- {Explanation: Keynes is fiscalist so he
emphasizes on fiscal policy. The flatter the LM
curve (money demand is more sensitive to change in
interest rate), then fiscal policy is more effective
than monetary policy and vice versa.
The steeper the IS curve(investment is less
sensitive to change in interest rate) the fiscal
policy is more effective than monetary policy i.e. a
large change in national income results from a given
change in government spending or taxes. If IS curve
is flatter then vice versa.}
76-In Friedman’s analysis, money is a commodity so
it is:
(a) Not subject to income constraint
(b) Also subject to income constraint
(c) Irrelevant to income constraint
Ans. b
77-According to Friedman, a change in money supply
brings about change in:
(a) Income
(b) Price
(c) Both a and b
Ans. c
78-In the open market, if central bank wants to
increase supply of money, it will:
(a) Sell the government securities
(b) Purchase the government securities
(c) Issue the government securities
Ans. b
79-According to Friedman, the relationship between
demand for money and interest rate is:
(a) Weak
(b) Strong
(c) Zero
Ans. a
80-The supply of money largely consists of:
(a) Notes and coins
(b) Notes, coins and demand deposits
(c) Notes, coins and time deposits
Ans. b
81-Barter system prevailed in past times because:
(a) In the absence of banks the credit money is
not available
(b) In the absence of banks the ATM cards are
not available
(c) There was no common medium of exchange
which had general acceptability and legal
sanction
(d) People disliked the money
Ans. c
82-The barter system of exchange failed because:
(a) It was inefficient
(b) It worked in a limited manner
(c) The government did not support it
Ans. a
83-Money is:
(a) A factor of production
(b) A mean of acquiring the factors
(c) Do not need it for acquiring the factors
Ans. b {Explanation: Money is used to acquire or
purchase the factors of production i.e. labor and
capital.}
84-James Tobin and others developed the portfolio
balance approach to money and other assets in the
early:
(a) 1970s
(b) 1960s
(c) 1830s
(d) 1990s
Ans. b
85-According to portfolio balance approach, the
demand for any asset, taken as a proportion of total
assets, varies:
(a) Inversely with interest rates of substitute
assets
(b) Directly with its own interest rate
(c) Both a and b
Ans. c
86-Friedman tries to prove that the relationship
between supply of money and rate of interest is:
(a) Negative
(b) Positive
(c) Zero
Ans. b
87-The present authors prefer to use the term
‘monetary assets’ to describe:
(a) M1 money
(b) M2 money
(c) M3 money
Ans. b
88-Credit creation by banks:
(a) Increases money supply
(b) Decreases money supply
(c) Do not effect on money supply
Ans. a
89-Pigou supported Fisher’s idea about supply of
money but his emphasis was on following function(s)
of money:
(a) Medium of exchange
(b) Store of value
(c) Both a and b
Ans. c
90-Many economists are of the view that in the long-
run, changes in money supply affect the prices only
and their impact on output is:
(a) Low
(b) Very high
(c) Negligible
Ans. c
91-The classical quantity theory of money (QTM) was
first challenged by:
(a) Keynes
(b) Adam Smith
(c) Friedman
(d) Karl Marx
Ans. c
92-The key figure in the history of monetary theory
after Keynes is:
(a) Fisher
(b) Adam Smith
(c) Friedman
(d) Karl Marx
Ans. c
93-Without money:
(a) Production is impossible
(b) Production is possible only in a limited
manner
(c) Production is possible in a large scale
Ans. b {Explanation: Without money we can not
directly acquire or hire factors of production so we
have to exchange factors with some other commodity
like barter system which is difficult process. We
have to also face difficulties in purchasing raw
materials without money. So we can say that without
money, production is possible but in a limited
manner.}
94-Money is:
(a) Helpful for production
(b) Harmful for production
(c) No role in production
Ans. a
95-The currency ratio (c) is:
(a) How much currency does the public hold
relative to their checkable deposits
(b) How much money is used by public for
speculative purpose
(c) How much money is used by public for
precautionary purpose
(d) How much money is used by public for
Ans. a {Explanation: The ratio of cash to demand
deposits is called ‘currency ratio’. It is: c =
C/D, Here ‘c’ is currency ratio, ‘C’ is currency and
‘D’ is demand deposit.}
96-The reserve ratio (rr) is:
(a) The fraction of checkable deposits that
banks hold in the form of reserve requirement
(b) How much money is used by public for
speculative purpose
(c) How much money is used by public for
(d) How much money is used by public for
Ans. a {Explanation: banks are required by the
central bank to hold specific amount of money as
cash reserve ratio (rr) against any deposit. It is
also called ‘reserve requirement”.}
97-The money supply and money multiplier are:
(a) Negatively related to reserve ratio (rr)
(b) Positively related to reserve ratio (rr)
(c) Do not related to reserve ratio (rr)
Ans. a
98- The money supply and money multiplier are:
(a) Negatively related to currency ratio (c)
(b) positively related to currency ratio (c)
(c) Do not related to currency ratio (c )
Ans. a
99-The quantity of money in an economy and supply of
money are:
(a) Synonyms
(b) Antonyms
(c) Unrelated
Ans. a
100-The effects of changes in money supply are:
(a) Only confined to domestic economy
(b) Not confined to domestic economy
(c) Both a and b
Ans. b {Explanation: The effects of changes in money
supply will not confined in domestic economy but it
has also impact on international trade and on the
exchange rate of the currency to other currencies of
the world etc. Suppose the money supply increase in
the Pakistan. Now due to increase in money supply
the prices in Pakistan also increases and the value
of rupee also decline which may leads to decline in
the exchange rate of rupee with other currencies of
the world.}
100-Due to tight monetary policy, the supply of
money will decrease leading to:
(a) Decrease the interest rate
(b) Increase the interest rate
(c) Converge the interest rate
Ans. b
101-The capital and money markets in underdeveloped
countries (UDCs) are very:
(a) Active
(b) Mature
(c) Immature
(d) Strong
Ans. c
102-The concept of national income (NI)
determination was given by:
(a) Adam Smith
(b) Keynes
(c) Friedman
(d) J.B.Clark
Ans. b
103-The balance of payment (BOP) of a country will
improve during falling prices, because falling
prices:
(a) Encourage exports
(b) Discourage imports
(c) Both a and b
Ans. c
104-The falling prices discourage the:
(a) Hoarding
(b) Speculation
(c) Black-marketing
Ans. d
105-Which of the following is an example of near
money?
(a) Coins
(b) Demand deposits
(c) Bills of exchange
(d) Furniture
Ans. c
106-Near money:
(a) Is almost the same thing as money
(b) Is money itself
(c) Is money only in a limited sense
(d) Is not money at all
Ans. c
107-The instruments (tools) of monetary policy are:
(a) Open market operation
(b) Change in discount rate
(c) Change in reserve ratio
(d) Only a and b
(e) All of the above a ,b and c
Ans. e
108-In Pakistan, the requirement of time and demand
deposits for commercial banks with central bank is:
(a) 10%
(b) 20%
(c) 70%
(d) 5%
Ans. d
109-The rising prices creates the incentives amongst
factors of:
(a) Saving
(b) Consumption
(c) Production
(d) Socialism
Ans. c
110-The biggest advantage of change in reserve
requirement is that due to this policy all the banks
are effects:
(a) Equally
(b) Not equally
(c) Occasionally
Ans. a
111-While advancing loans, the commercial banks ask
of mortgage known as:
(a) Minimum requirements
(b) Marginal requirements
(c) Loan requirements
(d) Credit requirements
Ans. b {Explanation: Marginal Requirement► ‘marginal
requirement is the difference b/w value of security
and actual loan accepted by bank’. Suppose a person
wants to take a loan of Rs.800, then for this he has
to give security (in the form of house, buildings,
land. or other assets) of Rs.100. So the marginal
requirement is» value of security – actual loan =
Rs.1000 – Rs.800 = Rs.200 i.e. marginal requirement
is 200/800 ×100 = 25% of the actual loan.
During inflation if central bank wants to control
the inflation by decreasing money supply then
central bank gives direction to commercial banks to
increase the marginal requirement. Now suppose for
controlling inflation the central bank increases
this rate from 25% to 40% then now if a person wants
to take loan of Rs. 800, he has to give security of
Rs.1120. So the marginal requirement is» value of
security – actual loan = Rs.1120 – 800 = 320. So the
marginal requirement is 320/800 × 100 = 40% of
actual loan. So when marginal requirement increases
then people can get fewer loans than before because
they have to now give more security to the bank than
before. When less loans are issued then money supply
will decrease which leads to control the inflation.
During deflation if central bank wants to control
the deflation by increasing money supply then
central bank gives direction to commercial banks to
decrease the marginal requirement. Now suppose for
controlling deflation the central bank decreases
this rate from 25% to 20% then now if a person wants
to take loan of Rs. 800, he has to give security of
Rs.960. So the marginal requirement is» value of
security – actual loan = Rs.960 – 800 = 160. So the
marginal requirement is 160/800 × 100 = 20% of
actual loan. So when marginal requirement decreases
then people can get more loans than before because
they have to now give less security to the bank than
before. When more loans are issued then money supply
will increase which leads to control the deflation.}
112- To control the inflation through monetary
policy, the central bank will:
(a) Increase the marginal requirements
(b) Decrease the marginal requirements
(c) Constant the marginal requirements
Ans. a
113- To control the deflation through monetary
policy, the central bank will:
(a) Increase the marginal requirements
(b) Decrease the marginal requirements
(c) Constant the marginal requirements
Ans. b
114-Monetary policy is considered a source of:
(a) Economic development
(b) Attaining full employment
(c) A means to remove deficit in balance of
payment(BOP)
Ans. d
115-During the period of inflation, the central
bank:
(a) Buy government securities
(b) Sells government securities
(c) Pays government securities
Ans. b
116-The loans provided by the FED (central bank) to
commercial banks:
(a) Adjustment loans
(b) Expanded loans
(c) Seasonal credit loans
Ans. d
117-In a multi-bank system:
(a) One bank alone multiplies deposits
(b) Some banks multiply deposits
(c) All banks together multiply deposits
Ans. c {Explanation: Multiplying of deposits means
the process of credit creation by banks. Through
money multiplier process, the commercial banks are
indulged in credit creation (money creation)}
118-The rate of interest at which central bank
advances loans to commercial banks or rediscounts
the bill of exchange is known as:
(a) Bank rate
(b) Discount rate
(c) Both a and b
Ans. c {Explanation: Bank Rate (Discount Rate)► is
the rate of interest which a central bank charges on
the loans and advances that it extends to commercial
banks and other financial intermediaries and at this
rate also rediscount the bill of exchange of the
banks (in Urdu the famous term used for ‘bill of
exchange is ‘Hundi’ and the process of discount or
rediscount the bill of exchange is called ‘Hundi ko
batta lagana’. Changes in bank rate are often used
by central bank to control the money supply. To
increase money supply, the central bank will
decrease the bank rate and thus commercial banks now
can get more loans from central banks and thus the
power of commercial banks to credit creation will
increase and thus money supply will increase in the
economy.}
119-The policy which is adopted by central bank of a
country to control supply of money and credit is
known as:
(a) Fiscal policy
(b) Monetary policy
(c) Inflationary policy
(d) Audit policy
Ans. b
120-The main objective of a central bank is to
attain:
(a) Economic stability
(b) Economic profit
(c) Maximum trade
(d) Maximum money
Ans. a
121-In Pakistan, the requirement of reserves for
State Bank of Pakistan (SBP) in the form of gold
against each Rs.100 issued is:
(a) 20%
(b) 10%
(c) 40%
(d) 30%
Ans. d
122-Credit incurs:
(a) No cost
(b) Some cost
(c) Heavy cost
Ans. b
123-The cost of credit has a reference to:
(a) The expenses incurred on the credit
document
(b) The interest paid on it
(c) The loss of the principal
Ans. d {Explanation: Credit or loan incurs some
cost. One of the cost is the cost on documentation
of the agreement of credit. The second one is the
cost of the loss of principal amount of the credit
when borrower has to face heavy financial loss in
the business. The third one is the cost of interest
which the borrower has to pay on the amount of
credit.}
124-Central bank provides the same services to
government which are provided by commercial banks to
their:
(a) Government
(b) Customers
(c) Boss
(d) Fellows
Ans. b
125-The central bank rediscounts the bills of
exchange offered by commercial banks, specialized
institutions and discount houses, and save them from
being:
(a) Bankrupt (insolvent)
(b) Solvent
(c) Instable
Ans. a
126-During deflation, central bank has to follow an
easy monetary policy for the sake of:
(a) Removal of deflation
(b) Removal of inflation
(c) Survival of inflation
(d) Survival of deflation
Ans. a
127--During inflation, central bank has to follow a
tight monetary policy for the sake of:
(a) Removal of deflation
(b) Removal of inflation
(c) Survival of inflation
(d) Survival of deflation
Ans. b
128-Whenever the supply of money increases, the
purchasing power of money will:
(a) Increases
(b) Decreases
(c) Remain constant
Ans. b
129-The amount which a money lender gets against the
money lent as:
(a) Tax
(b) Interest
(c) Tax rate
(d) Interest rate
Ans. b
130-The interest rate shows the ratio between the
interest and the:
(a) Money for transaction purposes
(b) Amount lent
(c) Profit
Ans. b {Explanation: Interest Rate► shows the
ratio between the interest and the amount lent.
For example suppose that we lend Rs 100 and on
this amount we have to pay the interest of Rs.10,
then the interest rate is» amount of interest /
amount lent = 10/ 100 = .10 = 10%.The interest
rate is also defined as» ‘A rate which is charged
or paid for the use of money’.}
131-On the basis of interest rate, the present
values and future values can:
(a) Not be compared
(b) Be fixed
(c) Be compared
Ans. c
133-Discounted bonds are purchased at the value:
(a) More than their face value
(b) Less than their face value
(c) Equal to their face value
Ans. b {Explanation: Discount Bonds► is a bond
bought at a discount, or a price less than its face
value. The face value is the amount of the money
that holder of the bond receives at the expiry date
of the bond. Unlike coupon bonds, discount bonds
only pay the bearer once, when the bond expires.}
134-The rate of interest which includes the expected
changes in price level is called:
(a) Nominal rate of interest
(b) Ordinary rate of interest
(c) Gross rate of interest
(d) Real rate of interest
Ans. d {Explanation: Real Interest rate► The real
interest rate is the nominal rate of interest minus
inflation. This rate of interest includes the
expected changes in price level and is adjusted for
price change (inflation etc). This is measured on
the basis of purchasing power. In the case of a
loan, it is this real interest that the lender
receives as income. If the lender is receiving 8
percent from a loan and inflation is 8 percent, then
the real rate of interest is zero b/c nominal
interest and inflation are equal. A lender would
have no net benefit from such a loan b/c inflation
fully diminishes the value of the loan’s profit.}
135-The rate of interest which is expressed in
monetary terms and which does not includes the
expected changes in price level is called:
(b) Ordinary rate of interest
(d) Real rate of interest
Ans. a {Explanation: Nominal Interest Rate► The
interest rate that is unadjusted for inflation .This
rate of interest is expressed in monetary terms and
do not tell about the effects of inflation on
interest rate because it does not includes the
expected changes in price level.}
136-The measure of real interest rate is very much
important, because it gives the inducement to:
(a) Lend
(b) Borrow
(c) Both a and b
Ans. c
137-Whenever rate of interest increases, the price
of bonds:
(a) Also increases
(b) Decreases
(c) Remain constant
(d) Become zero
Ans. b
138-When the wealth of a person increases, the
resources at his disposal:
(a) Increase
(b) Decrease
(c) Remain same
Ans. a
139-The uncertainty or degree of risk associated
with the return of any asset also determines its:
(a) Supply
(b) Demand
(c) Production
Ans. b
140-Other things remaining the same, more an asset
is liquid as compared to other assets:
(a) More will be its demand
(b) More will be its supply
(c) Less will be its demand
Ans. a
141-While deriving demand curve for bond, we kept
all the variables constant except:
(a) Rate of interest
(b) Price of bond
(c) Both a and b
Ans. c
142-If people expect that in future the rate of
inflation will rise, as a result the expected rate
of return from bond will:
(a) Rise
(b) Become zero
(c) Remain constant
(d) Fall
Ans. d
143-In liquidity preference framework, according to
Keynes, money supply is an:
(a) Endogenous factor
(b) Exogenous factor
(c) Hydrogenous factor
Ans. b
144-Keynes says that, on the basis of his past
experience, every person has some idea about a rate
of interest which is called:
(b) Real rate of interest
(c) Normal rate of interest
(d) Gross rate of interest
Ans. c
145-According to Keynes, ‘Liquidity Trap’ rises at
the level of:
(a) Minimum rate of interest
(b) Normal rate of interest
(d) Critical rate of interest
Ans. d {Explanation: Critical Rate of Interest And
Liquidity Trap► Critical rate of interest is that
rate of interest at which the demand for money curve
is infinitely elastic and at this rate of interest
people want to keep all their assets in the form of
cash. This situation is called ‘Liquidity Trap’.
Keynes argues that a liquidity trap would arise if
people believed that interest rates had bottomed out
at a ‘critical interest rate level’ and that rates
should subsequently rise, leading to capital losses
on bond holdings. The inelasticity of interest rate
expectations at a critical rate would imply that the
demand for money would become highly or perfectly
elastic. In this situation, the monetary authority
can not reduce the interest rate below the critical
level so monetary policy is unable to stimulate the
economy in this situation.}
146-Inflation is a situation where general price
level increases persistently and value of money goes
on to:
(a) Rise
(b) Fall
(c) Stable
Ans. b
147-‘Inflation takes place when price level expands
more in proportion to output’ is said by:
(a) Prof. Crowther
(b) Prof. Pigou
(c) Prof. Smith
(d) Adam Smith
Ans. b
148-If at the level of full employment, aggregate
demand increases, it will result in:
(a) Demand pull inflation
(b) Demand push inflation
(c) Cost push inflation
(d) Cost pull inflation
Ans. a
149-The increase in aggregate demand can be due to:
(a) Increase in government expenditure
(b) Increase in exports
(c) Increase in money supply
Ans. d
150-If in an economy, price level rises due to
increase in cost of production, it is given the name
of:
(a) Demand pull inflation
(b) Demand push inflation
(c) Cost push inflation
(d) Cost pull inflation
Ans. c
151-Now-a-days trade unions are well aware of:
(a) Rise in price level
(b) Wage agreements
(c) Change in fiscal and monetary policies
Ans. d
152-The combination of rising prices and rising
unemployment is given the name of:
(a) Stagnation
(b) Stagflation
(c) Inflation
(d) Deflation
(e) None of the above
Ans. b
153-The article “The relationship between employment
and rate of change of money wages in UK” is written
by:
(a) Adam Smith
(b) J.B.Hicks
(c) A.W.Philips
(d) Karl Marx
Ans. c
154-To drive Philips curve, the curve showing trade-
off between unemployment and inflation, we use
modern:
(a) AD curve
(b) AS curve
(c) Both a and b
Ans. c
155-The businessmen have relatively little excess
capacity, the increase in AD does not offer them
increase in profits for a long time by:
(a) Decreasing output
(b) Increasing output
(c) Decreasing input
Ans. b
156-Which method is adopted in Pakistan to measure
the inflation?
(a) Consumer price index
(b) Sensitive price index
(c) Wholesale price index
Ans. d
157-To meet the rising expenditures and accelerate
the pace of economic growth, government had to
depend upon:
(a) Sufficient financing
(b) Deficit financing
(c) Just own resources
Ans. b
158-Increase in wages results in:
(a) Increase in inflation
(b) Increase in unemployment
(c) Decrease in inflation
Ans. a
159-If an individual decides to hold money in
preference to the purchasing of securities because
he thinks the security prices are going to fall, we
may conclude that his behavior illustrates:
(a) The precautionary demand for money
(b) The speculative demand for money
(c) The quantity theory of money
Ans. b
160-Fisher theory believed that the value of money
is determined by:
(a) Velocity of money
(b) Quantity of money
(c) Consumption of money
(d) Level of investment
Ans. b
161-The adverse effects of inflation are least felt
by:
(a) A firm which has borrowed heavily in the
past to finance plant expansion
(b) The holder of short-term treasury bills
(c) Commercial bank
Ans. a
162-If the economy experience a 2% price inflation
during the fiscal year, it is most likely that:
(a) The real value of GNP was 2% higher at the
end of the fiscal year
(b) Prices of only consumer goods rose 2% during
the fiscal year
(c) The purchasing power of the currency fell
by 2%
(d) Prices of only food items rose 2% during the
fiscal year
Ans. c
163-Which one of the following statement is true?
(a) If 100 percent cash reserves were required
by law, banks would be unable to create new
money
(b) The quantity theory of money says that the
price level is inversely proportional to the
amount of money
(c) Whenever aggregate supply exceeds aggregate
demand then there will be inflation
(d) Cost push inflation is due to decrease of
cost of production
Ans. a
164-The ability of a bank to expand its loans
quickly depends most heavily on its:
(a) Cash
(b) Free reserves
(c) Excess reserves
Ans. c {Explanation: Excess Reserves► The amount
held by a bank above the reserve requirement is
called excess reserves. They keep excess reserves
for the extra measure of safety in the event of
sudden loan losses or cash withdrawals by the
customers. The ability of a bank to expand its loans
quickly depends most heavily on its excess
reserves.}
165-The amount of money the bank creates is:
(a) His asset
(b) His liability
(c) Both his asset and liability
Ans. b
166-According to Fisher’s Quantity Theory of Money
(QTM), if the amount of money in an economy doubles
then prices will:
(a) Halves
(b) Also doubles
(c) Decreases
(d) Zero
Ans. b {Explanation: According to Fisher’s Quantity
Theory of Money (QTM), if the amount of money in an
economy doubles then prices will also doubles and
vice versa}
167- According to Fisher’s Quantity Theory of Money
(QTM), if the amount of money in an economy doubles
then value of money will:
(a) Halves
(b) Also doubles
(c) Decreases
(d) Zero
Ans. a {Explanation: According to Fisher’s Quantity
Theory of Money (QTM), if the amount of money in an
economy doubles then value of money will become half
and vice versa}
168-According to Fisher’s Quantity Theory of Money
(QTM), in short-run, the V (velocity) and T (amount
of transaction or turnover) will:
(a) Increase
(b) Remain constant
(c) Decreases
(d) Zero
Ans. b
169-What is total supply for money according to

Irving Fisher?
(a) PT
(b) MV
(c) V
(d) T
Ans. a {Explanation: According to fisher, demand for
money is only made for transaction motive. The
demand for money is represented by price multiplied
by turnover (amount of transaction) i.e. total
quantity of goods and services sold and therefore
demand is determined as» Demand for money = P×T =
PT, Here P is price and T is turnover (amount of
transaction).}
170- What is total demand for money according to
Irving Fisher?
(a) PT
(b) MV +Ḿ V́
(c) V
(d) T
Ans. b {Explanation: According to fisher, supply of
money is represented by the total expenditure made
by the people calculated during a given period of
time. The total expenditure made by the people is
calculated by multiplying the total quantity of
‘currency money’ by its velocity plus the bank money
(check, draft etc) multiplied by its velocity.
According Fisher, supply of money is determined by
the following term:
MV + Ḿ V́ . Here ‘M’ represents the supply of
currency money, Ḿ is supply of bank money
(check, draft etc), ‘V’ is the velocity of
‘currency money’ and V́ is the velocity of ‘bank
money’.
According to Fisher, the value of money is
determined at a point where its demand is equal
to its supply and accordingly Fisher gives the
following equation of exchange:
PT = MV +Ḿ V́ or PT = (MV +Ḿ V́ ) / T
According to the above equation, the price level is
determined by dividing the total supply of money by
turnover (T).}
171-When there is inflation due to increase in
credit money it is called as:
(a) Over investment inflation
(b) Credit inflation
(c) Gross inflation
Ans. b
172-When prices raise rapidly it is called:
(a) Worst inflation
(b) Highly inflation
(c) Price high inflation
(d) Hyper inflation
Ans. d {Explanation: Hyper Inflation► Hyper
Inflation is inflation which is very high or out of
control. There is no precise numerical definition to
hyper inflation. It is a situation where the price
increases are so out of control that the concept of
inflation is meaningless. One of the most famous
examples of hyperinflation occurred in Germany after
the World War II. By some estimates, the average
price level increased by a factor of 20 billion,
doubling every 28 hours.}
173-Which one of the following should result from
the sale of securities in the open market by the
State Bank of Pakistan:
(a) It will reduce commercial bank reserves and
thereby curtail credit expansion
(b) It will increase commercial bank reserves
and thereby enhance credit expansion
(c) It will raise money supply in the economy
Ans. a {Explanation: When the State Bank of Pakistan
sale out government securities (bonds etc) through
open market operation then people purchase these
securities and so money is transferred to State bank
as the price of securities by the people. When
people purchase the securities they withdraw the
amounts from their commercial bank’s deposits to pay
the price of these securities. So by this act, the
reserves of the commercial banks will be reduced and
thereby the capacity of commercial banks to credit
creation (money creation) will also reduce.}
174- Which one of the following should result from
the purchase of securities in the open market by the
(a) It will reduce commercial bank reserves and
thereby curtail credit expansion
(b) It will increase commercial bank reserves
and thereby enhance credit expansion
(c) It will reduce money supply in the economy
Ans. b {Explanation: When the State Bank of Pakistan
purchase government securities (bonds etc) through
open market operation then people sale these
securities to State bank and so money is transferred
to people as the price of these securities. When
people sale these securities and get the money from
its sale then they submit these amounts in
commercial bank’s deposits. So by this act, the
reserves of the commercial banks will be increased
and thereby the capacity of commercial banks to
credit creation (money creation) will also
increase.}
(a) It will increase interest rate in the
economy
(b) It will reduce interest rate in the economy
(c) The interest rate will remain constant
purchases government securities (bonds etc) through
open market operation then the prices of securities
will boost up, as a result the rate of interest
decreases b/c there is inverse relationship b/w
price of securities (bonds) and rate of interest. On
the other hand , if State Bank or government sales
the securities then the prices of government
securities will decrease leading to raise the rate
of interest}.
the sale of securities in the open market by the
(a) It will reduce the money supply in the
economy
(b) It will increase the money supply in the
economy
(c) The money supply will remain constant
Ans. a {Explanation: When the State Bank of Pakistan
sale out government securities (bonds etc) through
open market operation then people purchase these
securities and so money is transferred to State bank
as the price of securities by the people and so
amount of money or money supply in the economy will
be reduced and so inflation is also reduced.}
(a) It will reduce the money supply in the
economy
(b) It will increase the money supply in the
economy
(c) The money supply will remain constant
to people as the price of these securities. And so
amount of money or money supply in the economy will
be raised and so inflation will also rise.}
178-If the State Bank of Pakistan purchases
securities in open market operations, then credit
will usually:
(a) Contract (reduce) by a greater amount than
the purchase amount
(b) Expand by a greater amount than the
purchase amount
(c) Remains the same
to people as the price of these securities. When
people sale these securities and get the money from
its sale then they submit these amounts in
commercial bank’s deposits. So by this act, the
reserves of the commercial banks will be increased
and thereby the capacity of commercial banks to
credit creation (money creation) will also increase.
When the commercial banks create credit by the
increased deposits then the credit will usually
expand by a greater amount than the deposits because
of money multiplier process.}
179-The speed with which a unit of currency moves
from one spender to another spender is called:
(a) Velocity of money
(b) Transactions demand for money
(c) Speculative demand for money
Ans. a
180-According to Cambridge equation or Cambridge
approach, the equation of quantity theory of money
is:
(a) M = kPY
(b) MV = PT
(c) MV = PY
Ans. a {Explanation: Cambridge equation of QTM is
presented by Cambridge economists (Pigou etc). This
is also called Cambridge approach or cash balance
approach. Here k = 1/v (reciprocal of the velocity
of money) .The ‘k’ remains constant in this
equation. According to Pigou, a certain portion of
the money supply will not be used for transaction
purposes and individuals wish to hold this certain
portion of money (k) in the form of cash and it will
be held for the convenience and security of having
cash on hand.}
181-Suppose if the value of ‘k’ increases, then it
will be result in:
(a) Decrease in prices
(b) Increase in prices
(c) Constant prices
Ans. a {Explanation: According to Pigou, a certain
portion of the money supply will not be used for
transaction purposes and individuals wish to hold
this certain portion of money (k) in the form of
cash and it will be held for the convenience and
security of having cash on hand. Although the
assumption is that the value of ‘k’ remains constant
but if the value of ‘k’ increases then it means that
people hold more money in the form of cash rather
than use for transaction purposes. When the greater
portion of money is not used for transaction
purposes then transactions of goods will be reduced
and when fewer goods will be purchased than before
then automatically prices of goods will be reduced.}
182-A quantity of money beyond which a further
increase will not lower the interest rate refers to
the:
(a) Marginal efficiency of capital
(b) Quantity theory of money
(c) Liquidity Trap
(d) Stuck point
Ans. c
183-Which one of the following are the least liquid
assets?
(a) Currency
(b) Demand deposits
(c) Household goods
(d) Time deposits
Ans. c
184-Which of the following are goals of national
monetary and fiscal policies?
(a) High level of employment
(b) Stable price levels
(c) An adequate rate of growth
Ans. d
185-Credit creation means:
(a) To accumulate more credit
(b) To develop new credit schemes
(c) To process many credit papers
(d) To create the greater amount of credit than
the actual deposits by the banks
Ans. d
186-It is necessary that the borrower use the cheque
system extensively for:
(a) Rapid credit expansion
(b) Rapid credit contraction
(c) The favorable balance of payments
Ans. a
187-The term ‘demand for money’ denotes the money
balance that a community:
(a) Wants to hold under given conditions
(b) Must hold under any conditions
(c) Wants to spend under given conditions
(d) Must spend under any conditions
Ans. a
188-Money is most liquid of all the assets because:
(a) It is easily convertible into other assets
(b) It can be easily stored
(c) It gives income to the holder
(d) It has no carrying cost
Ans. a
189-The four measures of money supply M1, M2, M3 and
M4 are:
(a) In the ascending order of liquidity
(b) In the descending order of liquidity
(c) Have the same liquidity
(d) Have no relevance to liquidity
Ans. b {Explanation: Descending order of liquidity
means that these four measures of money supply are
written in descending order with respect of having
liquidity. M1 is most liquid in these four measures
and after this M2, M3 and M4 are liquid
respectively. According to this M4 is least liquid
measure among these four measures. Liquidity of an
asset means how easily that asset can be converted
into cash or other asset.}
190-According to Fisher-effect, when expected
inflation increases, the rate of interest will:
(a) Increase
(b) Decrease
(c) Remain constant
(d) Not certain
Ans. a
191-Bretton Woods System which was the
representative of the fixed exchange rate collapsed
in:
(a) 1971
(b) 1871
(c) 1945
(d) 1920
Ans. a {Explanation: Bretton Woods System► An
agreement signed in 1944 that outlined rules and
regulations for an international monetary system. It
established a fixed exchange rate linked to the
U.S.dollar, with other countries pegging their
currency to the dollar. It created the International
Monetary Fund (IMF) , as well as the International
Bank for Reconstruction and Development (IBRD) which
is today simply called World Bank. In 1971, the
fixed exchange rate collapsed as the U.S was no
longer willing to exchange the dollar for gold. Then
this system was reluctantly replaced with floating
exchange rate system. The agreement of Bretton Woods
system was so named b/c it was signed in Bretton
Woods (New Hampshire).}
192-If currency of a country is a reserve currency,
the efficiency of conducting monetary policy will:
(a) Decrease
(b) Increase
(c) Remain stable
Ans. b {Explanation: Reserve Currency► A ‘reserve
currency’ or ‘anchor currency’ is a currency that is
held in significant quantities by many governments
and institutions as part of their foreign exchange
reserves. It is used for the payments of the
products traded on a global market like oil, gold,
etc. Holding currency reserves, therefore, minimizes
exchange rate risk, as the purchasing nation will
not have to exchange their currency for the current
reserve currency in order to make the purchase.
If a currency of a country is also a reserve
currency (for example the currency of U.S.A is US
dollar which is also a reserve currency for U.S.A)
then the efficiency of conducting monetary policy
will increase b/c this reserve currency can be used
for a tool to influence on domestic exchange rate.}
193-When any country fixes its exchange rate in some
anchor currency (reserve currency), it is aimed at
keeping its inflation rate:
(a) Above that of anchor currency
(b) Below that of anchor currency
(c) Equal to that of anchor currency
Ans. c
194-When the domestic real interest rate rises, the
attraction for domestic securities:
(a) Remains same
(b) Decreases
(c) Increases
(d) Becomes zero
Ans. c
195-In case of fixed exchange rate system, the role
of reserves like dollar and gold was:
(a) Greater
(b) Lower
(c) Unlimited
(d) Zero
Ans. a
PUBLIC FINANCE
1-The goods, whose consumption benefits are limited

to particular consumer are termed as:
(a) Private goods
(b) Public goods
(c) Commercial goods
(d) Domestic goods
Ans. a {Explanation: Private good► Private good has
following properties;
i-Excludable (Exclusive) :- The private good is
excludable or exclusive in nature. The owner of a
good can exclude the others from using the good. The
owner in possession of the good can exercise private
property rights, preventing a class of consumers
(e.g. those who have not paid for it) from using the
good or consuming its benefits. Private goods can
also defined as an exclusive production of goods.
They are almost exclusively made for profit and are
exclusive in nature i.e. the owner of a private good
can exclude the others from using the good.
ii-Rivalrous :- Consumption by one consumer prevents
simultaneous consumption by other consumers. Private
goods satisfy an individual want while public goods
satisfy a collective want of the society.
iii-Opposite of Public Good :- A private good is the
opposite of public good.
iv-Examples:- Food, clothing, cars, etc. }
2-The goods, the benefits of which are available in
a non-rival fashion are termed as:
(a) Private goods
(b) Public goods
(c) Commercial goods
(d) Domestic goods
Ans. b {Explanation: Public good► Public good has
following properties;
i-Non-excludable:- The public good is non-excludable
or non-exclusive in nature. It means that no one can
exclude the others from using the good.
ii-Non-Rivalrous:- Consumption of the good by one
individual does not reduce availability of the good
for consumption by others.
iii-Opposite of Private Good :- A public good is the
opposite of private good.
iv-Examples:- Television transmission, national
defence, air, etc. Breathing air does not
significantly reduce the amount of air available to
others, and people cannot exclude others from using
the air.}
3-In competitive market, failure may occur in case
of:
(a) Private goods
(b) Commercial goods
(c) Social goods
(d) Domestic goods
Ans. c {Explanation: Social Good► A good or service
that benefits the largest number of people in the
largest possible way. Some times also called ‘public
good’ or ‘collective good’. Some classic examples of
social goods are clean air, clean water and
literacy. In addition, many economic proponents
include access to services such as healthcare in the
definition of the ‘social or common good’. There are
some problems that are associated with the providing
of these particular goods. Suppose the government
decided that anyone who wanted to benefit from
national defense would therefore have to pay for it.
What would be the incentive to pay? The problem is
that people would recognize that there is no way the
government could prevent them from benefiting from
the national defense if they did not pay for it. As
a result, many people would consume the service
(take advantage of national defense) without paying
for it. This situation is called the free-rider
problem. If many people want to consume a good, but
very few are willing to pay for it, then there will
not be enough of the good produced. So b/c of these
problems no private business firm will want to
produce these goods because firms only produce for
the profit motive and they do not produce free goods
or social goods (public goods) for which people pay
nothing. So in competitive market, failure may occur
in case of social or public goods. So these goods
are provided by the government.}
4-Given their large number, individual consumers:
(a) Will not bid for social goods
(b) Will act as free riders
(c) Both a and b
Ans. c
5-The theory of both social and private goods is
based on the:
(a) Premise of consumer sovereignty
(b) The role of community preferences
(c) The role of merit goods
Ans. d
6- Efficient resources used in the case of private
goods require the marginal rates of substitution in
consumption to be the same for all consumers and:
(a) More than the marginal rate of
transformation
(b) Less than the marginal rate of
transformation
(c) Equal to the marginal; rate of
transformation
Ans. c
7-The corrective adjustments in distribution:
(a) Cannot be independent of the allocation
choice
(b) Can be independent of the allocation choice
(c) Cannot be dependent of the allocation
choice
Ans. a
8- Expenditure concentration is reduced if inter-
governmental grants are included at the level of:
(a) Origin
(b) Recipient
(c) Customer
Ans. b
9-Highly centralized states derive a large share of
state-local revenue from:
(a) Sales tax
(b) Property tax
(c) Capital gains
(d) Income tax
Ans. a
10-The most important use of state grants is in:
(a) Health sector
(b) Education
(c) Services sector
(d) Manufacturing sector
Ans. b
11-If a person receives income which originates in
various countries, he or she will be subject to
taxation by:
(a) One authority
(b) No authority
(c) More than one authority
Ans. c
12-In case of income and profit taxes, the country
entitled to tax that income is the one in which the
income:
(a) Originates
(b) Used
(c) Both a and b
Ans. a
13-In matter of product taxes, the equity issue
relates to the possibility of burdening foreigners
through:
(a) Constant price
(b) Changes in price
(c) Constant income
(d) Changes in income
Ans. b
14-If differential product taxes are imposed at the
producer’s stage, they effect the relative costs of
producing a given product in:
(a) One country
(b) Two countries
(c) Various countries
(d) Few countries
Ans. c
15-Destination taxes:
(a) Retail sales taxes
(b) Do not interfere with commodity flows
(c) Imposed as tariffs
Ans. d
16-The taxes which are imposed in the country of
production and do interfere with the efficient flow
of trade are known as:
(a) Destination taxes
(b) Origin taxes
(c) Sales taxes
(d) Combined taxes
Ans. b
17-A cross-section sample shows:
(a) Simple relationship between public sector
size and the rate of economic growth
(b) No simple relationship between public
sector size and the rate of economic growth
(c) Both a and b
Ans. b
18-The rate of tax to GNP of LDCs is:
(a) Equal to developed countries
(b) More than developed countries
(c) Much below that of developed countries
Ans. c
19-At low levels of per capita income’ tax handlers
are:
(a) Very high
(b) Productive
(c) Scarce
(d) Considerable
Ans. c
20-Turning to the problems of tax policy, we dealt
with the general problems of:
(a) Taxable capacity
(b) The composition of tax structure
(c) Design of particular taxes
Ans. d
21-Tax incentives to foreign capital should aim at:
(a) Minimizing domestic value added
(b) Maximizing domestic value added
(c) Both a and b
Ans. b
22-The incentive structure should be designed to
consider effects on:
(a) Employment
(b) Investment
(c) Production
(d) Both a and b
Ans. d
23-Foreign borrowing increases the current supply of
available resources and thus permits development
with a:
(a) Moderate burden on the present generation
(b) Lesser burden on the present generation
(c) Higher burden on the present generation
(d) Zero burden on the present generation
Ans. b
24-In human resources, the concept of public capital
formation should be interpreted to include
productivity:
(a) Decreasing investment
(b) Increasing investment
(c) Stable investment
(d) No investment
Ans. b
25-In development, strategic roles are played by:
(a) Public investment
(b) Public lending
(c) Both a and b
Ans. c
26-Agricultural taxation is of major importance in
most LDCs because of the relatively:
(a) Large scope of their agri. sectors
(b) Small scope of their agri. sectors
(c) Large scope of other countries’ agri.
sector
Ans. a
27-A fundamental requirement of economic development
is an adequate rate of capital formation relative to
that of population:
(a) Contraction
(b) Expansion
(c) Stability
(d) Density
Ans. b
28-A system of tax incentives and penalties may be
designed to influence the efficiency of resource:
(a) Mobilization
(b) Centralization
(c) Utilization
Ans. c
29-A rising ratio of interest payments to GNP,
however, imposes a burden because taxation is needed
to:
(a) Finance the interest payments
(b) Impose deadweight loss
(c) Both a and b
Ans. c
30-Public debt is an important investment medium for
financial institutions, especially:
(a) Commercial banks
(b) Insurance companies
(c) Money market funds
Ans. d
31-Various mechanisms of burden transfer were
considered, including:
(a) Reduced capital formation
(b) Transfer with generation overlap
(c) Transfer with outside debt
Ans. d
32-Reliance on outside resources needs:
(a) Not to involve foreign absorption of the
debt
(b) Take the form of capital inflow
(c) An associated import surplus
Ans. d
INTERNATIONAL TRADE
1-Free trade means:

(a) Shopkeepers are free to fix their own
prices
(b) There are no restrictions placed on foreign
trade
(c) The price mechanism is not hampered by
government controls
(d) Foreigners are allowed to sell goods in the
home market
Ans. b
2-The requirement for two countries to benefit from
trade is:
(a) That their pre-trade respective internal
price ratios must differ
(b) That their pre-trade rates of
transformation in production must differ
(c) That each country must have a comparative
advantage in the production of same good
Ans. a
3-The study of economics has since its earliest
beginnings been concerned with the acquisition and
sharing of:
(a) Raw material
(b) Production processes
(c) Wealth
(d) Resources
Ans. c
4-The great and ultimate effect of trade is not
wealth at large, but particularly abundance of:
(a) Silver
(b) Gold
(c) Jewels
Ans. d {Explanation: In ancient times, the country
who had abundance of wealth in the form of precious
metal coins like silver, gold, and jewels was
indulged in international trade and that country
could easily trade with another countries and import
different goods from other countries in exchange of
these types of precious metals}
5-Abundance of money provided an active stimulus to
trade and:
(a) Savings
(b) Production
(c) Consumption
(d) Investment
Ans. b
6-In the earliest stages of mercantilist thought,
the predilection for money-wealth was particularly:
(a) Recessive
(b) Dominant
(c) Hidden
Ans. b
7-In the last decade of seventeenth century, the
significant contributions to the growth of
mercantilist views in foreign trade was made by:
(a) Dudley North
(b) John Locks
(c) Samuel Clement
Ans. d
8-The author who added to the Mercantile thought a
clear statement of the essentials of the specific
point mechanism was:
(a) Dudley North
(b) John Locks
(c) Samuel Clement
(d) Adam Smith
Ans. c
9-Free trade is favored because:
(a) Countries have less work to do
(b) It leads to greater world efficiency, i.e.
resources are better allocated
(c) Wealthier countries gain an advantage over
underdeveloped ones
Ans. b
10-Balance of trade (BOT) means:
(a) Difference between the monetary value of
exports and imports over a certain period of
time
(b) Difference between the monetary value of
production and consumption over a certain period
of time
(c) Difference between the output and input
over a certain period of time
Ans. a {Explanation: The balance of trade (or net
exports, sometimes symbolized as NX) is the
difference between the monetary value of exports and
imports of output in an economy over a certain
period. Only the import and export of visible items
are included in balance of trade. It is the
relationship between a nation's imports and exports.
Only the imports and exports of visible items are
included in it. A positive balance is known as a
trade surplus if it consists of exporting more than
is imported; a negative balance is referred to as a
trade deficit or, informally, a trade gap.}
11-A favorable balance of trade means:
(a) An excess of imports of raw material over
exports of manufacture goods
(b)An excess of capital outflows over capital
inflows
(c )An excess of the value of total exports over
the value of total imports
(d) An excess of total credits over total debits
in the balance of payments
Ans. c {Exports: Favorable Balance of Trade► The
value of a nation's exports in excess of the value
of its imports. It is also called ‘Trade Surplus’. A
balance of trade surplus is most favorable to
domestic producers responsible for the exports.
However, this is also likely to be unfavorable to
domestic consumers of the exports who pay higher
prices.}
12- An unfavorable balance of trade means:
(b) An excess of imports of raw material over
exports of manufacture goods
(c) An excess of capital inflows over capital
outflows
(d) An excess of the value of total imports
over the value of total exports
(e) An excess of total credits over total
debits in the balance of payments
Ans. c {Explanation: Unfavorable Balance of Trade►
The value of a nation's imports in excess of the
value of its exports. It is also called ‘Trade
Deficit’. A balance of trade deficit is most
unfavorable to domestic producers in competition
with the imports, but it can also be favorable to
domestic consumers of the exports who pay lower
prices
13-Devaluation of currency means:
(a) The reduction of the value of currency
relative to other currencies by the government
(b)The increase of the value of currency relative
to other currencies by the government
(c) The freeze of the value of currency relative
Ans. a {Explanation: Devaluation of Currency►
decreasing the value of one nation's currency
relative to gold or the currencies of other nations.
It is usually undertaken as a means of correcting a
deficit in the balance of payment.}
14- Revaluation of currency means:
(a) The reduction of the value of currency
relative to other currencies by the government
(b)The increase of the value of currency relative
(c) The freeze of the value of currency relative
Ans. b
15-Depreciation of currency means:
(a) Fall in the value of a currency relative to
other currencies due to market forces of supply
and demand
(b) Increase in the value of a currency
relative to other currencies due to market
forces of supply and demand
(c) Fixing the value of a currency relative to
and demand
Ans. a {Explanation: Depreciation of Currency► Fall
in the value of a currency relative to other
currencies in the floating exchange rate due to
market forces of supply and demand of currency. This
is not due to government decision as in the mater of
devaluation.}
16- Appreciation of currency means:
(a) Fall in the value of a currency relative to
and demand
(b) Increase in the value of a currency
relative to other currencies due to market
forces of supply and demand
(c) Fixing the value of a currency relative to
and demand
Ans. b {Explanation: Appreciation of Currency►
increase in the value of a currency relative to
other currencies in the floating exchange rate due
to market forces of supply and demand of currency.
This is not due to government decision as in the
mater of revaluation.}
17-Devaluation is effective when:
(a) It is accompanied by a decline in short-
term interest rates
(b) Foreign demand for the devaluing country’s
exports is elastic
(c) Foreign demand for the devaluing country’s
imports is elastic
Ans. b
18-Devaluation is resorted to:
(a) Encourage consumption
(b) Encourage exports
(c) Give more value to home currency
(d) Tide over post-war difficulties
Ans. b
19-The prices in different countries are:
(a) Independent
(b) Dependent
(c) Interdependent
(d) Varying
Ans. c
20-“The process by which one product stimulates or
does not stimulate the production of others and
thereby encourage growth, has been called linkage;
It is said by:
(a) Adam Smith
(b) John Mill
(c) Albert O. Hirashman
(d) Pigou
Ans. c
21-The less developed countries give away more of
their gains in productivity because of:
(a) Monopolistic competition abroad
(b) Perfect competition among them
(c) Both a and b
(d) None of them
Ans. c
22-The terms of trade shows:
(a) Unilateral trade agreements between
countries
(b) The excess of imports over exports
(c) The relationship between prices of imports
and prices of exports
(d) The comparative advantage of one country
over another in the production of certain goods
Ans. c
23- The terms of trade is defined as:
(a) It is ratio of value of exports to value of
imports
(b) It is ratio of value of production to value
of consumption
(c) It is a product of exports and imports
Ans. a “{Explanation: Terms of Trade► “The value of
a country's exports relative to that of its
imports”. It is calculated by dividing the value of
exports by the value of imports, then multiplying
the result by 100. If a country's terms of trade
(TOT) is less than 100%, there is more capital going
out (to buy imports) than there is coming in.
A result greater than 100% means the country is
accumulating capital (more money is coming in from
exports).}
24-One alleged reason that the law of comparative
advantage should not be applied to the less
developed countries is that factor prices in these
countries:
(a) Always reflect social marginal effects
(b) Do not always reflect social marginal
effects
(c) Both a and b
Ans. b
25-Trade between two countries takes place because
of:
(a) Scarcity of goods
(b) Differences in costs
(c) Comparative differences in costs
Ans. c
26-If a country devaluates her currency, its result
will typically be as follows:
(a) Her imports will cheaper for her citizens
and her exports will be expensive from the point
of view of foreigners
(b) Both her imports and exports will be
cheaper for the citizens and for foreigners
(c) Her imports will seen more expensive for
the citizens and export will seem cheaper to the
foreigners
(d) Both exports and imports will seem more
expensive
Ans. c
27-In the process of growth, domestic production
replaces:
(a) Imports
(b) Exports
(c) Capital gains
(d) Savings
Ans. a
28-The gold standard was in general use from the
later part of the 19th century until the time of:
(a) World War II
(b) WORLD War I
(c) 21st century
(d) 20th century
Ans. b
29-Although import quotas have relatively long
history, they were not extensively used, except in
war time, until the early:
(a) 1920s
(b) 1960s
(c) 1930s
(d) 1940s
Ans. c
30-Only one of the following measures is likely to
be effective in dealing with persistent balance of
payments surplus. Which one?
(a) Ban on exports
(b) An increase in taxes on consumer
expenditure
(c) Revaluation of the currency
(d) Imposition of import tariffs
Ans. c {Explanation: If some country faces the
balance of payment surplus for a long time, then to
control this she should revaluate her currency i.e.
increases the value of her currency. By this way,
her exports become expensive and imports become
cheaper than before. So surplus balance of payments
will be vanished.}
31-Which of the following items in the balance of
payments is invisible?
(a) Export of goods
(b) Shipping
(c) Investment by foreigners
(d) Import of goods
Ans. b
32-Which of the following methods of protection
depends for its success on more than units
elasticity of demand for imports?
(a) Quotas
(b) Prohibitions
(c) Tariffs
(d) Exchange controls
Ans. c {Explanation: Imposition of tariff on imports
is effective only when the elasticity of demand for
imports is more than unity.}
33-In ‘Anti-Trade Biased Growth’:
(a) Country’s ability to make the importable
goods grows faster than its ability to make the
exportable goods
(b) Country’s ability to make the exportable
importable goods
(c) Country’s ability to make the consumer
goods grows faster than public goods
Ans. a {Explanation: Anti-Trade Biased Growth
(Import-Biased Growth)► If the increase in the
endowments of factors of production is biased toward
the import-competing industry, the Country’s ability
to make the importable goods grows faster than its
ability to make the exportable goods. ‘Anti-trade
biased growth’ cuts trade, yet brings gains to the
country itself. It is also called ‘Import-Biased
Growth’.}
34-In ‘Pro-Trade Biased Growth’:
(a) Country’s ability to make the importable
exportable goods
(b) Country’s ability to make the exportable
importable goods
(c) Country’s ability to make the consumer
goods grows faster than public goods
Ans. b {Explanation: Pro-Trade Biased Growth
(Export-Biased Growth)► If the increase in the
endowments of factors of production is biased toward
the exporting industry, the Country’s ability to
make the exportable goods grows faster than its
ability to make the importable goods. Pro-trade
biased growth (export expanding growth) brings gains
to the country by increasing the volume of trade. It
is also called ‘Export-Biased Growth’}
35-The total effect of growth is export-biased (pro-
trade biased) if:
(a) Both the production and consumption effects
are export biased
(b) The production effect is export-biased and
the consumption effect is neutral
(c) Both a and b
Ans. c
36-In equilibrium position, the volume and terms of
trade must be such that each country’s exports pay
for its:
(a) Exports
(b) Imports
(c) Savings
(d) Consumption
Ans. b
37-In terms of value theory, the terms of
international trade will depend on the elasticity of
world demand for:
(a) Exports
(b) Manufacture goods
(c) Savings
(d) Consumption
Ans. b
38-The countries marginal propensity to spend output
on imports will be negative if the marginal
propensity to spend output on consumption of
importable decreases due to economic:
(a) Contraction
(b) Expansion
(c) Relaxation
(d) Recession
Ans. b
39-Economic growth has:
(a) Production effects
(b) Consumption effects
(c) Both a and b
Ans. c
40-A nation’s balance of payments (BOP) is record of
its:
(a) Imports and exports of goods in a year
(b) Imports and exports of services
(c) All its economic transactions with the
outside world in a year
(d) All receipts and payments on capital
account in a year
Ans. c {Explanation: Balance of Payment► A record of
all transactions made between one particular country
and all other countries during a specified period of
time. BOP compares the dollar difference of the
amount of exports and imports, including all
financial exports and imports. A negative balance of
payments means that more money is flowing out of the
country than coming in, and vice versa. In balance
of payments, all the transactions of both visible
and invisible items are included while in balance of
trade, only the transactions of visible items are
included.}
41-Which of the following is a debit entry in a
country’s balance of payments accounts:
(a) Import of goods and services
(b) Exports of goods and services
(c) Inflow of capital from abroad
(d) Transfer receipt from a friendly country
Ans. b
42-An increased consumption of exportables tends to:
(a) Decrease the volume of trade
(b) Increase the volume of trade
(c) Maximize the volume of trade
(d) Neutralize the volume of trade
Ans. a
43-The consumption effects of factor growth
emphasize the behavior of domestic consumptions of:
(a) Exportables
(b) Raw material
(c) Importables
Ans. c
44-Technological progress can itself be thought of
as a change in factor:
(a) Combinations
(b) Analysis
(c) Endowment
(d) Production
Ans. c
45-The function of the foreign exchange market is
to:
(a) Transfer funds from one nations to another
(b) Provide short-term credits to finance trade
(c) Provide the facilities for hedging
Ans. d
46-The exchange rate is kept the same in all parts
of the world by:
(a) Exchange arbitrage
(b) Interest arbitrage
(c) Hedging
(d) Speculation
Ans. a
47- A change from $3=£1 to $2=£1 represents:
(a) Depreciation of the dollar
(b) An appreciation of the dollar
(c) An appreciation of the pound
Ans. b
48-If all the industries, or even just most
industries, emigrate from the leader over their
productive cycles, then the leader can be left with:
(a) High comparative advantage
(b) No comparative advantage
(c) Few comparative advantage
Ans. b
49-Follower countries can just borrow the latest
technology cheaply without having to bear the costs
of:
(a) Research
(b) Invention
(c) Development
Ans. d
50-Leaders are saddled with old equipment while
followers can just by the latest and be:
(a) More efficient
(b) Less efficient
(c) Not efficient
Ans. a
51-Under a flexible exchange rate system, the
exchange rate is determined by:
(a) The nation’s monetary authorities
(b) The price of gold
(c) The forces of demand and supply in the
foreign exchange market
(d) Stock Exchange
Ans. c
52-Ohlin begins his analysis by considering certain
characteristics of international trade which seems
to furnish a logical point of:
(a) Entry
(b) Departure
(c) Permission
(d) Inception
Ans. b
53-Interregional trade is a:
(a) Income phenomenon
(b) Wealth phenomenon
(c) Price phenomenon
Ans. c
54-The supply of goods in international trade is
greatly affected by technological advances, and by
spread of technology to:
(a) Few countries
(b) Certain countries
(c) One country
(d) More and more countries
Ans. d
55-When the U.S demand for pounds increases under a
flexible exchange rate system:
(a) The dollar depreciates
(b) The pounds depreciates
(c) The dollar appreciates
Ans. a
56-Adjustment of balance of payments disequilibria
can be brought about by variations in:
(a) Internal prices
(b) External prices
(c) Income
Ans. d
57-Under a freely flexible exchange rate system (and
stable foreign exchange market), a deficit in a
nation’s balance of payments is automatically
corrected by:
(a) A depreciation of its currency
(b) An appreciation of its currency
(c) Domestic inflation
(d) A rise in national income
Ans. a
58-A devaluation of nation’s currency usually causes
internal (domestic) prices to:
(a) Fall
(b) Rise
Ans. b
59-Devaluation should be used as a remedy for
balance of payments dis-equilibrium only when a
country faces:
(a) Elastic foreign demand for its exports and
elastic internal demand for its imports
(b) Inelastic foreign demand for its exports
and inelastic internal demand for its imports
(c) Elastic foreign demand for its exports but
inelastic internal demand for its imports
(d) Inelastic foreign demand for its exports
and elastic internal demand for its imports
Ans. a
60-The invention of artificial fibers has
drastically affected the countries producing:
(a) Wool
(b) Cotton
(c) Silk
Ans. d
61-New manufacturing nations which enter production
with the most modern plants and without the
encumbrance of established labor organization can
reduce prices to the determinate of established
nations whose terms of trade become more:
(a) Favorable
(b) Unfavorable
(c) Important
Ans. b
62-If country A has an absolute advantage over B in
both the commodities X and Y, it necessarily has:
(a) Comparative advantage in both
(b) Comparative advantage in A
(c) Comparative advantage in B
(d) Comparative advantage in either A or B as
the case may be
Ans. d
63-Fundamentally, the relative scarcity of factors,
the shortage of supply in relation to demand, is
essential for trade:
(a) Within a country
(b) Between regional countries
(c) Between two countries
(d) Between many countries
Ans. c
64-Factor endowment or factor production theory of
international trade is formulated by:
(a) David Ricardo
(b) Bertil Ohlin
(c) Adam Smith
(d) Keynes
Ans. b
65-H-O Theory of international trade is presented
by:
(a) Heckscher-Ohlin
(b) Adam Smith
(c) David Ricardo
(d) Samuelson
Ans. a {Explanation: Heckscher-Ohlin (H-O) Theory►
The Heckscher-Ohlin theory explains why countries
trade goods and services with each other. One
condition for trade between two countries is that
the countries differ with respect to the
availability of the factors of production. They
differ if one country, for example, has many
machines (capital) but few workers, while another
country has a lot of workers but few machines.
According to the Heckscher-Ohlin theory, a country
specializes in the production of goods that it is
particularly suited to produce. Countries in which
capital is abundant and workers are few, therefore,
specialize in production of goods that, in
particular, require capital. Specialization in
production and trade between countries generates,
according to this theory, a higher standard-of-
living for the countries involved.}
66- H-O Theory of international trade is also
called:
(a) Modern theory of international trade
(b) General equilibrium theory of international
trade
(c) Both a and b
Ans. c {Explanation: The modern theory of
international trade also named as the General
Equilibrium Theory of International Trade was
developed by two Swedish economists, Hecksher and
Ohlin. According to these economists, the main cases
and the regulator of international trade is the
differences in the relative prices of the
commodities between the countries. The differences
in the prices of goods arise due to;
(i) Difference in climatic and technical know how.
(ii) Difference in the allocation of resources for
the production of goods.
(iii) Variation in the demand for and supply of
commodity as well as the demand for and the supply
of the required factors.}
67-Heckscher-Ohlin explains richness in factor

endowment in terms of:
(a) Wealth
(b) Factor prices
(c) Business
Ans. b
68-If a country is capital abundant, then according
to H.O theorem, it will export relatively:
(a) Expansive capital-intensive commodity
(b) Cheap capital-intensive commodity
(c) Expansive labor-intensive commodity
(d) Cheap labor-intensive commodity
Ans. b
69-The H.O theorem takes the two factors, (i) labor.
(ii) capital, whereas classical model takes into
account only one factor:
(a) Capital
(b) Labor
(c) Raw material
(d) Land
Ans. b
70-Like other theories, H.O theorem relies heavily
on a number of assumptions which have proved:
(a) Realistic
(b) Extraordinary
(c) Unrealistic
Ans. c
71-The necessary and sufficient condition for trade
between two countries is:
(a) Absolute cost differences
(b) Equal cost differences
(c) Comparative cost differences
Ans. c
72-Classical explanation of the theory of
comparative cost was based on:
(a) Labor cost
(b) Opportunity cost
(c) Money cost
Ans. a
73-If country A has lower opportunity cost for a
commodity X than country B, then:
(a) A has a comparative advantage in commodity
X
(b) B has a comparative advantage in commodity
X
(c) A has a comparative advantage in commodity
X
Ans. a
74-The effect of trade with different production
possibilities curves and identical indifference
curves are to make each country:
(a) More specialized in production
(b) Less specialized in consumption
(c) Both a and b
Ans. c
75-In general, the new indifference curve attained
will be higher one for both countries than that
reached in the:
(a) Present of trade
(b) Absence of trade
(c) Importance of trade
(d) Limitation of trade
Ans. b
76-Human capital is formed through the education of
labor, while knowledge capital is created through
expenditures on research and development and:
(a) Learning through reading
(b) Learning through writing
(c) Learning through doing
(d) Learning through teaching
Ans. c
77-With trade between two countries:
(a) Both produce and consume the same amount of
the two commodities
(b) Both produce and consume more of the two
commodities
(c) Both produce and consume less of the two
commodities
Ans. b
78-Pre-trade production and consumption in countries
are:
(a) The same as with trade
(b) Higher than with trade
(c) Lower than with trade
(d) Nothing can be said
Ans. c
79-Gains from international trade are distributed
between the participating countries:
(a) Equally
(b) Unequally
(c) In terms of their reciprocal demand and
supply
Ans. c
80-For Heckscher and Ohlin, the most important
causes of the difference in relative commodity
prices and trade between nations is a difference in:
(a) Factor endowments
(b) Technology
(c) Tastes
(d) Demand and conditions
Ans. a {Explanation: Factor Endowment► A country's
factor endowment is commonly understood as the
amount of land, labor, capital, and entrepreneurship
that a country possesses and can exploit for
manufacturing. The importance of factor endowments
in a country's historical prosperity is great.
Countries with a large endowment of resources tend
to be more prosperous than those with a small
endowment, all other things being equal. The
development of sound institutions to access and
equitably distribute these resources, however, is
necessary in order for a country to obtain the
greatest benefit from its factor endowment.}
81-If a nation gains from trade, its consumption
point is:
(a) Inside its production possibilities
frontier
(b) Above its production possibilities frontier
(c) Above its indifference curve
Ans. b
82-A difference in relative commodity prices between
two nations can be based upon a difference in:
(a) Factor endowments
(b) Technology
(c) Specialization
Ans. d
83- The modern theory of international trade
predicts that as a result of trade, the difference
in factor prices between nations:
(a) Diminishes
(b) Increases
Ans. a
84-The Heckscher-Ohlin (H-O) Theory is an advance
over the classical theory because it says how:
(a) Nations gain from international trade
(b) Nations use their resources for producing
commodities
(c) International trade affects factor prices
and the distribution of income in each nation
Ans. c
85-In a two-nation world, terms of trade of the
partner nation’s is:
(a) The same as the other nation
(b) The inverse or reciprocal of that of the
other nations
(c) Increase or decrease in the same direction
(d) Cannot be known correctly
Ans. b
86-If the cost of transporting goods between two
nations exceeds the pre-trade price difference for
the goods between the two nations, then trade in
that goods is:
(a) Possible
(b) Impossible
(c) Reversed
(d) Cannot say
Ans. b
87-Developing nations complain that:
(a) Their terms of trade deteriorate
(b) Their export proceeds are very unstable
(c) The present international monetary system
favors developed countries
Ans. d
88-The most important of the Non-Tariff Trade
Barriers (NTBs) are:
(a) Quotas
(b) Health regulations
(c) Transport regulation
(d) Labeling and packaging regulation
Ans. a
89-When a nation imposes an import tariff:
(a) Domestic price of the importable commodity
rises
(b) Domestic consumption of the importable
commodities rises
(c) Domestic production of the import competing
commodity falls
Ans. a
90-The imposition of an import duty by a nation
causes the consumer surplus in the nation to:
(a) Rise
(b) Fall
(d) Any of the above is possible
Ans. b {Explanation: ‘Consumer Surplus is the
difference b/w what the consumer has to pay for a
good and the amount he is willing to pay. It is the
area under the demand curve and above the price’.
Consumers of the product in the importing country
suffer a reduction in well-being as a result of the
tariff. The increase in the domestic price of both
imported goods and the domestic substitutes reduces
the amount of consumer surplus in the market.}
91- The imposition of an import duty by a nation
causes the producer surplus in the nation to:
(a) Rise
(b) Fall
(d) Any of the above is possible
Ans. a {Explanation: ‘Producer Surplus is the
difference b/w what the producer receives for the
good and the amount he must receive to be willing to
provide the good. It is the area above the supply
curve and below the price’. Producers in the
importing country experience an increase in well-
being as a result of the tariff. The increase in the
price of their product on the domestic market
increases producer surplus in the industry. The
price increases also induces an increase in output
of existing firms (and perhaps the addition of new
firms).}
92-The arguments in favour of protectionist policy
are:
(a) Protection of domestic labor against cheap
foreign labor and the reduction of domestic
unemployment
(b) Correction of a deficit in the nation’s
balance of payments and improvement of the
nation’s terms of trade
(c) Protection of infant industries of the
economy
Ans. d
93-Autarky is a state of:
(a) Trade between friendly nations
(b) No trade between nations
(c) Trade between neighbors
Ans. b {Explanation: Autarky► Autarky is a state of
independence. For example, a country that is
functional without partaking in any international
trade. The word autarky, which comes from the Greek
words meaning "self-sufficiency," is used to
describe the policy of being economically
independent of other nations by having no trade with
them.}
94-By commercial policy, we mean those measures
which are taken by the government to influence the
value, volume and directions of:
(a) National trade
(b) Economic decisions
(c) Foreign trade
(d) Mutual trade
Ans. c
95-Instruments or tools of commercial policies:
(a) Trade agreements
(b) Tariffs and quotas
(c) Dumping and exchange control
Ans. d
96-The device to prevent the movement of capital for
a short period is termed as:
(a) Bilateral trade agreement
(b) Clearing agreement
(c) Standstill agreement
(d) Block agreement
Ans. c {Explanation: Standstill Agreement► an
agreement that preserves the status quo, especially
between two countries when one country cannot pay
its debts to the other then a certain fixed
extension of time will be given to repay the debts.}
97-In international trade, the agreements which take
balance between two countries are called:
(a) Bilateral trade agreements
(b) Clearing agreements
(c) Standstill agreements
(d) Mutual agreements
Ans. a {Explanation: Bilateral Trade Agreements►
Bilateral Trade Agreements are between on two
nations at a time. They are fairly easy to
negotiate, and give those two nations favored
trading status between each other.}
98-In international trade, the agreements which take
balance among many countries are called:
(a) Bilateral trade agreements
(b) Clearing agreements
(c) Standstill agreements
(d) Multilateral trade agreements
Ans. d {Explanation: Multilateral Trade Agreements►
Multilateral trade agreements are between many
nations at one time. For this reason, they are very
complicated to negotiate, but are very powerful once
all parties sign the agreement. The primary benefit
of multilateral agreements is that all nations get
treated equally, and so it levels the playing field,
especially for poorer nations that are less
competitive by nature.}
99-The tax which is levied on the movement of goods
and services beyond the territories of any country
is termed as:
(a) Income tax
(b) Property tax
(c) Tariff
Ans. c
100-In order to import one car, one should pay
custom duty as Rs.20000, it is called:
(a) Granted duty
(b) Specific duty
(c) Agreed duty
(d) Regional duty
Ans. b {Explanation: Specific Duty► Specific duty is
based on a fixed amount of money for each unit of
quantity or weight of a product, rather than its
market value. On the other hand, ‘Ad valorem duty’
is according to the cost or market value of the
product.}
101-When custom duty is paid at the uniform rate in
order to import any commodity from various
countries, then this policy is called:
(a) Discriminatory policy
(b) Discretionary policy
(c) Expansionary policy
(d) Non-discriminatory policy
Ans. d
102-The effect of a tariff, to protect the domestic
industry from foreign competition by imposing a
tariff on the commodity imported is known as:
(a) Income effect
(b) Substitution effect
(c) Competitive effect
(d) Comparative effect
Ans. c
103-A tariff has a favorable balance of payment
effect by reducing imports in the tariff imposing
country and reducing exports in the:
(a) Same country
(b) Other country
(c) Third country
Ans. b
104-The term protection refers to a policy whereby
domestic industries are to be protected from:
(a) Domestic competition
(b) Local competition
(c) Foreign competition
Ans. c
105-A usual argument for protection is that it is a
cure for:
(a) Inflation
(b) Deflation
(c) Unemployment
(d) Poverty
Ans. c
106-The concept of ‘Offer curve’ is presented by two
English economists:
(a) Edgworth and Marshal
(b) Ricardo and Adam Smith
(c) Hume and Samuelson
(d) Marshal and Peter
Ans. a
107-The ‘Offer curve’ shows:
(a) Quantity of one good that a country is
willing to export for each quantity of the other
good that it imports
(b) Quantity of one good that a country is
willing to produce for each quantity of the
other good that it consume
(c) Quantity of one good that a country is
willing to buy for each quantity of the other
good that it sell
Ans. a {Explanation: Offer curve► A curve showing
for a two-good model, the quantity of one good that
a country is willing to export (or offer) for each
quantity of the other that it imports. It is also
called the ‘reciprocal demand curve’. It is
convenient for representing both exports and imports
in the same curve and can be used for analyzing
tariffs and other changes.}
108-A tariff improves the terms of trade if the
offer curve facing the imposing country is:
(a) Less than infinitely elastic
(b) More than infinitely elastic
(c) Equal to infinitely elastic
Ans. a
109-Nations can restrict their foreign trade by
erecting barriers to:
(a) Exports
(b) Imports
(c) Both a and b
Ans. c
110-The major reason for quotas in today’s world is
the:
(a) Balance of trade
(b) Balance of payments
(c) Unemployment rate
(d) Inflation rate
Ans. b
111-In calculating our balance of payments position,
we must:
(a) Not include expenditure by foreign tourists
as imports
(b) Omit invisible items
(c) Omit exports and imports of gold
(d) Include long-term loan capital outflow
debits
Ans. d
112-The economist who said that international trade
was based on the concept of absolute advantage was:
(a) Adam Smith
(b) David Ricardo
(c) Bertil Ohlin
(d) Samuelson
Ans. a
113-The doctrine of purchasing power parity (PPP)
indicates that balance of payments dis-equilibrium
which is due to inflation may be corrected by:
(a) Appreciation of foreign exchange rate by
the same percentage as the price rise
(b) A general price deflation
(c) An increase in the money supply by the same
amounts as prices
(d) Depreciation of foreign exchange rate by
the same percentage as the price rise
Ans. d {Explanation: Purchasing Power Parity (PPP)
Theory► Purchasing power parity (PPP) is a theory
which states that exchange rates between currencies
are in equilibrium when their purchasing power is
the same in each of the two countries. This means
that the exchange rate between two countries should
equal the ratio of the two countries' price level of
a fixed basket of goods and services. When a
country's domestic price level is increasing (i.e.,
a country experiences inflation), that country's
exchange rate must depreciated by the same
percentage as the price increase in order to return
to PPP. The basis for PPP is the "law of one price".
In the absence of transportation and other
transaction costs, competitive markets will equalize
the price of an identical good in two countries when
the prices are expressed in the same currency.
Purchasing Power Parity (PPP) theory estimates the
amount of adjustment needed on the exchange rate
between countries in order for the exchange to be
equivalent to each currency's purchasing power. In
other words, the exchange rate adjusts so that an
identical good in two different countries has the
same price when expressed in the same currency. For
example, a chocolate bar that sells for C$1.50 in a
Canadian city should cost US$1.00 in a U.S. city
when the exchange rate between Canada and the U.S.
is 1.50 USD/CDN. (Both chocolate bars cost
US$1.00.)}
114-The balance of trade is also known as:
(a) Capital transfers
(b) Gain from trade
(c) The visible balance
Ans. c
115-The economists consider international trade to
be advantageous to each country because:
(a) It raises national income valued in terms
of imports
(b) It raises the country above the initial
budget constraint
(c) It raises the country to a higher
indifference curve
(d) a only
(e) b only
(f) a and b only
(g) b and c only
(h) a, b and c
Ans. g
116-The basis of international trade and the reason
that many economists oppose protective tariff is the
law of:
(a) Diminishing returns
(b) Diversification
(c) Consumer surplus
(d) Comparative advantage
Ans. d
117-‘Protectionism’ in the international trade
stands for:
(a) Restricted trade policy
(b) Free trade policy
(c) Open trade policy
Ans. a
118-The balance of payments:
(a) Is also affected by capital movements
(b) Is never affected by capital movements
(c) The balance of payment is never concerned
with the capital movements
Ans. a
119-Which of the following is a group of items
within the total of balance of payments:
(a) The merchandise balance
(b) Current account
(c) Capital account
Ans. d
120-If the elasticity of demand for imports is
greater than one, then by devaluation:
(a) The value of imports will increase
(b) The value of imports will decrease
(c) The value of imports will remain constant
Ans. b
121-Ricardo theory of comparative cost is based on:
(a) Labor theory of value
(b) Differences in factor endowments
(c) Differences in opportunity cost
Ans. a
122-In Heckscher-Ohlin model (H-O Model), factor
abundance is defined in:
(a) Terms of physical quantities of factors
(b) Terms of factor prices
(c) Both a and b
Ans. c
123-‘Export Biased Growth’ will benefit the country
only when:
(a) It faces fixed world prices for its exports
(b) It faces declining terms of trade
(c) It faces varying world prices for its
exports
Ans. a
124-Growth that leads to a deterioration in terms of
trade:
(a) Raises the domestic growth rate
(b) Lowers the domestic growth rate
(c) May raise or lower the domestic growth rate
(d) Has no effect on domestic growth rate
Ans. b
125-Technical progress that is biased towards
country’s import competing goods sector will:
(a) Improves terms of trade
(b) Deteriorate terms of trade
(c) Has no effect on terms of trade
Ans. a
126-Trade does not now work as an engine of growth
in developing countries because:
(a) Demand for developing country’s primary
products is growing slowly
(b) Demand for manufactured products is growing
slowly
(c) The developed nations have a low growth
rate in their GNP
Ans. a
127-Marshal Learner Condition in international trade
defines that:
(a) Devaluation could remove deficit in balance
of trade if the sum of elasticities of demand
for exports and imports is greater than unity
(one)
(b) Devaluation could remove deficit in balance
for exports and imports is greater less than
unity (one)
(c) Devaluation could remove deficit in balance
for exports and imports is equal to unity (one)
Ans. a {Explanation: Marshal Learner Condition in
international trade defines that devaluation
could remove deficit in balance of trade if the
sum of elasticities of demand for exports and
imports is greater than unity (one). In such
case, a stability will rise in the foreign
exchange market. But such situation will rise if
the supply curves of exports and imports are
perfectly elastic. If the sum of elasticities of
demand for exports and imports is less than
unity, the devaluation will not be able to remove
deficit. In such situation, an instability will
rise in the market of foreign exchange. Again if
the sum of elasticities of demand for exports and
imports is equal to one, the devaluation will not
remove deficit in balance of payment (BOP). }
128-The currency of IMF is called:
(a) LDRs
(b) SDRs
(c) Lira
Ans. b
ISLAMIC ECONOMICS
1-Islamic economics is a social science which

studies the economic problems of people with respect
to values of:
(a) Arabs
(b) English
(c) Islam
(d) Muslim
Ans. c
2-In order to pursue his society, in Islamic
economics, the individual must take into account the
injunctions of the:
(a) Holly Quran
(b) Sunnah
(c) Both a and b
Ans. c
3-In an Islamic state, the activities which cannot
promote human welfare can:
(a) Not be encouraged
(b) Be encouraged
(c) Be supported
(d) Be tolerated
Ans. a
4-Islamic economics is different from modern
economics (western economics) in:
(a) Political respect
(b) Social respect
(c) Cultural respect
Ans. d
5-Many variables which are treated as exogenous
variables in western economics are treated in
Islamic economics:
(a) As endogenous variables
(b) Also as exogenous variables
(c) Output variables
Ans. a
6-A significant basic economic value of Islam is:
(a) Production process
(b) Distribution of wealth
(c) Economic equality
(d) Immediate response
Ans. c
7-The holly Quran says,” We have made you in
different tribes and families so that you may:
(a) Beat each other
(b) Recognize each other
(c) Cheat each other
(d) Help each other
Ans. b
8-If the entrepreneurs pay more than the rightful
reward of their workers, the kind of material aid is
termed as:
(a) Aariat
(b) Condolences
(c) Loss
(d) Extravagance
Ans. a
9-The activities which are forbidden by Islam are
called:
(a) Halal
(b) Haram
(c) Beneficial
(d) Protective
Ans. b
10-The means of gaining wealth which the Holly Quran
declares unlawful are:
(a) Bribery
(b) Forcible occupation
(c) Gambling
Ans. d
11-Capitalism is an economic system where the means
of production are owned by:
(a) Government
(b) Public
(c) Private individuals
(d) Investors
Ans. c
12-The most important feature of capitalism is the
existence of:
(a) Private property
(b) System of inheritance
(c) Joint property
(d) Both a and b
Ans. d
13-The consumer has been compared to a king in:
(a) Capitalism
(b) Socialism
(c) Mixed economy
(d) Communism
Ans. a
14-The merits of capitalism is/are:
(a) Increase in production and standard of
living
(b) Economic use of resources
(c) Freedom of choice
Ans. d
15-In socialism, the national instruments of
production are owned by:
(a) Public authorities
(b) Government
(c) Individuals (private)
Ans. a
16-In socialism, whole economic activity is planned
covering:
(a) Production
(b) Exchange
(c) Distribution and consumption
Ans. d
17-Under socialism, there is:
(a) High competition in the market
(b) No competition
(c) No monopoly
(d) Lot of choices for consumers
Ans. b
18-In socialist economy, there are:
(a) Tremendous business fluctuations
(b) No fluctuations
(c) Many uncertainties
(d) Certain fluctuations
Ans. b
19-In socialist economy, there are no existence of
forces of:
(a) Demand
(b) Supply
(c) Both a and b
Ans. c
20-The mixed economy comprises of:
(a) Private sector
(b) Public sector
(c) Semi-public/ autonomous bodies
Ans. d
21-Monetary and fiscal policies are more effective
in:
(a) Capitalistic system
(b) Socialistic system
(c) Mixed economy
(d) Communist system
Ans. c
22-Islamic system is not an independent system, it
is a part of life system, which is called:
(a) Religion
(b) Islam
(c) Quran
(d) Pledge
Ans. b
23-The main objective(s) of the economic system is/
are:
(a) General welfare of the people
(b) Social justice
(c) Modernization and brotherhood
Ans. d
24-Zakat is an effective way for transferring a part
of wealth from:
(a) Poor to rich
(b) Rich to poor
(c) Rich to rich
(d) Poor to poor
Ans. b
25-In Islamic economic system, the entrepreneurs
produce profitable goods but they can earn only:
(a) Maximum profit
(b) Normal profit
(c) Minimum profit
(d) Nominal profit
Ans. b
26-In Islamic economy, entrepreneurs produce to the
point where average revenue of the firms are:
(a) Equal to the average cost of production
(b) Less than average cost of production
(c) Greater than average cost of production
(d) Zero
Ans. a
27-If the system introduced by Islam is fully
adopted, the great mass of people will be
moderately:
(a) Poor
(b) Well-off
(c) Extravagant
(d) Spendthrift
Ans. b
28-Islam wants wider circulation of wealth so that
it spread out in the community and not confined to
a:
(a) Large group of people
(b) Whole economy
(c) Small group of people
Ans. c
29-To take the responsibility of public maintenance
along with the utility services is the distinctive
feature of:
(a) Capitalism
(b) Socialism
(c) Mixed economy
(d) Islamic system
Ans. d
30-Islam wants to establish justice in the:
(a) Specific people life
(b) Entire social life of man
(c) Some special aspects of life of man
(d) Some particular sectors
Ans. b
31-Consumption on luxuries is declared against the
concept of:
(a) Taqva in Islam
(b) Necessities in Islam
(c) Spending in Islam
(d) Optimism in Islam
Ans. a
32-Islam restricts:
(a) Extravagance
(b) Miserness
(c) Both a and b
(d) None of these
Ans. c
33-Capitalism and Socialism are the victims of
inbalancement while Islam creates balance between:
(a) Luxuries and necessities
(b) Income and consumption
(c) Government and poor
(d) Goods and services
Ans. b
34-Islam forbids the use of certain goods, such as:
(a) Intoxicants
(b) Flesh of dead animals
(c) Sacrifices made to idols
Ans. d
35-Hording is forbidden in Islam because hoarding is
considered as a market imperfection and it exerts
adverse effects on the:
(a) Producers
(b) Consumers
(c) Laborers
(d) Investors
Ans. b
36-Except Islam, there is no other religion in the
whole world which has prohibited:
(a) Development
(b) Usury (interest)
(c) Production
Ans. b
37-The business in which the subscriber participates
with the money and the manager with the knowledge
and skill is called:
(a) Musharika
(b) Mudaraba
(c) Hire-purchase
(d) Qarz-e-Hasna
Ans. b
38-Equity participation means sharing of:
(a) Risks
(b) Reward
(c) Both a and b
Ans. c
39-Qarz-e Hasna is normally payable to the:
(a) Needy and poor persons
(b) Rich and extravagant people
(c) Government employees
(d) Factory workers
Ans. a
40-A person can open PLS term deposit account with a
minimum amount of:
(a) Rs.100
(b) Rs.10000
(c) Rs.1000
(d) Rs50
Ans. c
41-The PLS savings account can be opened with a
minimum amount of:
(a) Rs.100
(b) Rs.10000
(c) Rs.1000
(d) Rs50
Ans. a
42-All the previous governments did not give proper
attention to change the system which is based on
interest, except president:
(a) Zulfiqar Ali Bhutto
(b) Parvez Musharif
(c) Rafiq Tarar
(d) Zia-ul-Haq
Ans. d
43-The government of Pakistan promulgated the
Modaraba Ordinance in:
(a) 1970
(b) 1980
(c) 1990
(d) 1950
Ans. b
44-All Pakistani commercial banks are accepting
interest-free deposits from July1, 1981 on:
(a) Current account basis
(b) PLS (Profit Loss Share) basis
(c) Fixed profit account basis
Ans. b
45-Bank financing for investment on the basis of
sharing in the profit and the losses of the
enterprise is said to be:
(a) Mudaraba
(b) Musharika (Partnership)
(c) Term Deposit
Ans. b
46-In Musharika (Partnership)business, loss must be
shared or distributed according to the ratio of
respective:
(a) Consumption
(b) Savings
(c) Investment
(d) Deposits
Ans. c
47-Mudaraba certificates are:
(a) Transferable
(b) Not transferable
(c) Both a and b
Ans. a
48-In Musharika business, profits are to be shared
or distributed as the ratio:
(a) Which is agreed
(b) 3:1
(c) Which is prevailing
(d) 2:1
Ans. a

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TABLE OF CONTENTS

1. Nature and Scope of Economics

1-The main contribution of Adam Smith is in the

13- “Time Preference Theory of Interest” was

15- According to Robbins, economics is a:

49- Government planners play a central role in

1- According to Saint Thomas Aquinas ‘value is

The effect on the demand for a product as a result

If the price of productB falls the budget line now

98- Which of the following statement is wrong?

100- Law of Diminishing Marginal Utility is

1. Meaning of Decomposition of Price

The price effect is viewed as a combination of

The substitution and income effects work in

We are now going to study decomposition of

2. Decomposition of Price Effect: Normal

Figure.1 Decomposition of Price Effect:

When the price of good X falls, the consumer

This price effect can be decomposed into the

Suppose the consumer is given back the money

Price Effect = Substitution Effect + Income

Decomposition of the price effect into substitution

Figure.2 Decomposition of Price Effect: Inferior

4. Decomposition of Price Effect: Giffen

Decomposition of the price effect into substitution

Figure.3 Decomposition of Price Effect: Giffen Goods

UNIT 2: DEMAND, SUPPLY & ELASTICITY

1-Production is a function of:

33- Average cost curve contains in it:

141- The elliptical isoquant represents the:

UNIT 4: THEORY OF PRICE

1-Under the perfect competition, the transportation

Common examples of first degree price discrimination

Figure 3, Second Degree Price Discrimination

Common examples of second degree price

97-A normal profit is:

200- In case of perfect competition, TR curve rises

211-The monopolist firm is price setter. The price

Break even point is the level of sales at which

1- The game theory was basically presented by:

1-The general equilibrium shows equilibrium in:

1-The theory of distribution analysis the principles

UNIT 1: NATIONAL INCOME

1-Which of the following is not one of the problems

1-Say’s law of market is concerned with:

1-Consumption function represents the relationship

50-The fall in interest rate will increase:

1-The goods having the ability to produce further

UNIT5: THE DEMAND AND

1-According to classicals, money is demanded for:

UNIT 6: AGGREGATE DEMAND

1-Aggregate Demand is defined as:

32-The aggregate demand curve (ADC) shows the amount

UNIT 7: OPEN ECONOMY &

1-In open economy, the aggregate demand is:

11-In Mundell-Fleming model, LM slopes:

1-According to sticky wage model, the behavior of

5-The workers’ misperception model is concerned

9-Each supplier of the economy according to

22-The adaptive expectations are based upon the fact

25-According to Rational Expectation Theory,

1-An economy, according to Keynesians, is

UNIT10: GOVT. DEBT AND