AA Economics Theories 3 — Questions and Answers
Question 1: The Austrian Business Cycle Theory attributes booms and busts primarily to:
- Irrational consumer behavior
- Artificially low interest rates set by central banks (Correct answer)
- Sudden technology shocks
- Government fiscal deficits
Correct answer: Artificially low interest rates set by central banks
Austrian economists (Mises, Hayek) argue that central bank credit expansion distorts investment, creating unsustainable booms that end in busts.
Question 2: Which concept describes the additional utility gained from consuming one more unit of a good?
- Total utility
- Marginal utility (Correct answer)
- Consumer surplus
- Diminishing returns
Correct answer: Marginal utility
Marginal utility is the change in total satisfaction from consuming one additional unit, and it typically declines as consumption increases.
Question 3: Endogenous growth theory, associated with Paul Romer, emphasizes that long-run growth is driven by:
- Population growth alone
- Knowledge, innovation, and human capital (Correct answer)
- Physical capital accumulation only
- Natural resource discoveries
Correct answer: Knowledge, innovation, and human capital
Romer's model shows that ideas and technological progress, generated inside the economy, sustain long-run growth without diminishing returns.
Question 4: According to the quantity theory of money (MV = PQ), if velocity and real output are constant, doubling the money supply will:
- Double real GDP
- Double the price level (Correct answer)
- Halve the interest rate
- Halve unemployment
Correct answer: Double the price level
With V and Q fixed, the equation of exchange implies price level P moves proportionally with money supply M.
Question 5: The concept of 'moral hazard' in economics refers to:
- Unethical pricing by monopolists
- Increased risk-taking because someone else bears the cost (Correct answer)
- Consumers hiding private information from sellers
- Firms colluding to set prices
Correct answer: Increased risk-taking because someone else bears the cost
Moral hazard occurs when a party takes on more risk because another party (e.g., an insurer) absorbs the consequences.
Question 6: In game theory, a Nash Equilibrium is a situation where:
- All players maximize joint payoffs
- No player can improve their outcome by changing strategy alone (Correct answer)
- The government sets optimal rules for competition
- Players cooperate to achieve the socially best outcome
Correct answer: No player can improve their outcome by changing strategy alone
Named after John Nash, this equilibrium exists when each player's strategy is the best response to the strategies of all others.
Question 7: The Phillips Curve originally described a trade-off between:
- Inflation and economic growth
- Unemployment and inflation (Correct answer)
- Interest rates and investment
- Trade deficits and exchange rates
Correct answer: Unemployment and inflation
A.W. Phillips observed an inverse relationship between unemployment and wage inflation in UK data, later generalized to price inflation.
AA Economics Theories 3
The Austrian Business Cycle Theory attributes booms and busts primarily to: