AA Economics Theories 3

Question 1

The Austrian Business Cycle Theory attributes booms and busts primarily to:

Accepted Answer

Artificially low interest rates set by central banks

Answer

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?

Accepted Answer

Marginal utility

Answer

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:

Accepted Answer

Knowledge, innovation, and human capital

Answer

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:

Accepted Answer

Double the price level

Answer

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:

Accepted Answer

Increased risk-taking because someone else bears the cost

Answer

Moral hazard occurs when a party takes on more risk because another party (e.g., an insurer) absorbs the consequences.

AA - Associate of Arts Practice Test