Bcom Bachelor of Commerce Bachelor of Commerce: Economics 2 — Questions and Answers
Question 1: When the price of a good rises and consumers buy more of it because it signals higher quality, this is an example of:
- Giffen good behavior
- Veblen good behavior (Correct answer)
- Normal good behavior
- Inferior good behavior
Correct answer: Veblen good behavior
A Veblen good is one whose demand increases as price rises due to its status or prestige appeal.
Question 2: If nominal GDP is $500 billion and the GDP deflator is 125, what is the real GDP?
- $400 billion (Correct answer)
- $625 billion
- $375 billion
- $500 billion
Correct answer: $400 billion
Real GDP = (Nominal GDP / GDP deflator) × 100 = (500 / 125) × 100 = $400 billion.
Question 3: The concept of 'crowding out' in fiscal policy refers to:
- Government spending reducing net exports
- Government borrowing raising interest rates and reducing private investment (Correct answer)
- Higher taxes reducing consumer spending
- Increased imports crowding out domestic production
Correct answer: Government borrowing raising interest rates and reducing private investment
Crowding out occurs when government borrowing drives up interest rates, discouraging private sector investment.
Question 4: Which market structure is characterized by a few large firms, significant barriers to entry, and strategic interdependence?
- Monopolistic competition
- Perfect competition
- Oligopoly (Correct answer)
- Monopsony
Correct answer: Oligopoly
Oligopoly features a small number of dominant firms that must consider rivals' reactions when making decisions.
Question 5: In the Keynesian model, the multiplier effect means that an initial increase in government spending leads to:
- A proportionally smaller increase in GDP
- An equal increase in GDP
- A proportionally larger increase in GDP (Correct answer)
- No change in GDP due to crowding out
Correct answer: A proportionally larger increase in GDP
The multiplier amplifies initial spending because each dollar spent becomes income, which is re-spent in successive rounds.
Question 6: A negative externality causes the market equilibrium to produce:
- Too little of the good relative to the socially optimal level
- The socially optimal level of output
- Too much of the good relative to the socially optimal level (Correct answer)
- Zero output if the externality is large enough
Correct answer: Too much of the good relative to the socially optimal level
Because producers ignore external costs, market output exceeds the socially efficient quantity with negative externalities.
Question 7: Which of the following best describes the concept of moral hazard?
- Withholding information before a transaction to gain advantage
- Taking greater risks because someone else bears the cost of failure (Correct answer)
- The tendency for markets to collapse due to adverse selection
- A firm exploiting its monopoly power unethically
Correct answer: Taking greater risks because someone else bears the cost of failure
Moral hazard arises when one party changes behavior after an agreement because they are insulated from the consequences of that behavior.
Bcom Bachelor of Commerce Bachelor of Commerce: Economics 2
When the price of a good rises and consumers buy more of it because it signals higher quality, this is an example of: