Bcom Bachelor of Commerce Bachelor of Commerce: Economics 4 — Questions and Answers
Question 1: According to the quantity theory of money (MV = PQ), if the velocity of money and real output are constant, doubling the money supply will:
- Double real GDP
- Halve the price level
- Double the price level (Correct answer)
- Have no effect on prices
Correct answer: Double the price level
With V and Q fixed, any increase in M must be fully absorbed by a proportional rise in P.
Question 2: A price floor set below the market equilibrium price will:
- Create a surplus
- Create a shortage
- Have no effect on the market (Correct answer)
- Reduce the equilibrium price
Correct answer: Have no effect on the market
A price floor below equilibrium is non-binding because the market price already clears the market above that floor.
Question 3: The income effect of a wage increase states that:
- Higher wages encourage workers to supply more labor
- Higher wages may reduce hours worked as workers can achieve target income with fewer hours (Correct answer)
- Higher wages always reduce the supply of labor
- Higher wages have no effect on leisure preferences
Correct answer: Higher wages may reduce hours worked as workers can achieve target income with fewer hours
The income effect suggests that as wages rise, workers may choose more leisure, potentially bending the labor supply curve backward.
Question 4: In game theory, a Nash Equilibrium occurs when:
- All players cooperate to maximize total welfare
- Each player's strategy is the best response to the other players' strategies (Correct answer)
- One player maximizes payoff regardless of rivals' actions
- Players randomize strategies to keep rivals guessing
Correct answer: Each player's strategy is the best response to the other players' strategies
A Nash Equilibrium is a stable state where no player can improve their payoff by unilaterally changing their strategy.
Question 5: Which of the following is NOT included in the calculation of GDP using the expenditure approach?
- Government purchases
- Net exports
- Transfer payments (Correct answer)
- Business investment
Correct answer: Transfer payments
Transfer payments (e.g., Social Security, unemployment benefits) are excluded from GDP because they do not represent payment for new goods or services.
Question 6: In macroeconomics, the term 'stagflation' describes a situation of:
- High inflation combined with rapid economic growth
- Declining prices combined with stagnant wages
- High inflation combined with high unemployment and slow growth (Correct answer)
- Deflation combined with rising unemployment
Correct answer: High inflation combined with high unemployment and slow growth
Stagflation, experienced in the 1970s, is the simultaneous occurrence of high inflation and high unemployment, challenging traditional Keynesian remedies.
Question 7: The concept of 'deadweight loss' in economics refers to:
- The tax revenue collected by the government
- The loss of economic efficiency when equilibrium is not achieved (Correct answer)
- The cost of enforcing property rights
- The reduction in consumer surplus due to income taxes
Correct answer: The loss of economic efficiency when equilibrium is not achieved
Deadweight loss is the reduction in total surplus that occurs when a market produces more or less than the socially optimal quantity.
Bcom Bachelor of Commerce Bachelor of Commerce: Economics 4
According to the quantity theory of money (MV = PQ), if the velocity of money and real output are constant, doubling the money supply will: