Bcom Bachelor of Commerce Bachelor of Commerce: Economics 5 — Questions and Answers
Question 1: The Fisher Effect states that nominal interest rates rise one-for-one with:
- Real GDP growth
- Expected inflation (Correct answer)
- Money supply growth
- Government spending
Correct answer: Expected inflation
The Fisher Effect: nominal rate = real rate + expected inflation, so higher expected inflation translates directly into higher nominal interest rates.
Question 2: Which of the following best describes the concept of 'price discrimination'?
- Setting one uniform price for all customers to maximize market share
- Charging different prices to different customers for the same good based on willingness to pay (Correct answer)
- Reducing prices below cost to drive out competitors
- Adjusting prices based on changes in input costs
Correct answer: Charging different prices to different customers for the same good based on willingness to pay
Price discrimination allows a firm to capture more consumer surplus by charging each consumer group a price closer to their reservation price.
Question 3: Automatic stabilizers in fiscal policy include:
- Discretionary tax cuts approved by Congress
- Progressive income taxes and unemployment insurance (Correct answer)
- Central bank interest rate adjustments
- Balanced budget requirements
Correct answer: Progressive income taxes and unemployment insurance
Automatic stabilizers like progressive taxes and unemployment benefits automatically increase or decrease without legislative action, dampening business cycle swings.
Question 4: The Laffer Curve illustrates the relationship between:
- Tax rates and government tax revenue (Correct answer)
- Interest rates and investment spending
- Money supply and inflation
- Trade policy and export levels
Correct answer: Tax rates and government tax revenue
The Laffer Curve shows that tax revenue can be maximized at an intermediate tax rate; rates too high or too low reduce revenue.
Question 5: When a firm's average total cost is declining as output increases, marginal cost must be:
- Greater than average total cost
- Equal to average total cost
- Less than average total cost (Correct answer)
- Rising
Correct answer: Less than average total cost
ATC falls when MC is below it, because each additional unit brings the average down — a mathematical pull-down effect.
Question 6: In international finance, 'purchasing power parity' (PPP) suggests that exchange rates should adjust so that:
- Trade deficits are eliminated over time
- An identical basket of goods costs the same in different countries when expressed in a common currency (Correct answer)
- Interest rates are equalized across countries
- Capital flows balance trade flows
Correct answer: An identical basket of goods costs the same in different countries when expressed in a common currency
PPP holds that in the long run, exchange rates should equalize the price of a common basket of goods across countries.
Question 7: Which of the following best explains why public goods lead to market failure?
- They are too expensive for private firms to produce profitably
- They are non-excludable and non-rival, leading to free-rider problems (Correct answer)
- They generate negative externalities that harm third parties
- Government regulation prevents private firms from supplying them
Correct answer: They are non-excludable and non-rival, leading to free-rider problems
Because public goods are non-excludable, individuals can consume them without paying, causing under-provision by the private market.
Bcom Bachelor of Commerce Bachelor of Commerce: Economics 5
The Fisher Effect states that nominal interest rates rise one-for-one with: