BSocSc Bachelor of Social Science Bachelor of Social Science Economics 3 — Questions and Answers
Question 1: If the cross-price elasticity of demand between two goods is negative, the goods are best described as:
- Substitutes
- Complements (Correct answer)
- Inferior goods
- Giffen goods
Correct answer: Complements
Negative cross-price elasticity means a rise in one good's price reduces demand for the other, indicating the goods are complements used together.
Question 2: The multiplier effect in macroeconomics suggests that an initial increase in government spending leads to:
- A proportionally smaller increase in national income
- A proportionally larger increase in national income (Correct answer)
- No change in national income
- A decrease in consumer spending
Correct answer: A proportionally larger increase in national income
Each dollar of government spending cycles through the economy as recipients spend a portion, amplifying the total impact on national income beyond the initial injection.
Question 3: Which of the following is an example of a negative externality?
- A beekeeper whose bees pollinate neighboring farms
- A factory emitting pollution into a river used by fishers (Correct answer)
- A homeowner planting flowers that beautify the neighborhood
- A researcher publishing findings that others use freely
Correct answer: A factory emitting pollution into a river used by fishers
Factory pollution imposes costs on third parties (fishers) who are not part of the production transaction, making it a classic negative externality.
Question 4: In long-run equilibrium under perfect competition, economic profit is:
- Maximized above normal returns
- Zero, as entry eliminates excess profits (Correct answer)
- Negative due to price wars
- Determined by the government
Correct answer: Zero, as entry eliminates excess profits
Free entry of firms in perfect competition drives prices down to average total cost, eliminating economic profit in the long run.
Question 5: The Phillips Curve illustrates a short-run trade-off between:
- Inflation and unemployment (Correct answer)
- GDP growth and government debt
- Savings rates and investment
- Trade deficits and exchange rates
Correct answer: Inflation and unemployment
The original Phillips Curve depicted an inverse relationship where lower unemployment was associated with higher inflation and vice versa.
Question 6: Purchasing Power Parity (PPP) theory predicts that in the long run, exchange rates will adjust so that:
- Trade balances equal zero
- Identical goods cost the same in different countries when expressed in a common currency (Correct answer)
- Interest rates equalize across countries
- Capital flows are balanced
Correct answer: Identical goods cost the same in different countries when expressed in a common currency
PPP holds that exchange rates should reflect relative price levels, so the same basket of goods costs the same internationally once converted to one currency.
Question 7: A monopsony in the labor market is characterized by:
- Many employers competing for workers
- A single employer with market power over wages (Correct answer)
- Unions setting industry-wide wages
- Government as the sole employer
Correct answer: A single employer with market power over wages
A monopsony is a market with a single buyer — in labor markets this means one dominant employer can pay wages below competitive levels.
BSocSc Bachelor of Social Science Bachelor of Social Science Economics 3
If the cross-price elasticity of demand between two goods is negative, the goods are best described as: