BSocSc Bachelor of Social Science Bachelor of Social Science Economics 4 — Questions and Answers
Question 1: Which concept explains why nations benefit from trade even when one country is more efficient at producing everything?
- Absolute advantage
- Comparative advantage (Correct answer)
- Terms of trade
- Factor endowments
Correct answer: Comparative advantage
Comparative advantage shows that a country gains from specializing in goods it produces at lower opportunity cost, even if another country is absolutely more efficient at all goods.
Question 2: When calculating GDP using the expenditure approach, which component is subtracted?
- Government spending
- Exports
- Imports (Correct answer)
- Investment
Correct answer: Imports
Imports are subtracted in the expenditure formula (GDP = C + I + G + NX) because they represent spending on foreign-produced goods, not domestic output.
Question 3: The concept of 'moral hazard' in economics refers to:
- Firms colluding to raise prices
- Risky behavior encouraged by being insulated from consequences (Correct answer)
- Government corruption in public spending
- Worker shirking due to low wages
Correct answer: Risky behavior encouraged by being insulated from consequences
Moral hazard arises when individuals or firms take on greater risk because they do not bear the full cost of that risk, such as when insured parties are less careful.
Question 4: Stagflation, which challenged Keynesian economics in the 1970s, refers to the simultaneous occurrence of:
- High growth and low unemployment
- High inflation and high unemployment (Correct answer)
- Deflation and rising GDP
- Trade surpluses and currency appreciation
Correct answer: High inflation and high unemployment
Stagflation — stagnant growth plus inflation — contradicted the traditional Phillips Curve trade-off and prompted reconsideration of demand-management policies.
Question 5: In behavioral economics, 'loss aversion' means people:
- Prefer certain gains over uncertain but higher expected gains
- Feel losses more strongly than equivalent gains (Correct answer)
- Avoid all financial risk regardless of reward
- Overestimate the probability of rare events
Correct answer: Feel losses more strongly than equivalent gains
Kahneman and Tversky found that the pain of losing a given amount is roughly twice as powerful as the pleasure of gaining the same amount.
Question 6: Which of the following best describes 'frictional unemployment'?
- Unemployment caused by an economic recession
- Short-term unemployment while workers search for new jobs (Correct answer)
- Unemployment due to skills mismatch with available jobs
- Unemployment caused by seasonal industry changes
Correct answer: Short-term unemployment while workers search for new jobs
Frictional unemployment is temporary and arises naturally as workers transition between jobs, reflecting normal job search in a dynamic economy.
Question 7: A tariff on imported steel primarily benefits which group while harming which other?
- Domestic steel consumers; domestic steel producers
- Foreign steel producers; domestic manufacturers
- Domestic steel producers; domestic manufacturers using steel (Correct answer)
- Government revenue; foreign exporters equally
Correct answer: Domestic steel producers; domestic manufacturers using steel
A steel tariff raises prices for imported steel, helping domestic steel producers compete, but raises costs for domestic manufacturers who use steel as an input.
BSocSc Bachelor of Social Science Bachelor of Social Science Economics 4
Which concept explains why nations benefit from trade even when one country is more efficient at producing everything?