CAA Business Finance & Economics 1 — Questions and Answers
Question 1: What is the primary relationship between bond prices and interest rates?
- They move in the same direction
- They move in opposite directions (Correct answer)
- They are unrelated to each other
- Bond prices affect interest rates but not vice versa
Correct answer: They move in opposite directions
When interest rates rise, existing bond prices fall because new bonds offer higher yields, making existing bonds less attractive to investors.
Question 2: In a perfectly competitive market, which of the following best describes the long-run equilibrium?
- Firms earn positive economic profits
- Firms earn negative economic profits
- Firms earn zero economic profits (Correct answer)
- Firms earn maximum accounting profits
Correct answer: Firms earn zero economic profits
In long-run competitive equilibrium, free entry and exit drive economic profits to zero as firms enter when profits are positive and exit when losses occur.
Question 3: Which of the following best describes 'opportunity cost'?
- The total monetary expenditure of a decision
- The value of the next best alternative foregone (Correct answer)
- The sunk cost of a previous investment
- The accounting profit derived from a decision
Correct answer: The value of the next best alternative foregone
Opportunity cost is the value of the best alternative you give up when making a choice, capturing the true economic cost of any decision.
Question 4: What happens to the demand for a good when the price of a complementary good increases?
- Demand for the good increases
- Demand for the good decreases (Correct answer)
- Demand for the good remains unchanged
- Supply of the good increases
Correct answer: Demand for the good decreases
Complementary goods are consumed together, so when the price of one rises and its demand falls, the demand for the complementary good also decreases.
Question 5: The money multiplier in a fractional reserve banking system is equal to:
- The total deposits in the banking system
- The reciprocal of the reserve requirement ratio (Correct answer)
- The interest rate set by the central bank
- The reserve requirement multiplied by deposits
Correct answer: The reciprocal of the reserve requirement ratio
The money multiplier equals 1 divided by the reserve requirement ratio, indicating how much the total money supply expands per dollar of monetary base injected.
Question 6: What does a country's Gross Domestic Product (GDP) measure?
- Total income earned by citizens regardless of where they live
- Total market value of final goods and services produced within its borders in a period (Correct answer)
- Total exports minus imports over a fiscal year
- Total government expenditures on public services
Correct answer: Total market value of final goods and services produced within its borders in a period
GDP measures the total market value of all final goods and services produced within a country's geographic borders during a specific time period.
Question 7: The law of diminishing marginal returns states that, as more units of a variable input are added to fixed inputs:
- Total output will eventually decline to zero
- The additional output from each extra unit of input will eventually decrease (Correct answer)
- Prices will fall proportionally as production increases
- Total costs rise at a constant rate with output
Correct answer: The additional output from each extra unit of input will eventually decrease
As more of a variable input is combined with fixed inputs, the marginal product of that input eventually decreases even though total output may still rise.
CAA Business Finance & Economics 1
What is the primary relationship between bond prices and interest rates?