CEA Economic Theory & Principles 4

Question 1

According to the theory of comparative advantage, trade between two countries is beneficial when:

Accepted Answer

Each country specializes in goods with lower opportunity costs

Answer

Comparative advantage holds that countries gain from trade by specializing in goods they produce at relatively lower opportunity cost.

Question 2

The velocity of money (V) in the Quantity Theory of Money equation MV = PQ represents:

Accepted Answer

The average number of times a unit of currency is spent in a period

Answer

Velocity measures how frequently money circulates through the economy to facilitate transactions.

Question 3

Which of the following best describes 'moral hazard' in economics?

Accepted Answer

Risk-taking behavior that increases when one party is insulated from consequences

Answer

Moral hazard arises when insulation from risk (e.g., through insurance) leads to riskier behavior.

Question 4

A rightward shift in the aggregate supply curve most likely results in:

Accepted Answer

Lower price levels and higher output

Answer

An increase in aggregate supply shifts the AS curve right, reducing the price level and increasing real GDP output.

Question 5

The 'crowding out' effect refers to:

Accepted Answer

Government spending reducing private investment by raising interest rates

Answer

When government borrows to fund spending, it competes for loanable funds, pushing up interest rates and reducing private investment.

(CEA) Certified Economic Analyst Practice Test