IFC Understanding Economic Principles 5

Question 1

Which economic theory argues that markets naturally self-correct and government intervention in the economy is generally unnecessary?

Accepted Answer

Classical economics

Answer

Classical economics holds that flexible prices and wages allow markets to clear efficiently, making recessions self-correcting without government intervention.

Question 2

An increase in Canada's money supply, all else equal, would most likely lead to:

Accepted Answer

Lower interest rates and potential inflationary pressure

Answer

Expanding the money supply typically lowers interest rates in the short run, stimulating borrowing and spending, but risks generating inflationary pressure over time.

Question 3

In analyzing economic cycles, which asset class has historically acted as a leading indicator by typically declining before a recession begins?

Accepted Answer

Equities (common shares)

Answer

Equity markets are considered leading indicators because falling stock prices reflect investors' expectations of lower future corporate earnings ahead of an actual economic downturn.

Question 4

The 'terms of trade' for a country refers to:

Accepted Answer

The ratio of export prices to import prices

Answer

A country's terms of trade measures how many imports it can acquire for a given quantity of exports; an improvement means exports buy more imports.

Question 5

Which scenario demonstrates the 'paradox of thrift' identified by John Maynard Keynes?

Accepted Answer

When all households increase saving simultaneously, total income falls, reducing aggregate saving

Answer

The paradox of thrift holds that individually prudent saving, if adopted collectively, reduces total spending, lowering income and potentially leaving society no better off in aggregate.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Understanding Economic Principles 5