MTTC Economics Flashcards

According to the quantity theory of money (MV = PQ), if money supply doubles and velocity and real output remain constant, what happens to the price level?

Answer: It doubles

With V and Q constant, doubling M must double P to maintain the equation MV = PQ, illustrating the monetarist view that money supply growth drives inflation.

A progressive tax system is one in which:

Answer: The tax rate increases as income increases

In a progressive tax system, higher-income earners pay a larger percentage of their income in taxes, as the marginal tax rate rises with income.

Which of the following would shift the aggregate demand curve to the right?

Answer: A decrease in interest rates

Lower interest rates reduce borrowing costs, stimulating consumer spending and business investment, which increases aggregate demand and shifts the AD curve rightward.

In the labor market, the wage rate is most likely to rise when:

Answer: Labor demand increases while labor supply remains constant

When demand for labor rises (e.g., due to increased product demand) without a corresponding increase in labor supply, firms bid up wages to attract workers.

Which concept explains why consumers buy more of a good as its price falls, holding income constant, because the good becomes relatively cheaper compared to substitutes?

Answer: Substitution effect

The substitution effect describes how consumers switch toward a good that has become relatively cheaper compared to substitute goods when its price falls.

Gross Domestic Product (GDP) measures:

Answer: The total market value of all final goods and services produced within a country's borders in a given period

GDP counts the market value of all final goods and services produced within a nation's geographic borders during a specific time period, regardless of producer nationality.

When a firm's marginal revenue equals its marginal cost, the firm is:

Answer: Maximizing its profit

The profit-maximizing rule states that a firm should produce at the output level where MR = MC, since any additional unit beyond this point costs more to produce than it generates in revenue.