MTTC Economics Flashcards

Which trade policy instrument involves placing a tax on imported goods to raise their price and protect domestic producers?

Answer: Tariff

A tariff is a tax levied on imported goods, raising their domestic price to protect domestic industries from foreign competition and generating government revenue.

The crowding-out effect suggests that increased government borrowing may:

Answer: Reduce private investment by driving up interest rates

When the government borrows heavily, it competes with private borrowers for loanable funds, driving up interest rates and reducing private sector investment.

A country running a current account deficit must simultaneously be running:

Answer: A capital and financial account surplus

By accounting identity, a current account deficit must be offset by a capital and financial account surplus, as foreign investors must finance the deficit by buying domestic assets.

Which of the following best illustrates the concept of moral hazard?

Answer: A homeowner takes fewer fire precautions after buying full fire insurance

Moral hazard occurs when a party takes greater risks because they do not bear the full consequences, such as a fully insured homeowner reducing precautions against loss.

Which economic school of thought argues that market economies are inherently self-correcting and that government intervention is generally counterproductive?

Answer: Classical/neoclassical economics

Classical and neoclassical economists believe flexible prices and wages allow markets to self-correct to full employment, making government intervention unnecessary and often harmful.

When calculating GDP using the expenditure approach, which formula is correct?

Answer: GDP = C + I + G + NX

The expenditure approach sums Consumer spending (C), Investment (I), Government purchases (G), and Net Exports (NX = Exports − Imports) to equal GDP.

Price elasticity of demand is defined as:

Answer: The percentage change in quantity demanded divided by the percentage change in price

Price elasticity of demand measures the responsiveness of quantity demanded to price changes, calculated as the percentage change in quantity demanded divided by the percentage change in price.