MTTC MTTC Economics 3 — Questions and Answers
Question 1: 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?
- It falls by half
- It remains constant
- It doubles (Correct answer)
- It quadruples
Correct 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.
Question 2: A progressive tax system is one in which:
- Everyone pays the same dollar amount in taxes
- The tax rate decreases as income increases
- The tax rate increases as income increases (Correct answer)
- Taxes are collected at the point of sale
Correct 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.
Question 3: Which of the following would shift the aggregate demand curve to the right?
- An increase in consumer saving rates
- A decrease in government spending
- An appreciation of the domestic currency
- A decrease in interest rates (Correct answer)
Correct 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.
Question 4: In the labor market, the wage rate is most likely to rise when:
- The supply of labor increases faster than demand
- Labor demand increases while labor supply remains constant (Correct answer)
- The minimum wage is below the equilibrium wage
- Automation reduces the need for workers
Correct 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.
Question 5: 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?
- Income effect
- Substitution effect (Correct answer)
- Diminishing marginal utility
- Price elasticity of demand
Correct 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.
Question 6: Gross Domestic Product (GDP) measures:
- The total income of a country's citizens regardless of where they work
- The total market value of all final goods and services produced within a country's borders in a given period (Correct answer)
- A country's total wealth including financial assets and real property
- The purchasing power of a country's currency relative to trading partners
Correct 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.
Question 7: When a firm's marginal revenue equals its marginal cost, the firm is:
- Maximizing its revenue
- Minimizing its costs
- Maximizing its profit (Correct answer)
- Operating at the break-even point
Correct 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.
MTTC MTTC Economics 3
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?