MTTC MTTC Economics 3

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?

Accepted Answer

It doubles

Answer

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:

Accepted Answer

The tax rate increases as income increases

Answer

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?

Accepted Answer

A decrease in interest rates

Answer

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:

Accepted Answer

Labor demand increases while labor supply remains constant

Answer

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?

Accepted Answer

Substitution effect

Answer

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

MTTC Test Practice Test

MTTC Test Practice Test

MTTC MTTC Economics 3