MTTC MTTC Economics 5 — Questions and Answers
Question 1: Which trade policy instrument involves placing a tax on imported goods to raise their price and protect domestic producers?
- Import quota
- Tariff (Correct answer)
- Embargo
- Subsidy
Correct 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.
Question 2: The crowding-out effect suggests that increased government borrowing may:
- Stimulate private investment by raising consumer confidence
- Reduce private investment by driving up interest rates (Correct answer)
- Automatically increase tax revenues through economic growth
- Lower the trade deficit by reducing imports
Correct 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.
Question 3: A country running a current account deficit must simultaneously be running:
- A government budget deficit
- A capital and financial account surplus (Correct answer)
- A trade surplus in services
- A surplus in its official reserve transactions
Correct 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.
Question 4: Which of the following best illustrates the concept of moral hazard?
- A buyer researches a car thoroughly before purchasing
- A homeowner takes fewer fire precautions after buying full fire insurance (Correct answer)
- A bank charges higher interest rates to riskier borrowers
- A government regulates food safety standards
Correct 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.
Question 5: Which economic school of thought argues that market economies are inherently self-correcting and that government intervention is generally counterproductive?
- Keynesian economics
- Classical/neoclassical economics (Correct answer)
- Post-Keynesian economics
- Institutional economics
Correct 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.
Question 6: When calculating GDP using the expenditure approach, which formula is correct?
- GDP = C + I + G + NX (Correct answer)
- GDP = Wages + Rent + Interest + Profit
- GDP = Total Revenue − Cost of Intermediate Goods
- GDP = National Income + Depreciation − Subsidies
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.
Question 7: Price elasticity of demand is defined as:
- The change in quantity demanded divided by the change in price
- The percentage change in quantity demanded divided by the percentage change in price (Correct answer)
- The ratio of consumer surplus to total revenue
- The slope of the demand curve at any given point
Correct 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.
MTTC MTTC Economics 5
Which trade policy instrument involves placing a tax on imported goods to raise their price and protect domestic producers?