Economics-Test-Set-19

Economics Test - 19

Question 1: What is the Kaldor-Hicks efficiency criterion used for?

a) To measure Pareto efficiency in a market
b) To determine if an economic decision improves overall welfare, even if compensation is not provided
c) To evaluate the utility derived from public goods
d) To calculate the marginal cost of production

Answer: b) To determine if an economic decision improves overall welfare, even if compensation is not provided

Explanation: Kaldor-Hicks efficiency allows for policy evaluation where gains outweigh losses, even if losers are not compensated directly, unlike Pareto efficiency which requires no one to be worse off.

Question 2: In the Solow Growth Model, what is the primary determinant of long-term economic growth?

a) Capital accumulation
b) Population growth
c) Technological progress
d) Government spending

Answer: c) Technological progress

Explanation: In the Solow Growth Model, long-term growth is driven by exogenous technological progress, as capital and labor face diminishing returns.

Question 3: What does the term crowding out refer to in fiscal policy?

a) An increase in private investment due to government spending
b) A reduction in private sector investment caused by increased government borrowing
c) The dominance of public enterprises over private firms
d) A fall in aggregate demand due to high interest rates

Answer: b) A reduction in private sector investment caused by increased government borrowing

Explanation: Crowding out occurs when government borrowing raises interest rates, making it costly for the private sector to borrow and invest.

Question 4: What is the primary cause of stagflation in an economy?

a) Increased government expenditure
b) Simultaneous occurrence of high inflation and unemployment
c) Rapid technological advancements
d) A surplus in the balance of payments

Answer: b) Simultaneous occurrence of high inflation and unemployment

Explanation: Stagflation is typically caused by supply shocks, such as a sudden increase in oil prices, which raise production costs and reduce output, leading to inflation and unemployment.

Question 5: Which of the following equations represents the Taylor Rule in monetary policy?

a) $i_t = r_t + \pi_t$
b) $i_t = \pi_t + 0.5(\pi_t - \pi^*) + 0.5(y_t - y^*) + r_t$
c) $i_t = (1 - \beta)(r_t) + \beta(\pi_t)$
d) $i_t = \pi_t \times r_t$

Answer: b) $i_t = \pi_t + 0.5(\pi_t - \pi^*) + 0.5(y_t - y^*) + r_t$
Explanation: The Taylor Rule is a guideline for setting interest rates based on inflation ($\pi_t$), output gap ($y_t - y^*$), and the equilibrium real interest rate ($r_t$).

Question 6: What does the Laffer Curve demonstrate?

a) The relationship between tax rates and government revenue
b) The trade-off between inflation and unemployment
c) The diminishing marginal returns of labor
d) The efficiency of supply-side economics

Answer: a) The relationship between tax rates and government revenue

Explanation: The Laffer Curve suggests that at a certain point, increasing tax rates will decrease government revenue as economic activity diminishes.

Question 7: Which market structure is characterized by contestable markets?
a) Monopoly
b) Oligopoly
c) Perfect competition
d) Monopolistic competition

Answer: b) Oligopoly
Explanation: A contestable market exists in oligopolistic structures where there are low entry and exit barriers, making it easy for potential competition to influence incumbent behavior.

Question 8: In game theory, what is the Nash Equilibrium?

a) A situation where one player wins and the other loses
b) A state where no player can improve their payoff by unilaterally changing their strategy
c) The optimal strategy that maximizes total welfare
d) A zero-sum game solution where all players break even

Answer: b) A state where no player can improve their payoff by unilaterally changing their strategy
Explanation: In a Nash Equilibrium, each player\u2019s strategy is optimal given the strategies of the other players, and no one benefits from deviating individually.

Question 9: Which of the following is a core assumption of the Heckscher-Ohlin Trade Model?

a) Economies experience constant returns to scale
b) Comparative advantage arises from differences in factor endowments
c) Countries with similar resource endowments trade more with each other
d) Trade occurs only under perfect competition

Answer: b) Comparative advantage arises from differences in factor endowments
Explanation: The Heckscher-Ohlin model posits that countries export goods that intensively use their abundant factors of production.

Question 10: What is the Fisher Equation in economics?

a) $i = r + \pi$
b) $i = r - \pi$
c) $r = i + \pi$
d) $r = i \\times \pi$

Answer: a) $i = r + \pi$
Explanation: The Fisher Equation relates nominal interest rates ($i$) to real interest rates ($r$) and expected inflation ($\pi$).