Multiple Choice Questions (MCQs) on Macro Economics for General Awareness and GK preparation for competitive exams like SSC, Railways, NDA, CDS, AFCAT, CAPF, UPSC, and State PSC.
MCQ on Macro Economics
Which among the following statements is not true when there is an increase in interest rate in an economy?
(a) increase in saving
(b) decrease in loan
(c) increase in production cost
(d) increase in capital return
Solution: (d)
Interest rate increase the cost of borrowing, which results in lesser investment activity and the purchase of consumer durables. In a low interest-rate environment, shares become a more attractive buy, raising households’ financial assets. This may also contribute to higher consumer spending, and makes companies’ investment projects more attractive. Lower interest rates also tend to cause currencies to depreciate: Demand for domestic goods rises when imported goods become more expensive. All of these factors raise output and employment as well as investment and consumer spending.
Personal disposable income is:
(a) always equal to personal income.
(b) always more than personal income.
(c) equal to personal income minus direct taxes paid by the household.
(d) equal to personal income minus indirect taxes.
Solution: (c)
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings.
Investment is equal to:
(a) gross total of all types of physical capital assets
(b) gross total of all capital assets minus wear and tear
(c) the stock of plants, machines, and equipment
(d) None of the above
Solution: (b)
Capital formation is frequently thought of as a measure of total “investment”, in the sense of that portion of capital actually used for investment purposes and not held as savings or consumed. But in fact, in national accounts, the concept of gross capital formation refers only to the accounting value of the “additions of non-financial produced assets to the capital stock less the disposals of these assets”. “Investment” is a broader concept that includes investment in all kinds of capital assets, whether physical property or financial assets. The net valuation method views “depreciation” as the compensation for the cost of replacing fixed equipment used up or worn out, which must be deducted from the total investment volume to obtain a measure of the “real” value of investments; the depreciation write-off compensates and cancels out the loss in capital value of assets used due to wear & tear, obsolescence, etc.
‘Marginal efficiency of capital is
(a) expected rate of return on new investment
(b) expected rate of return of existing investment
(c) difference between the rate of profit and the rate of interest
(d) value of output per unit of capital invested
Solution: (a)
The volume of investment depend upon the following two factors: (a) rate of interest; and (b) marginal efficiency of capital. Before investing the money a businessman compares interest with the rate of marginal efficiency capital. If they expect that rate of profit will be greater than the rate of interest, then they invest the money otherwise not. The expected rate of return on capital is called the marginal efficiency of capital. In other words, marginal efficiency of capital is a return on investment which is based partly on expectations of future yields and partly on the actual price of the capital good concerned.
Capital output ratio of a commodity measures
(a) it’s per unit cost of production
(b) the amount of capital invested per unit of output
(c) the ratio of capital depreciation to the quantity of output
(d) the ratio of working capital employed to the quantity of output
Solution: (b)
Capital Output Ratio is the ratio of capital used to produce an output over a period of time. This ratio has a tendency to be high when capital is cheap as compared to other inputs. For instance, a country with abundant natural resources can use its resources in lieu of capital to boost its output; hence the resulting capital output ratio is low. The capital output ratio tends to increase if the capital available in a country is cheaper than the other inputs. Therefore, the countries that are rich in natural resources have a low capital output ratio. This is because they can easily substitute the capital with natural resources in order to increase the output. When countries use their natural resources instead of capital then COR reduces.
The best measure to assess a country’s economic growth is
(a) per capita income at constant prices
(b) per capita income at current prices
(c) gross domestic product at current prices
(d) gross national product at current prices
Solution: (a)
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. Per capita income or average income or income per person is the mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross National Income) and dividing it by the total population. It does not attempt to reflect the distribution of income or wealth. Per capita income is often used as average income, a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a commonly used international currency such as the Euro or United States dollar, and is useful because it is widely known, easily calculated from readily-available GDP and population estimates, and produces a useful statistic for comparison.
According to Keynesian theory of income determination, at full employment, a fall in aggregate demand causes
(a) a fall in prices of output and resources
(b) a fall in real gross National product and employment
(c) a rise in real gross National product and investment
(d) a rise in prices of output and resources
Solution: (a)
In 1936, John Maynard Keynes published the book “The General Theory of Employment, Interest and Money to explain the prolonged and massive unemployment in the Great Depression. The book criticises the classical model. Keynes turns Say’s Law on its head, arguing that aggregate demand determines national output and employment in the economy. In this sense, demand creates its own supply. Unlike the Classical economists, Keynes believes that prices and wages are rigid, especially in the downward direction and hence the economy is not a selfcorrecting mechanism. In other words, Keynes believes that as prices and wages are rigid, the economy can stay at a below-full-employment equilibrium. Suppose that the economy is at the full-employment equilibrium. Further suppose that aggregate demand falls. When this happens, national output will fall below the full-employment level which will lead to unemployment resulting in a downward pressure on wages.
The difference between the GNP and the NNP is equal to the
(a) consumer expenditure on durable goods
(b) direct tax revenue
(c) indirect tax revenue
(d) capital depreciation
Solution: (d)
Depreciation refers to two very different but related concepts: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle). The difference between the GNP and NNP is equal to capital depreciation. It is the wearing out, breaking down, or technological obsolescence.
Which of the following is not required while computing Gross National Product (GNP)?
(a) Net foreign investment
(b) Private investment
(c) Per capita income of citizens
(d) Purchase of goods by government
Solution: (c)
Gross National Product (GNP) is the market value of all products and services produced in one year by labour and property supplied by the residents of a country. Basically, GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. GNP measures the value of goods and services that the country’s citizens produced regardless of their location.
Which of the following results by dividing national income by the size of the population?
(a) Per capita income
(b) Subsistence level
(c) Subsistence expenditure
(d) Per capita production
Solution: (a)
Per capita income or average income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross National Income) and dividing it by the total population
