418) Suppose that at present an economy is at some distance from the equilibrium position where the IS and LM curves intersect, and is on neither the IS curve nor the LM curve. Which of the following most accurately states what will happen?

The economy will move rapidly to the equilibrium.

The economy will move rapidly to the point on the LM curve that applies to the current level of output, and then move slowly along the LM curve to the equilibrium

The economy will move rapidly to the point on the IS curve that applies to the current rate of interest, and then move slowly along the IS curve to the equilibrium

The economy will move slowly to the new equilibrium, and will not be on either the IS curve or the LM curve until it reaches this equilibrium

Answer is:

The economy will move rapidly to the point on the LM curve that applies to the current level of output, and then move slowly along the LM curve to the equilibrium

Micro Economics MCQ (GK Set-1) with Answers

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419) Suppose there is an initial increase in planned investment of 100 billion dollar a year, and suppose the multiplier is four. Which of the following statements is false?

By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict that the planned expenditure line will end up 100 billion dollar a year higher than it started.

By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict a rise in output of 400 billion dollar a year

By allowing for the fact that a rise in output will lead to higher interest rates, the IS-LM model will predict a rise in output of less than 400 billion dollar a year

The IS curve will shift to the right by less than 400 billion dollar a year

Answer is:

The IS curve will shift to the right by less than 400 billion dollar a year

420) Which of the following statements is false?

If spending is very responsive to changes in interest rates, and the demand for money is interest inelastic, then monetary policy tends to be more powerful than fiscal policy

If spending is not very responsive to changes in interest rates, and the demand for money is interest elastic, then fiscal policy tends to be more powerful than monetary policy

It might sometimes make sense for a government to combine an expansionary monetary policy with an expansionary fiscal policy

It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy

Answer is:

It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy

421) Which of the following is a shortcoming of the simple multiplier model that the AS-AD model overcomes? 1. The multiplier model ignores the fact that a rise in planned spending which causes a rise in output will also lead to a rise in incomes and the dem

Answer is:

Both 1 and 2

422) Which of the following arguments for a sloping AD curve is unconvincing?

A rise in the price level in a country will tend to lead to a fall in the real value of exports and a rise in the real value of imports

A rise in the price level in a country will lead to lower real spending because it will lead to lower real wealth

A rise in the price level in a country will reduce the real value of firms’ profits, causing them to reduce planned investment

A rise in the price level in a country will lead to lower real spending because it will lead to a higher interest rate

Answer is:

A rise in the price level in a country will reduce the real value of firms’ profits, causing them to reduce planned investment

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