Micro Economics MCQ (GK Set-1) with Answers

The law of one price says that the prices which producers in different countries set for a particular product will be the same if the prices are expressed in the same currency using the current exchange rate

Purchasing power parity is a theory which says that says the total prices of any basket of products which apply in two different countries will be the same if the prices are expressed in the same currency using the current exchange rate.

Interest rate parity is a theory that the interest rates on similar assets in two countries will be the same.

The real exchange rate between two countries is the rate at which a particular basket of products produced in one country can be traded with a similar basket produced in another

The interest rate will initially fall but must in the end return to its initial value

Consumer spending and investment will initially increase, but must in the end return to their initial values.

Money demand must end up higher that it was initially.

The exchange rate must end up at its initial value.

There will be an initial increase in demand, probably government purchases and consumer spending

As demand increases, incomes and money demand start to increase, causing a rise in the interest rate and, in turn, in the exchange rate

The interest rate must end up at its initial value, so money demand must return to its original level

Output will end up higher than it was initially.

If the government wants an expansionary policy in which only consumer spending and government purchases increase, it should combine a fiscal expansion with a monetary expansion

In the event of a demand shock, fiscal policy is powerless to offset the change in demand

In the event of a demand shock, monetary policy can be used to offset the change in demand.

With either fiscal or monetary policy expansion, the exchange rate initially overshoots its new equilibrium value

The eurozone and the UK might not have well synchronized output gaps over time

Interest rate changes are thought to affect consumer spending less in the UK than in the eurozone

The UK might have to lend or give more money to eurozone countries which run into difficulty.

An oil price shock might affect the UK and the eurozone differently.