introduction to macro economics section 3 MCQ Questions & Answers Detailed Explanation

Answer: (c)

Market Equilibrium is determined when the quantity demanded of a commodity becomes equal to the quantity supplied.

The price determined corresponding to market equilibrium is known as equilibrium price and the corresponding quantity is known as equilibrium quantity.

Answer: (d)

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 self-correcting 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, the national output will fall below the full-employment level which will lead to unemployment resulting in downward pressure on wages.

Answer: (b)

Primarily there are three methods of measuring national income. Which method is to be employed depends on the availability of data and purpose. The methods are product method, income method and expenditure method.

According to the production method, the total value of final goods and services produced in a country during a year is calculated at market prices.

According to this method, only the final goods and services are included and the intermediary goods and services are not taken into account.

In this method, National Output = National Expenditure (Aggregate Demand) = National Income.

Answer: (c)

As a general rule, saving is considered as a derivative of consumption. Developed economies have lower saving rates than developing countries because at the same income level, the level of consumption is higher in their cases.

Besides, as seen in the recent case of the United States, welfare programmes have been found to be responsible for falling saving rates.

Redistributing from young and future generations to older generations raises national consumption and lower national saving (The Concise Encyclopedia of Economics).

Answer: (a)

Capacity utilisation refers to the extent or level to which the productive capacity of a plant, firm, or country is used in generation of goods and services. Expressed usually as a percentage, it is computed by dividing the total capacity with the portion being utilized.

Answer: (b)

Supply of labour in an economy depends upon both economic as well as non-economic factors. It depends upon the size of population, the number of workers available for work out of a given population, the number of hours worked, the intensity of work, the skills of workers, their willingness to work and the mobility of labour.