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

Answer: (d)

According to Keynes’ ‘General Theory of Employment, Interest and Money,’ business cycles are caused by variations in the rate of investment which are caused by fluctuations in the marginal efficiency of capital.

Marginal efficiency of capital means the expected profits from new investments.

Answer: (a)

An economy that does not interact with the economy of any other country is known as a closed economy.

A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out. It is the opposite of an open economy, in which a country conducts trade with outside regions.

Answer: (d)

National Income is the total value of all goods and services produced in the economy during a particular period of time.

Answer: (d)

Macroeconomics involves the sum total of economic activity, dealing with the issues such as the production of national income, growth, inflation, and unemployment.

It is all about is about maximizing national income and growth.

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: (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.