introduction to macro economics section 5 MCQ Questions & Answers Detailed Explanation

Answer: (a)

The Gross Domestic Income (GDI) is the total income received by all sectors of an economy within a nation. It includes the sum of all wages, profits, and taxes, minus subsidies.

Since all income is derived from production (including the production of services), the gross domestic income of a country should exactly equal its gross domestic product (GDP).

Answer: (b)

Normal profit or economic profit is an economic condition occurring when the difference between a firm’s total revenue and the total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market.

In a sense, normal profit is the same as net profit which is calculated by subtracting a company’s total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time.

Accounting profit occurs when revenues are greater than costs, and not equal, as in the case of normal profit.

Answer: (b)

According to the Marginal Productivity Theory, the reward or the price of a factor unit depends upon its productivity or its contribution to the total product. While employing a factor, an employer compares the marginal revenue productivity (MRP) of the lost unit and the marginal cost of the factor.

He will employ a factor up to the point where the reward (marginal cost of the factor) paid to the factor equals its MRP.

If MRP is more than the marginal cost, the employer increases its profits by employing more units of the factor; on the other hand, if the marginal cost of the factor is greater than MRP, it will reduce employment to reduce its loss.

Answer: (c)

A Closed economy is an economy in which no activity is conducted with outside economies.

A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy's borders.

Answer: (d)

Desired savings are kept equal to desired investment by responses to interest rate changes.

Savings identity or the savings-investment identity is a concept in National Income Accounting stating that the amount saved (S) in an economy will be the amount invested (I). This identity only holds true because investment here is defined as including inventories.

Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by the business to increase investment.

Answer: (c)

Consumers do one of two things with their disposable income: They save it or they spend it. So Income = Consumption + Saving.