introduction to macro economics section 2 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (d)

The volume of investment depends upon the following two factors:

1. rate of interest; and
2. marginal efficiency of capital.

Before investing the money a businessman compares interest with the rate of marginal efficiency capital. If they expect that rate of profit will be greater than the rate of interest, then they invest the money otherwise not. The expected rate of return on capital is called the marginal efficiency of capital.

In other words, the marginal efficiency of capital is a return on investment which is based partly on expectations of future yields and partly on the actual price of the capital good concerned.

Answer: (b)

The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. It is basically defined in terms of periods of expansion or recession.

During expansions, the economy grows in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes.

During recessions, the economy contracts, as measured by decreases in the above indicators.

Answer: (a)

Social Status is not a dimension of Human Development Index.

Answer: (a)

The classical economists’ belief in full employment as a normal condition of a free market economy is based on Say’s Law of Markets.

It was on the basis of this law that the classical economists thought that general overproduction and hence general unemployment were impossible. The law simply states “supply creates its own demand.”

Answer: (b)

National Income is defined as the sum total of all the goods and services produced in a country, in a particular period of time.

Normally this period consists of a one-year duration, as a year is neither too short nor long a period. National product is usually used synonymously with National income.

Alfred Marshall in his ‘Principle of Economics’ (1949) defines National income as “The labour and capital of a country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds…..and net income due on account of foreign investments must be added in.

This is the true net National income or Revenue of the country or the national dividend.” So the income of watchmen will be included while computing it.