ACCA BT · Chapter 3
The economic environment: micro and macroeconomics MCQs with Answers
11 multiple-choice questions on The economic environment: micro and macroeconomics for ACCA BT Business and Technology. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
When the price of a product rises from $20 to $22, the quantity demanded falls from 5,000 units to 4,400 units. Using percentage changes based on the original price and quantity, what is the price elasticity of demand (ignoring the minus sign) and what happens to total revenue?
- A) 1.2; total revenue falls
- B) 0.83; total revenue rises
- C) 1.2; total revenue rises
- D) 0.83; total revenue falls
Show answer & explanation
Answer: A) 1.2; total revenue falls
Percentage change in quantity = (4,400 - 5,000) / 5,000 = -12%. Percentage change in price = (22 - 20) / 20 = +10%. PED = 12% / 10% = 1.2, so demand is price elastic. Total revenue falls from $100,000 (5,000 x $20) to $96,800 (4,400 x $22), which is consistent with elastic demand: a price rise reduces revenue. The figure 0.83 results from dividing the price change by the quantity change.
Question 2
Average household income rises by 5% and, as a result, demand for a particular product falls by 2%. What is the income elasticity of demand and how would the product be classified?
- A) +0.4; a normal good
- B) -2.5; an inferior good
- C) +2.5; a luxury good
- D) -0.4; an inferior good
Show answer & explanation
Answer: D) -0.4; an inferior good
Income elasticity of demand = percentage change in quantity demanded / percentage change in income = -2% / +5% = -0.4. A negative income elasticity means demand falls as income rises, which defines an inferior good. The value -2.5 comes from inverting the calculation.
Question 3
The price of product Y rises by 8% and, as a result, the quantity demanded of product X rises by 4%. What is the cross elasticity of demand for X with respect to the price of Y, and what is the relationship between the goods?
- A) +0.5; substitutes
- B) -0.5; complements
- C) +2.0; substitutes
- D) +0.5; complements
Show answer & explanation
Answer: A) +0.5; substitutes
Cross elasticity = percentage change in quantity of X / percentage change in price of Y = +4% / +8% = +0.5. A positive cross elasticity means that when Y becomes more expensive consumers switch to X, so the goods are substitutes. Complements have a negative cross elasticity. The value 2.0 results from inverting the ratio.
Question 4
Which of the following would cause a shift of the demand curve for a normal good to the right, rather than a movement along it?
- A) An increase in consumers' disposable income
- B) A fall in the price of the good itself
- C) A rise in the price of the good itself
- D) An increase in the cost of raw materials used to make the good
Show answer & explanation
Answer: A) An increase in consumers' disposable income
A change in the good's own price causes a movement along the demand curve, not a shift. A rise in income increases demand for a normal good at every price, shifting the curve to the right. Higher raw material costs affect supply, shifting the supply curve, not demand.
Question 5
Which of the following is a characteristic of a perfectly competitive market?
- A) There are significant barriers to entry protecting existing firms
- B) A few large firms dominate and react to each other's pricing decisions
- C) Firms differentiate their products through branding
- D) Each firm is a price taker and sells a homogeneous product
Show answer & explanation
Answer: D) Each firm is a price taker and sells a homogeneous product
In perfect competition there are many buyers and sellers, products are identical, information is perfect and there are no barriers to entry, so each firm must accept the market price. Barriers to entry are associated with monopoly, interdependent pricing among a few large firms describes oligopoly, and branding describes monopolistic competition.
Question 6
A government sets a legal minimum price for a product above the market equilibrium price. What is the most likely result?
- A) A shortage, because quantity demanded exceeds quantity supplied
- B) A surplus, because quantity supplied exceeds quantity demanded
- C) No effect, because the market will continue to clear at equilibrium
- D) A fall in the price paid by consumers
Show answer & explanation
Answer: B) A surplus, because quantity supplied exceeds quantity demanded
A minimum price set above equilibrium raises the price, which reduces quantity demanded and increases quantity supplied, so a surplus arises. A shortage would result from a maximum price set below equilibrium. A minimum price below equilibrium would have no effect, but here it is above equilibrium.
Question 7
Rising wage costs and higher imported raw material prices are pushing up prices across an economy. What type of inflation is this?
- A) Demand-pull inflation
- B) Imported deflation
- C) Structural unemployment
- D) Cost-push inflation
Show answer & explanation
Answer: D) Cost-push inflation
Cost-push inflation arises when increases in costs of production, such as wages and imported materials, are passed on as higher prices. Demand-pull inflation is caused by excess aggregate demand relative to the economy's capacity. Structural unemployment is not a type of inflation.
Question 8
Workers lose their jobs because the coal mining industry in their region has permanently declined, and their skills are not needed by expanding industries. What type of unemployment is this?
- A) Structural unemployment
- B) Frictional unemployment
- C) Cyclical unemployment
- D) Seasonal unemployment
Show answer & explanation
Answer: A) Structural unemployment
Structural unemployment results from long-term changes in the structure of the economy, leaving a mismatch between workers' skills or locations and available jobs. Frictional unemployment is the short time spent moving between jobs, cyclical unemployment arises from a downturn in the business cycle, and seasonal unemployment is linked to particular times of year.
Question 9
In an open economy, the marginal propensity to save is 0.15, the marginal rate of taxation is 0.06 and the marginal propensity to import is 0.04. The government increases its spending by $30 million. By how much will national income eventually increase?
- A) $120 million
- B) $200 million
- C) $37.5 million
- D) $750 million
Show answer & explanation
Answer: A) $120 million
Total marginal propensity to withdraw = 0.15 + 0.06 + 0.04 = 0.25. The multiplier = 1 / 0.25 = 4. The increase in national income = $30 million x 4 = $120 million. Using only the savings ratio gives a multiplier of 1 / 0.15 = 6.67 and $200 million, which ignores taxes and imports; $37.5 million wrongly divides by 0.8; $750 million wrongly divides the spending by the withdrawal rate of 0.04.
Question 10
Which of the following is an example of contractionary fiscal policy?
- A) Reducing interest rates to encourage borrowing
- B) Increasing government spending on infrastructure
- C) Selling government bonds to reduce the money supply
- D) Increasing income tax rates while keeping government spending unchanged
Show answer & explanation
Answer: D) Increasing income tax rates while keeping government spending unchanged
Fiscal policy concerns government taxation and spending. Raising taxes without increasing spending withdraws demand from the economy, so it is contractionary. Changing interest rates and open market operations in government bonds are monetary policy tools. Increasing government spending is expansionary fiscal policy.
Question 11
In the circular flow of income, which of the following is an injection into the flow?
- A) Savings
- B) Taxation
- C) Exports
- D) Imports
Show answer & explanation
Answer: C) Exports
Injections are investment, government spending and exports, which add to the circular flow of income. Savings, taxation and imports are withdrawals (leakages) from the flow.