Economics GK Quiz-5

Question: Purchasing Power Parity theory is related with
(1) Interest rate
(2) Bank rate
(3) Wage rate
(4) Exchange rate
Answer: (4) Exchange rate
Purchasing power parity (PPP) is an economic theory and a technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency’s purchasing power. It asks how much money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. Using that PPP rate, an amount of money thus has the same purchasing power in different countries.

Question: Economies of Scale means reduction in
(1) unit cost of production
(2) unit cost of distribution
(3) total cost of production
(4) total cost of distribution
Answer: (1) unit cost of production
In microeconomics, economies of scale are the cost advantages that an enterprise obtains due to
expansion. “Economies of scale” is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.



Question: When the total product rises at an increasing rate, the
(1) marginal product is zero
(2) marginal product is rising
(3) marginal product is falling
(4) marginal product remains constant
Answer: (2) marginal product is rising
Marginal product of an input (factor of production) is the extra output that can be produced by using one more unit of the input (for instance, the difference in output when a firm’s labor usage is increased from five to six units), assuming that the quantities of no other inputs to production change. Marginal product, which occasionally goes by the alias marginal physical product (MPP), is one of two measures derived from total product. The other is average product. Marginal product is directly proportional to total product.



Question: The main determinant of real wage is
(1) extra earning
(2) nature of work
(3) promotion prospect
(4) purchasing power of money
Answer: (4) purchasing power of money
The term real wages refers to wages that have been adjusted for inflation. This term is used in contrast to nominal wages or unadjusted wages. Real wages provide a clearer representation of an individual’s wages. The real purchasing power of income or money is the key determinant of real wage. It an indication of an individual’s actual purchasing power. Real wages are a useful economic measure, as opposed to nominal wages, which simply show the monetary value of wages in that year. However, real wages does not take into account other compensation like benefits or old age pensions.



Question: A refrigerator operating in a chemist’s shop is an example of
(1) free good
(2) final good
(3) producers good
(4) consumer’s good
Answer: (2) final good
Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.



Question: When average cost production (AC) falls, marginal cost of production must be.
(1) rising
(2) Falling
(3) Greater than the average cost
(4) Less than the average cost
Answer: (4) Less than the average cost
Average cost is the total cost per unit of output. Marginal cost, on the other hand, is the addition to the total cost by producing one more units of output. Economies of scale are said to exist if an additional unit of output can be produced for less than the average of all previous units— that is, if long-run marginal cost is below long-run average cost, so the latter is falling. Conversely, there may be levels of production where marginal cost is higher than average cost, and average cost is an increasing function of output.



Question: Production function expresses
(1) technological relationship between physical inputs and output
(2) financial relationship between physical inputs and output
(3) relationship between finance and technology
(4) relationship between factors of production
Answer: (1) technological relationship between physical inputs and output
Production involves transformation of inputs into outputs. The output is a function of input. The functional relationship between physical inputs and physical output of a firm is called production function. The word ‘function’ in mathematics means the precise relationship that exists between one dependent variable and a number (or one) of independent variables. The production function states the maximum quantity of output that can be produced from any given quantities of various inputs during a given period of time.



Question: “Interest is a reward for parting with liquidity” is according to
(1) Keynes 
(2) Marshall
(3) Haberler 
(4) Ohlin
Answer: (1) Keynes 
In macroeconomic theory, liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936) to explain determination of the interest rate by the supply and
demand for money. The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds. Interest rates, he argues, cannot be a reward for saving as such because, if a person hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although
he has nevertheless refrained from consuming all his current income. Instead of a reward for saving, interest in the Keynesian analysis is a reward for parting with liquidity.



Question: Extension or contraction of quantity demanded of a commodity is a result of a change in the
(1) unit price of the commodity
(2) income of the consumer
(3) tastes of the consumer
(4) climate of the region
Answer: (1) unit price of the commodity
Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, etc) being constant. Demand includes the desire to buy the commodity accompanied by the willingness to buy it and sufficient purchasing power to purchase it. So changes in the unit price of a commodity leads to either extension or contraction in demand. The law of demand states that there is an inverse relationship between quantity demanded of a commodity and its price, other factors being constant. In other words, higher the price, lower the demand and vice versa, other things remaining constant.



Question: Cross elasticity of demand between petrol and car is
(1) infinite 
(2) positive
(3) zero 
(4) negative
Answer: (4) negative
In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be -2. A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products.

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