MCQ Questions and Answers:

37. Question: A country’s national income per head increases. What could explain why this is accompanied by a fall in households’ standard of living?

A) An increase in personal taxes
B) An increase in the trade deficit
C) An increase in population
D) A rise in the exchange rate

Answer: A

Explanation: An increase in personal taxes (option A) would reduce disposable income, leading to a fall in households' standard of living despite an increase in national income per head.

38. Question: A government uses real personal disposable income per head as a measure of the standard of living. What does this measure not take into account?

A) The distribution of income
B) The level of national income
C) The size of the population
D) The average price level

Answer: A

Explanation: Real personal disposable income per head is an average measure and does not take into account the distribution of income among individuals within the country.

39. Question: Over a given period, the nominal value of a country’s national income increased by 20% and the rate of inflation was 10%. What can be deduced from this information?

A) There was an increase in the volume of output.
B) There was a reduction in the demand for money.
C) There was an increase in the income velocity of circulation.
D) The country’s money supply increased by 10%.

Answer: A

Explanation: The nominal value of national income increased by 20%, and the rate of inflation was 10%. Since inflation accounts for the increase in prices, the real value of output (volume of output) must have increased by 10%.

40. Question: What might cause the growth of measured GNP to overstate the ‘true’ rate of economic growth in an economy?

A) People move from unpaid housework to paid employment.
B) The exchange rate is overvalued according to purchasing power parity.
C) There is a reduction in environmental pollution.
D) There is a reduction in the rate of investment in physical capital.

Answer: A

Explanation: When people move from unpaid housework to paid employment, their work becomes part of the measured GNP, leading to an increase in measured economic growth. However, this may not accurately reflect the 'true' rate of economic growth since the value of unpaid housework is not included in GNP.

41. Question: Gross Domestic Product (GDP) per head is an indicator sometimes used to compare living standards of various countries. What might cause this indicator to exaggerate the relative position of an individual country?

A) A high level of female participation in the labor force
B) A high level of foreign ownership in domestic industry
C) A high level of subsistence farming
D) Relatively low hours worked by the labor force

Answer: B

Explanation: Foreign ownership of domestic industry means that a portion of the country's GDP may be repatriated as profits to foreign investors, which can lead to an exaggeration of the country's GDP per head when compared to other countries.

42. Question: What would cause estimates of the money value of the ‘Measure of Economic Welfare’ for a country to be greater than the value of ‘Gross National Product'?

A) Negative externalities such as pollution
B) Property income received from abroad
C) Regrettable necessities
D) The value of non-marketed activities and leisure

Answer: D

Explanation: The 'Measure of Economic Welfare' takes into account factors like the value of non-marketed activities and leisure, which are not considered in Gross National Product (GNP). Including these factors can lead to a higher value for the Measure of Economic Welfare than GNP.

43. Question: During a certain period, a country with a constant population expands its output per head. It also experiences a significant increase in river and atmospheric pollution. In the absence of any other changes, which measure would show a decrease in living standards?

A) Gross Domestic Product per head
B) Gross National Product per head
C) Human Development Index
D) Measure of Economic Welfare

Answer: D

Explanation: The Measure of Economic Welfare takes into account factors such as pollution, which can negatively impact living standards. Therefore, in the given scenario, the Measure of Economic Welfare would likely show a decrease in living standards.

44. Question: How might real GNP per head be adjusted to make it a more reliable indicator when comparing standards of living in different countries?

A) Adjustments to allow for differences in population size in different countries
B) Adjustments to allow for differences in rates of inflation in different countries
C) Adjustments to allow for differences in the relative size of the hidden economy in different countries
D) The use of market exchange rates rather than purchasing power parity exchange rates

Answer: C

Explanation: Adjustments to allow for differences in the relative size of the hidden economy in different countries can help make real GNP per head a more reliable indicator when comparing standards of living. The hidden economy includes informal and unreported economic activities that may not be accurately captured in official statistics.