Correct: C. Avg income

Per capita income (also known as income per person) is the mean income of the people in an economic unit such as a country or city. It is calculated by taking the total national income and dividing it by the total population. It is often used as a rough measure of the standard of living in a country.

Correct: A. Purchasing power

Purchasing Power Parity (PPP) is an economic theory that allows for the comparison of the purchasing power of various world currencies to each other. It adjusts for the fact that the cost of living is different in different countries; for example, 10 can buy much more food in India than it can in Switzerland.

Correct: D. Cyclical

Cyclical unemployment is the component of overall unemployment that results directly from cycles of economic upturn and downturn. When the economy is in a recession, demand for goods and services falls, leading companies to lay off workers.

Correct: C. GDP at current market prices

Nominal GDP is the total value of all goods and services produced in a country during a specific period, measured at current market prices. Unlike "Real GDP," it does not account for inflation, which can make it look like the economy is growing when prices are just going up.

Correct: A. Tool to measure PPP

The Big Mac Index was invented by The Economist magazine in 1986 as a lighthearted guide to whether currencies are at their "correct" level. It is based on the theory of Purchasing Power Parity (PPP).

Correct: A. Falling prices

Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. While lower prices sound good, deflation can be dangerous because it discourages spending-people wait for even lower prices, which causes businesses to lose money and lay off workers.

Correct: B. Adjusted for inflation

Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. By using "base year" prices, it allows economists to see if an economy is actually growing in size or if prices are just rising.

Correct: A. Measure of inflation based on a basket of goods

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a "basket" of consumer goods and services, such as transportation, food, and medical care. It is the most common way to calculate inflation.

Correct: A. Frictional unemployment

Frictional unemployment is a natural type of unemployment that occurs when workers are transitioning between jobs or entering the workforce. It is generally considered a sign of a healthy economy because it shows people are seeking better opportunities. This type of unemployment is present even in an economy operating at full employment.

Correct: B. Real GDP is adjusted for inflation

Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Unlike Nominal GDP, which uses current prices, Real GDP uses constant base-year prices. This adjustment makes it a much more accurate indicator of actual economic growth over time.

Correct: D. C + I + G + (X - M)

Aggregate demand is an economic measurement of the total amount of demand for all finished goods and services produced in an economy. The formula includes consumer spending, investment, government spending, and net exports. When aggregate demand falls, it typically leads to a decrease in economic growth and potential recession.

Correct: C. Cyclical unemployment

Cyclical unemployment is directly related to the macroeconomic situation in the business cycle. During periods of economic contraction or recession, demand for goods and services falls, leading companies to lay off workers. Once the economy begins to recover and expand, these lost jobs are typically restored.

Correct: D. Structural unemployment

Structural unemployment is a long-lasting form of unemployment caused by fundamental shifts in an economy. It happens when workers lack the requisite skills for the available jobs, often due to technological advancements or industry relocation. Unlike cyclical unemployment, structural unemployment requires extensive retraining or education to resolve.

Correct: A. GNP includes production by citizens abroad but excludes foreign production domestically

Gross National Product (GNP) measures the total value of all finished goods and services produced by a country's citizens, regardless of their location. Unlike GDP, which focuses strictly on geographic borders, GNP includes the income earned by citizens overseas. However, it excludes the income earned by foreign residents working within the domestic economy.

Correct: D. Cost-push inflation

Cost-push inflation occurs when overall prices increase due to increases in the cost of production, such as wages or raw materials. This type of inflation is characterized by a decrease in the aggregate supply of goods and services. Because production costs are higher, companies pass these expenses onto consumers to maintain their profit margins.

Correct: A. Demand-pull inflation

Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply, driving prices upward. It is often described as 'too much money chasing too few goods.' This phenomenon typically occurs in a growing economy where employment is high and consumers have ample disposable income.

Correct: A. Disinflation

Disinflation refers to a temporary slowing of the pace of price inflation. Unlike deflation, where prices actually drop, disinflation means prices are still rising, but at a slower rate than before. It is often the intended result of tight monetary policy deployed by central banks to cool down an overheating economy.

Correct: A. Value added

Value added is the difference between the price of a product or service and the cost of the inputs used to create it. In macroeconomics, calculating GDP by the value-added approach prevents the double-counting of raw materials. It isolates the actual economic contribution generated at each stage of production.

Correct: C. Full employment

Full employment is an economic situation in which all available labor resources are being used efficiently. It does not mean a zero percent unemployment rate, as there will always be some frictional and structural unemployment. Instead, it represents the maximum level of employment an economy can sustain without generating runaway inflation.

Correct: D. Base effect

The Base Effect refers to the impact of using different starting reference points when measuring changes in economic data, like inflation. If inflation was unusually low in the corresponding month of the previous year, the current inflation rate might appear misleadingly high. It is a critical mathematical anomaly that policymakers must account for when interpreting economic trends.

Correct: C. Velocity of money

The velocity of money measures how frequently a single unit of currency is used to purchase domestically produced goods and services within a given time frame. When the velocity is high, it usually indicates a healthy, expanding economy where businesses and consumers are readily spending. Conversely, a low velocity of money often signals economic stagnation and hoarding behavior.

Correct: B. GDP Deflator

The GDP Deflator is a comprehensive metric used to measure the level of prices of all new, domestically produced, final goods and services in an economy. Unlike the Consumer Price Index (CPI), which only tracks a fixed basket of consumer goods, the GDP Deflator adapts to changes in consumption patterns automatically. This makes it an incredibly accurate, though broader, tool for assessing macroeconomic inflation.

Correct: A. Output gap

An output gap is an economic measure of the difference between the actual output of an economy and its maximum potential output. A positive output gap indicates that the economy is overheating, which often leads to inflationary pressures as demand exceeds supply. Conversely, a negative output gap means the economy is underperforming and usually signifies elevated unemployment rates.

Correct: B. The wealth effect

The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. Even if their actual income remains completely unchanged, consumers feel more financially secure when their homes or stock portfolios gain value. This increased consumer confidence leads to higher aggregate demand across the entire economy.

Correct: D. The Balance of Payments

The Balance of Payments (BOP) is a comprehensive statement that records all economic transactions between a country's residents and the rest of the world over a specific period. It includes the current account, which tracks trade and income, and the capital and financial accounts, which track investments. In a theoretically perfect accounting system, the balance of payments should always net to zero.

Correct: B. 0.25

The Marginal Propensity to Save (MPS) is the fraction of an increase in income that is not spent on consumption, but instead saved. Because any additional income must be either spent or saved, the Marginal Propensity to Consume (MPC) plus the MPS will always equal exactly 1. Therefore, if the MPC is 0.75, the remaining 0.25 represents the proportion of new income that goes into savings.

Correct: A. Current Account

The Current Account is a primary component of a nation's balance of payments that records all transactions involving goods, services, investment income, and current transfers. It provides a real-time snapshot of a country's economic interaction with the rest of the world. A positive balance means the country is a net lender to the rest of the world, while a negative balance makes it a net borrower.

Correct: B. Potential GDP

Potential GDP is the maximum level of real gross domestic product an economy can produce over time while maintaining stable inflation. It represents the ideal macroeconomic state where all resources-labor, capital, and technology-are fully employed but not overextended. If an economy exceeds its potential GDP, it typically triggers an inflationary spiral.

Correct: A. Leakages

In the circular flow of income model, leakages are funds that exit the primary economic system of consumption and production. The main leakages are taxes paid to the government, money saved in financial institutions, and capital spent on imported foreign goods. For an economy to remain in equilibrium, total leakages must perfectly equal total injections (government spending, investment, and exports).

Correct: A. Shoeleather costs

Shoeleather costs refer to the time, effort, and resources people expend trying to counteract the negative effects of inflation, specifically the depreciation of cash. During high inflation, people will hold less cash and make more frequent trips to the bank or ATM to keep their money in interest-bearing accounts. This physical effort wastes valuable time that could have been spent productively.

Correct: C. Real wages

Real wages are wages adjusted for inflation, providing a much clearer picture of an individual's actual purchasing power. If a worker receives a 5% raise, but the inflation rate is 8%, their real wage has actually decreased by 3%. Economists track real wages to determine if the standard of living for the average worker is genuinely improving over time.

Correct: B. Monetarism

Monetarism is an economic theory which asserts that the total supply of money in an economy is the primary determinant of economic growth and inflation. Championed heavily by Milton Friedman and the Chicago School of Economics, it argues that governments should target a steady, predictable growth rate in the money supply rather than relying on fiscal stimulus. Monetarists famously believe that 'inflation is always and everywhere a monetary phenomenon.'

Correct: B. Elastic wages

The concept of sticky wages refers to the phenomenon where workers' earnings do not quickly adjust downward to changing macroeconomic conditions. Even during a severe recession, companies are reluctant to cut nominal wages due to employment contracts, labor union resistance, and the devastating effect it has on employee morale. Because wages are 'sticky,' businesses are forced to lay off workers instead of lowering pay, which drives up unemployment.

Correct: D. Automatic stabilizers

Automatic stabilizers are built-in features of government tax and spending policies that automatically dampen fluctuations in the business cycle. During a recession, progressive tax burdens naturally decrease while unemployment benefits automatically increase, injecting money into the economy. Conversely, during an economic boom, tax collections naturally rise, helping to cool down aggregate demand.

Correct: C. Comparative advantage

Comparative advantage is an economic law demonstrating the ways in which protectionism is unnecessary in free trade. It asserts that countries should produce and export goods for which they have a lower opportunity cost than other nations, even if another country could produce everything more efficiently in absolute terms. This specialization leads to mutual benefits and greater overall wealth for all trading partners.

Correct: A. Inflation rate and unemployment rate

The Misery Index is an economic indicator meant to measure the degree of economic distress felt by everyday people. It is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate. The logic is that both a higher rate of unemployment and a worsening of inflation create significan't economic and social costs for a country.

Correct: C. M2

The M2 money supply is a broad measure of the money circulating in an economy. It includes everything in M1 (cash and checking accounts) and adds 'near money' like savings deposits, money market securities, and mutual funds. Economists heavily monitor M2 because it represents funds that are highly liquid but not quite as instant as physical cash, acting as a key indicator for potential future inflation.

Correct: A. Yield Curve

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and overall economic activity. A normal, upward-sloping curve indicates economic expansion, while a flat or inverted curve suggests an economic slowdown.

Correct: A. Capital controls

Capital controls are measures such as taxes, tariffs, or outright bans that a nation's government can use to regulate the flow of foreign capital in and out of the domestic economy. These policies are often deployed during financial crises to prevent devastating capital flight, which can instantly collapse the value of the national currency. While they offer short-term stability, free-market economists argue they discourage vital foreign investment.

Correct: B. Money illusion

Money illusion is a psychological bias where people tend to think of their wealth in nominal terms (the raw face value) rather than in real terms (their actual purchasing power). Because of this illusion, workers often feel wealthier when they receive a modest wage increase, completely ignoring that high inflation may have actually reduced their real standard of living. It is a critical concept in behavioral economics that explains sticky wages.

Correct: B. Real exchange rate

The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. While the nominal exchange rate just tells you how many Euros a Dollar can buy, the real exchange rate tells you how much European stuff a Dollar can buy compared to American stuff. It is widely considered the ultimate metric of a country's international trade competitiveness.