Economics: Beyond Supply and Demand

A Giffen good is one whose quantity demanded does what as its price rises?

Increases

Falls sharply

Stays exactly the same

Becomes perfectly elastic

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Correct

Correct. For a Giffen good, the income effect outweighs the substitution effect, so demand rises with price.

Incorrect

The answer is that it increases. For a Giffen good, a strong income effect outweighs the substitution effect, so a higher price raises demand.

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Which theory states that rational consumers spend based on expected lifetime income rather than current income?

Keynesian consumption function

Permanent income hypothesis

Ricardian equivalence

Say's law

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Correct

Correct. Milton Friedman's permanent income hypothesis holds that consumption tracks long-run expected income.

Incorrect

The answer is the permanent income hypothesis. Milton Friedman argued consumption depends on expected long-term income, not temporary changes.

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The 'impossible trinity' says a country cannot simultaneously have a fixed exchange rate, free capital movement and what?

A balanced budget

Low inflation

An independent monetary policy

Full employment

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Correct

Correct. The Mundell-Fleming trilemma says only two of the three can be maintained at once.

Incorrect

The answer is an independent monetary policy. Under the trilemma, a country can pick only two of fixed rates, free capital flows and monetary independence.

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What does the Phillips curve originally describe?

Tax rates versus tax revenue

Income versus environmental damage

Interest rates versus investment

Unemployment versus wage inflation

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Correct

Correct. A. W. Phillips found an inverse relationship between UK unemployment and wage growth in 1958.

Incorrect

The answer is unemployment versus wage inflation. A. W. Phillips observed that lower unemployment was linked to faster wage growth.

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In game theory, a Nash equilibrium is reached when:

No player can gain by changing strategy alone

All players maximise joint payoff

One player dominates all others

Every outcome is Pareto efficient

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Correct

Correct. At a Nash equilibrium, each player's strategy is a best response to the others'.

Incorrect

The answer is that no player can gain by changing strategy alone. As the prisoner's dilemma shows, such an equilibrium need not be efficient.

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A Gini coefficient of 0 indicates:

Perfect inequality

No economic growth

Perfect equality of income

Zero inflation

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Correct

Correct. A Gini of 0 means everyone has the same income, while 1 means one person has it all.

Incorrect

The answer is perfect equality of income. The Gini coefficient runs from 0 (perfect equality) to 1 (maximum inequality).

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Which economist coined the term 'creative destruction'?

John Maynard Keynes

Joseph Schumpeter

Friedrich Hayek

Alfred Marshall

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Correct

Correct. Schumpeter popularised it in 1942 to describe innovation replacing old industries.

Incorrect

The answer is Joseph Schumpeter. In 'Capitalism, Socialism and Democracy' (1942) he described innovation destroying old economic structures.

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A liquidity trap occurs when monetary policy fails because:

Inflation is too high

Banks hold too little reserve

Exchange rates are fixed

Interest rates are near zero and people hoard cash

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Correct

Correct. With rates near zero, extra money is simply held, so it fails to stimulate spending.

Incorrect

The answer is that rates are near zero and people hoard cash. Keynes described how added money is then held rather than spent or invested.

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Perfect! Every answer right!

8 of 8 right

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Question 1:
A Giffen good is one whose quantity demanded does what as its price rises?
Increases
Falls sharply
Stays exactly the same
Becomes perfectly elastic
Correct. For a Giffen good, the income effect outweighs the substitution effect, so demand rises with price.
The answer is that it increases. For a Giffen good, a strong income effect outweighs the substitution effect, so a higher price raises demand.
Question 2:
Which theory states that rational consumers spend based on expected lifetime income rather than current income?
Keynesian consumption function
Permanent income hypothesis
Ricardian equivalence
Say's law
Correct. Milton Friedman's permanent income hypothesis holds that consumption tracks long-run expected income.
The answer is the permanent income hypothesis. Milton Friedman argued consumption depends on expected long-term income, not temporary changes.
Question 3:
The 'impossible trinity' says a country cannot simultaneously have a fixed exchange rate, free capital movement and what?
A balanced budget
Low inflation
An independent monetary policy
Full employment
Correct. The Mundell-Fleming trilemma says only two of the three can be maintained at once.
The answer is an independent monetary policy. Under the trilemma, a country can pick only two of fixed rates, free capital flows and monetary independence.
Question 4:
What does the Phillips curve originally describe?
Tax rates versus tax revenue
Income versus environmental damage
Interest rates versus investment
Unemployment versus wage inflation
Correct. A. W. Phillips found an inverse relationship between UK unemployment and wage growth in 1958.
The answer is unemployment versus wage inflation. A. W. Phillips observed that lower unemployment was linked to faster wage growth.
Question 5:
In game theory, a Nash equilibrium is reached when:
No player can gain by changing strategy alone
All players maximise joint payoff
One player dominates all others
Every outcome is Pareto efficient
Correct. At a Nash equilibrium, each player's strategy is a best response to the others'.
The answer is that no player can gain by changing strategy alone. As the prisoner's dilemma shows, such an equilibrium need not be efficient.
Question 6:
A Gini coefficient of 0 indicates:
Perfect inequality
No economic growth
Perfect equality of income
Zero inflation
Correct. A Gini of 0 means everyone has the same income, while 1 means one person has it all.
The answer is perfect equality of income. The Gini coefficient runs from 0 (perfect equality) to 1 (maximum inequality).
Question 7:
Which economist coined the term 'creative destruction'?
John Maynard Keynes
Joseph Schumpeter
Friedrich Hayek
Alfred Marshall
Correct. Schumpeter popularised it in 1942 to describe innovation replacing old industries.
The answer is Joseph Schumpeter. In 'Capitalism, Socialism and Democracy' (1942) he described innovation destroying old economic structures.
Question 8:
A liquidity trap occurs when monetary policy fails because:
Inflation is too high
Banks hold too little reserve
Exchange rates are fixed
Interest rates are near zero and people hoard cash
Correct. With rates near zero, extra money is simply held, so it fails to stimulate spending.
The answer is that rates are near zero and people hoard cash. Keynes described how added money is then held rather than spent or invested.

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