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Free CA Business Economics Practice Questions & Answers
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100% free · No login to startQuestion 1
The business cycle is also known as the:
Select an option first.
Correct answer: B — Trade cycle
Explanation: Trade cycle is the older British term for the same phenomenon of alternating expansion and contraction in aggregate activity. Product life cycle concerns a single product's sales over time and operating cycle a firm's working capital - both quite different ideas.
Question 2
Business cycles are said to vary in amplitude and duration, which means that:
Select an option first.
Correct answer: C — The depth of the swings and the length of the phases differ from one cycle to the next
Explanation: Because they are recurrent but not periodic, no two cycles are alike in depth or length, which is what makes forecasting turning points so difficult. A regular, predictable cycle could be planned around; an irregular one cannot.
Question 3
Automatic stabilisers are features of the budget that:
Select an option first.
Correct answer: C — Moderate the cycle without any new policy decision, such as progressive taxes and unemployment benefit
Explanation: In a downturn tax receipts fall automatically and benefit payments rise, cushioning disposable income; in a boom the reverse restrains demand. Because they act at once and without legislation, they avoid the recognition and implementation lags that hamper discretionary policy.
Question 4
An understanding of business cycles is important to a firm chiefly because it helps in:
Select an option first.
Correct answer: D — Timing investment, production, inventory and hiring decisions
Explanation: Expanding capacity at a peak or cutting stocks at a trough can be costly errors, so anticipating the phase informs almost every planning decision. This practical bearing on managerial choice is precisely why business cycles appear in a paper on BUSINESS economics.
Question 5
In the multiplier-accelerator model, the upswing is halted by a CEILING set by:
Select an option first.
Correct answer: D — The economy's full employment capacity, beyond which output cannot expand
Explanation: Once output cannot grow further, its rate of increase falls to zero, induced investment collapses through the accelerator, and the downswing begins. A FLOOR is set below by the fact that gross investment cannot fall below zero and by autonomous spending.
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Question 6
Business cycles are best described as:
Select an option first.
Correct answer: A — Recurrent but not periodic, and international in character
Explanation: Cycles recur but at irregular intervals and with varying amplitude, so they cannot be timed in advance. They are also SYNCHRONOUS - spreading across sectors and across countries through trade and capital flows - and cumulative, in that each phase tends to feed on itself until a turning point is reached.
Question 7
During a recession, appropriate counter-cyclical fiscal policy would be to:
Select an option first.
Correct answer: C — Cut taxes and increase public expenditure
Explanation: Expansionary fiscal policy raises aggregate demand directly through spending and indirectly through the higher disposable income left by lower taxes, and the multiplier magnifies the effect. During a BOOM the policy is reversed to restrain demand. Distractor D is monetary policy, and contractionary at that.
Question 8
Cyclical unemployment is unemployment that:
Select an option first.
Correct answer: D — Rises during a contraction and falls during an expansion
Explanation: Cyclical unemployment is caused by deficient aggregate demand and is therefore the type that expansionary policy can address. FRICTIONAL unemployment from job search and STRUCTURAL unemployment from skill mismatch persist even in a boom, and need different remedies.
Question 9
A business cycle refers to:
Select an option first.
Correct answer: B — Recurring fluctuations in aggregate economic activity over a period of years
Explanation: Business cycles are wave-like movements in output, employment, income and prices affecting the economy as a whole. They are distinguished from SEASONAL variation, which recurs within a year and is predictable, and from a long-term trend, which is the underlying direction over decades.
Question 10
During a deep depression, monetary policy alone may prove ineffective because:
Select an option first.
Correct answer: D — Even very cheap credit may not induce investment when business expectations are deeply pessimistic
Explanation: Keynes likened it to pushing on a string: the central bank can make credit available but cannot compel anyone to borrow or invest. This is the argument for direct fiscal action - government spending - when monetary measures have lost traction.
Question 11
Forecasting the turning points of a business cycle is difficult chiefly because:
Select an option first.
Correct answer: D — Cycles vary in duration and amplitude, and indicators give conflicting signals
Explanation: Leading indicators sometimes signal downturns that never arrive, and the lag between recognising a turn and policy taking effect can mean the remedy arrives after the problem has passed - which is itself an argument for automatic stabilisers over discretionary action.
Question 12
Over the course of a business cycle, employment:
Select an option first.
Correct answer: C — Rises in expansion and falls in contraction, generally lagging slightly behind output
Explanation: Firms hesitate to dismiss trained workers at the first sign of a downturn and hesitate to hire until a recovery looks durable, so employment turns after output. This lag is why unemployment is treated as a LAGGING indicator of the cycle.
Question 13
During the early stage of a downturn, business inventories typically:
Select an option first.
Correct answer: C — Accumulate involuntarily as sales fall short of production
Explanation: Production plans are made in advance, so when demand weakens goods pile up unsold before output can be cut. That involuntary accumulation is one of the earliest signals of a turning point, which is why inventory data are watched closely as an indicator.
Question 14
Company profits over the business cycle are typically:
Select an option first.
Correct answer: D — MORE volatile than output, since fixed costs magnify the effect of changes in sales
Explanation: With fixed costs to be covered, a modest fall in sales produces a much larger fall in profit, and the reverse in an upswing - the operating leverage effect. This is why profits are among the most cyclically sensitive of all economic variables.
Question 15
External or exogenous theories explain business cycles by reference to:
Select an option first.
Correct answer: C — Shocks originating OUTSIDE the system, such as wars, weather or major technological change
Explanation: Exogenous explanations point to events the economy does not generate; ENDOGENOUS theories such as the multiplier-accelerator interaction locate the cause within the system. Most modern accounts combine the two, with external shocks propagated by internal mechanisms.
Question 16
During a boom:
Select an option first.
Correct answer: D — Prices, output, employment and investment are all at high levels
Explanation: A boom brings full or over-full employment, rising prices, heavy investment and optimistic expectations. The strains it creates - shortages of labour and materials, rising costs and interest rates - are what eventually bring on the downturn, which is why the peak contains the seeds of the contraction.
Question 17
Which of the following characterises a depression?
Select an option first.
Correct answer: A — Widespread unemployment and very low aggregate demand
Explanation: In a depression demand collapses, unemployment becomes widespread, prices and profits fall and investment dries up. Goods are ABUNDANT relative to the purchasing power available to buy them, which is why distractor D has it exactly backwards - the problem is deficient demand, not deficient supply.
Question 18
A period of falling output, declining investment and rising unemployment is known as:
Select an option first.
Correct answer: D — Contraction or recession
Explanation: Contraction is marked by falling demand, output and employment, shrinking profits and pessimistic expectations. A prolonged and severe contraction becomes a DEPRESSION, of which the 1930s is the standard example. Note that a peak is a turning point, not a period of decline - the decline begins after it.
Question 19
The innovation theory of business cycles is associated with:
Select an option first.
Correct answer: D — Joseph Schumpeter
Explanation: Schumpeter argued that clusters of innovation by entrepreneurs set off waves of imitative investment, producing expansion; once the innovation is absorbed and profits fall, contraction follows. Innovation, in his account, is the engine both of growth and of the cycle's instability.
Question 20
Business cycles tend to spread from one country to another chiefly through:
Select an option first.
Correct answer: B — Trade and capital flows, since one country's imports are another's exports
Explanation: A recession abroad reduces demand for a country's exports and may trigger withdrawal of foreign capital. Deeper integration has made cycles more synchronous across countries, which is why the 2008 crisis spread so rapidly from its origin.
Question 21
According to Keynes, fluctuations in economic activity are caused chiefly by changes in:
Select an option first.
Correct answer: D — The marginal efficiency of capital, which drives investment
Explanation: Keynes traced the cycle to swings in business expectations about the profitability of new investment - the marginal efficiency of capital. Because investment is volatile and works through the MULTIPLIER, a modest change in it produces a magnified change in income and employment. Monetary and psychological explanations exist alongside this but are distinct theories.
Question 22
Leading economic indicators are variables that:
Select an option first.
Correct answer: C — Change BEFORE the economy turns, and so help forecast the cycle
Explanation: New orders, building permits and share prices typically turn before general activity does, which makes them useful for anticipating a turning point. Coincident indicators such as industrial production move with the cycle, and lagging indicators such as unemployment duration turn after it.
Question 23
To restrain an inflationary boom, the central bank would normally:
Select an option first.
Correct answer: C — Raise the repo rate, raise the CRR and sell securities
Explanation: All three measures contract credit and the money supply, damping demand. In a recession the same instruments are reversed. Note that monetary and fiscal policy should pull in the same direction; working against each other blunts both.
Question 24
The monetary theory of business cycles, associated with Hawtrey, attributes fluctuations to:
Select an option first.
Correct answer: A — Expansion and contraction of bank credit and the money supply
Explanation: On this view an easy credit policy sets off expansion, which continues until the banks are forced to contract, precipitating the downturn. It is one of several competing explanations - Schumpeter's innovation theory, Pigou's psychological theory and Keynes's marginal efficiency of capital being the principal alternatives.
Question 25
The interaction of the multiplier and the accelerator explains:
Select an option first.
Correct answer: D — How an initial change is amplified into a CUMULATIVE upswing or downswing
Explanation: Investment raises income through the multiplier; higher income induces further investment through the accelerator; that investment raises income again. The process feeds on itself until a ceiling or floor halts it - which is how the model generates turning points endogenously.
Question 26
The over-investment theory of business cycles attributes the downturn to:
Select an option first.
Correct answer: A — Investment in capital goods running ahead of what consumer demand can sustain
Explanation: Cheap credit encourages a build-up of capital goods beyond what consumption warrants; when the imbalance becomes apparent, investment collapses and the downswing begins. The theory is associated with Hayek and the Austrian school and emphasises the STRUCTURE of production, not merely its level.
Question 27
The phases of a business cycle, in order, are:
Select an option first.
Correct answer: B — Expansion, peak, contraction, trough
Explanation: A cycle runs from expansion, through a peak where activity is at its highest, into contraction, down to a trough where it is lowest, and then into recovery. The phases are recurrent but NOT of fixed length or amplitude, which is why business cycles are said to be recurring rather than periodic.
Question 28
The psychological theory of business cycles, associated with Pigou, emphasises:
Select an option first.
Correct answer: B — Waves of optimism and pessimism among businessmen
Explanation: Because investment decisions rest on expectations about an unknowable future, moods spread contagiously through the business community, and each mood tends to justify itself for a time - optimism raising investment and hence profits. The theory explains the cumulative and self-reinforcing character of each phase.
Question 29
A depression differs from a recession chiefly in its:
Select an option first.
Correct answer: A — Severity and duration, a depression being deeper and much longer
Explanation: Both are contractions; a depression is the extreme case, marked by very heavy unemployment, collapsing investment and falling prices over an extended period. The 1930s is the standard illustration, and depressions on that scale are rare.
Question 30
The accelerator principle states that:
Select an option first.
Correct answer: B — A change in income or consumption causes a magnified change in INVESTMENT
Explanation: The accelerator runs in the opposite direction to the multiplier: because capital equipment is durable and large relative to annual output, a modest rise in demand calls for a proportionately larger addition to the capital stock. Multiplier and accelerator interacting is a standard explanation of the cycle's cumulative character.
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