I85PREP
⌘ K
BCS Written Economics study materials
BCS Written Economics study resources

BCS Written Economics practice questions

One question at a time. Build your BCS Written Economics understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Microeconomics

A consumer's budget line shifts outward parallel when which change occurs?

  1. The price of one good falls while income is unchanged
  2. The consumer's preferences shift toward the cheaper good
  3. Money income rises while both prices stay constant Correct answer.
  4. Both prices fall in the same proportion as income

Explanation

A parallel outward shift of the budget line occurs only when nominal income increases while the prices of both goods remain unchanged, expanding affordable bundles by the same proportion on each axis. A change in a single price rotates the line rather than shifting it parallel. Preference changes do not move the budget line at all, since the constraint depends on income and prices only.

Question 2Microeconomics

Along a straight-line budget constraint, the slope equals which ratio?

  1. The ratio of total income to total utility
  2. The ratio of marginal utilities at the chosen bundle
  3. The ratio of the two quantities consumed
  4. The ratio of the two prices with a negative sign Correct answer.

Explanation

The budget line's slope is the negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis. This slope represents the market rate at which one good can be traded for the other. Marginal utility ratios describe preferences, not the constraint itself.

Question 3Microeconomics

At the utility-maximizing interior bundle, which condition must hold?

  1. Average utility per unit of price is equal across goods
  2. Total utility from each good is equal
  3. Marginal utility per unit of price is equal across all goods Correct answer.
  4. Marginal utility of each good is equal

Explanation

Utility maximization requires the marginal utility obtained per unit of money spent to be equalized across goods, so MUx/Px equals MUy/Py. This is equivalent to the marginal rate of substitution equaling the price ratio. Equating marginal utilities themselves ignores the differing prices of the goods.

Question 4Microeconomics

An indifference curve that is convex to the origin reflects which property?

  1. Constant marginal utility of income
  2. Perfect substitutability between the goods
  3. Increasing returns to scale in consumption
  4. A diminishing marginal rate of substitution Correct answer.

Explanation

Convexity of an indifference curve means the slope becomes flatter as more of the horizontal good is consumed, which is exactly a diminishing marginal rate of substitution. Consumers give up progressively less of one good for additional units of the other. Straight-line curves indicate perfect substitutes, and right-angled curves indicate perfect complements.

Question 5Microeconomics

A consumer faces two goods, X and Y. If MRS of X for Y is 3 and the price ratio Px/Py is 2, what adjustment raises utility?

  1. Reduce spending on both goods equally
  2. Consume more Y and less X
  3. Consume more X and less Y Correct answer.
  4. Keep the bundle unchanged

Explanation

The marginal rate of substitution of 3 exceeds the price ratio of 2, so the consumer values an extra unit of X more than the market charges for it. Substituting toward X and away from Y increases utility until the two ratios are equal. Moving the other way would widen the gap between valuation and price.

Question 6Microeconomics

The substitution effect of a price fall always moves quantity demanded in which direction?

  1. Toward more of the other good
  2. In a direction that depends on whether the good is normal
  3. Toward less of the good whose price fell
  4. Toward more of the good whose price fell Correct answer.

Explanation

The substitution effect is always negative with respect to own price: when a good becomes cheaper relative to others, the consumer substitutes toward it, holding utility constant. This holds for normal and inferior goods alike. Only the income effect can offset it, and that is a separate component.

Question 7Microeconomics

For a Giffen good, a fall in price leads to which outcome?

  1. No change in quantity demanded
  2. A rise in quantity demanded because substitution dominates
  3. A fall in quantity demanded because the income effect dominates Correct answer.
  4. A rise in quantity demanded because the good is normal

Explanation

A Giffen good is a strongly inferior good whose negative income effect outweighs the substitution effect when its price falls. The net result is a decrease in quantity demanded, producing an upward-sloping demand curve. The substitution effect still points toward more of the good but is overwhelmed.

Question 8Microeconomics

An Engel curve for a normal good is characterized by which shape?

  1. Upward sloping as income rises Correct answer.
  2. U-shaped over the income range
  3. Vertical at a fixed quantity
  4. Downward sloping as income rises

Explanation

For a normal good, quantity demanded increases as income increases, so the Engel curve relating income to quantity slopes upward. Inferior goods produce downward-sloping Engel curves over the relevant range. The curve plots income against quantity, not price against quantity.

Question 9Microeconomics

A firm's short-run production function exhibits diminishing marginal returns when which occurs?

  1. Total product falls as a variable input increases
  2. Marginal product falls as a variable input increases Correct answer.
  3. Marginal product becomes negative at low input levels
  4. Average product exceeds marginal product permanently

Explanation

Diminishing marginal returns begin where the marginal product of the variable input starts to decline as more of it is applied to a fixed input. Total product still rises while marginal product is positive. Negative marginal product marks a later stage beyond the onset of diminishing returns.

Question 10Microeconomics

When marginal cost lies below average total cost, which statement is true?

  1. Average total cost is rising
  2. Average total cost is at its minimum
  3. Average variable cost must be rising
  4. Average total cost is falling Correct answer.

Explanation

Marginal cost pulls the average toward itself. If marginal cost is below average total cost, each additional unit costs less than the current average, so the average falls. Average total cost reaches its minimum precisely where marginal cost equals it.

Question 11Microeconomics

In the long run, a firm's average cost curve is the envelope of short-run curves because of which flexibility?

  1. Fixed costs are sunk and ignored
  2. All inputs are variable and the firm chooses optimal scale Correct answer.
  3. The firm always operates at minimum efficient scale
  4. Marginal cost is constant at every output level

Explanation

The long-run average cost curve traces the lowest attainable average cost at each output when all inputs can be adjusted. Each point corresponds to a short-run curve at its optimal scale for that output. Sunk costs and constant marginal cost do not explain the envelope relationship.

Question 12Microeconomics

Economies of scale exist when which relationship holds over an output range?

  1. Total fixed cost rises with output
  2. Marginal cost exceeds average cost throughout
  3. Long-run average cost rises as output expands
  4. Long-run average cost declines as output expands Correct answer.

Explanation

Economies of scale mean that long-run average cost falls as the scale of output increases, so larger plants produce at lower unit cost. The cause is typically spreading fixed costs or improving specialization. Rising long-run average cost describes diseconomies of scale.

Question 13Microeconomics

In a perfectly competitive market, a profit-maximizing firm in the short run produces where which condition holds?

  1. Marginal revenue exceeds marginal cost by the largest amount
  2. Marginal cost equals marginal revenue, which equals price Correct answer.
  3. Average revenue equals average variable cost
  4. Price equals average total cost at every output

Explanation

A price-taking firm faces a horizontal demand curve, so marginal revenue equals price. Profit is maximized where marginal cost equals this marginal revenue, provided price covers average variable cost. Equating price to average total cost describes break-even, not profit maximization generally.

Question 14Microeconomics

A perfectly competitive firm should shut down in the short run when price falls below which level?

  1. Marginal cost at the current output
  2. Average fixed cost
  3. Minimum average variable cost Correct answer.
  4. Minimum average total cost

Explanation

The shutdown point occurs where price falls below the minimum of average variable cost, because the firm cannot even cover its variable costs and loses less by producing nothing. Operating below minimum average total cost but above average variable cost still reduces losses. Average fixed cost is not the relevant threshold because fixed costs are incurred regardless.

Question 15Microeconomics

A monopolist's marginal revenue is less than price because of which reason?

  1. The monopolist faces a perfectly elastic demand curve
  2. Fixed costs must be recovered through higher prices
  3. Marginal cost is always rising for a monopolist
  4. Selling extra units requires lowering price on all units sold Correct answer.

Explanation

A monopolist faces the downward-sloping market demand curve, so to sell an additional unit it must reduce the price on every unit, not just the extra one. Marginal revenue therefore lies below price. This gap disappears only under perfect competition, where the firm is a price taker.

Question 16Microeconomics

Compared with perfect competition, a profit-maximizing monopolist typically produces which outcome?

  1. A higher quantity at a higher price
  2. A higher quantity at a lower price
  3. A lower quantity at a higher price Correct answer.
  4. The same quantity at the same price

Explanation

The monopolist restricts output to the point where marginal revenue equals marginal cost, which is below the competitive quantity, and charges the price from the demand curve at that quantity. The result is a higher price and lower output than under competition. This restriction generates deadweight loss.

Question 17Microeconomics

A natural monopoly arises when which cost structure prevails over the relevant output range?

  1. Marginal cost is constant and equals average cost
  2. Long-run average cost declines continuously as output rises Correct answer.
  3. Average cost rises sharply at low output
  4. Fixed costs are negligible relative to variable costs

Explanation

A natural monopoly occurs where declining long-run average cost means a single firm can supply the market more cheaply than several firms. The large fixed or sunk costs create economies of scale across the relevant demand range. Rising average cost would favor competition among smaller firms.

Question 18Microeconomics

Price discrimination that raises profit requires which combination of conditions?

  1. Market power and the ability to separate buyers by elasticity Correct answer.
  2. Constant marginal cost and no resale possibilities
  3. A perfectly competitive market structure
  4. Identical demand elasticities across all buyers

Explanation

Successful price discrimination requires market power, distinguishable buyer groups with different price elasticities, and the ability to prevent resale. The firm charges higher prices to less elastic buyers. Identical elasticities would remove the gain from segmenting the market.

Question 19Microeconomics

In a Cournot duopoly with identical constant marginal costs, each firm's equilibrium output is characterized by which property?

  1. Each firm produces half the competitive market output when costs are equal Correct answer.
  2. Each firm produces more than under perfect competition
  3. One firm produces everything and the other nothing
  4. Each firm produces the full monopoly output

Explanation

In symmetric Cournot equilibrium with linear demand and equal constant marginal costs, each firm produces one-third of the competitive output, so together they produce two-thirds. The standard result is that each firm's output equals half of what a single firm would produce under the competitive benchmark. Output exceeds monopoly but falls short of competition.

Question 20Microeconomics

In the kinked demand curve model, prices tend to be sticky because of which asymmetry?

  1. Rivals match price cuts but ignore price increases Correct answer.
  2. Rivals match price increases but ignore price cuts
  3. Rivals always match both price cuts and increases
  4. Rivals never respond to any price change

Explanation

The kinked demand curve assumes that rivals will match a price cut, making demand inelastic below the current price, but will not follow a price increase, making demand elastic above it. This creates a discontinuity in marginal revenue at the current price. As a result, small cost changes do not alter the profit-maximizing price.

Question 21Microeconomics

A dominant strategy in a game is one that does which?

  1. Gives the highest payoff regardless of the rival's choice Correct answer.
  2. Gives the highest payoff only if the rival cooperates
  3. Maximizes the joint payoff of both players
  4. Matches whatever action the rival selects

Explanation

A dominant strategy yields a higher payoff than any alternative no matter what the other player does, so it is optimal unconditionally. Its presence simplifies prediction because the player need not forecast the rival's action. Strategies that depend on the rival's choice are not dominant.

Question 22Microeconomics

The prisoners' dilemma illustrates which tension?

  1. Individually rational choices producing a collectively worse outcome Correct answer.
  2. Collectively rational choices producing an individually better outcome
  3. Cooperation being a dominant strategy
  4. The absence of any Nash equilibrium

Explanation

In the prisoners' dilemma each player has a dominant strategy of defection, so the Nash equilibrium yields payoffs lower for both than mutual cooperation. It shows how individual rationality can conflict with collective welfare. The equilibrium exists but is Pareto inefficient.

Question 23Microeconomics

A positive externality in consumption causes which market outcome?

  1. Output equal to the socially efficient level
  2. Price above the socially efficient level with output unchanged
  3. Output above the socially efficient level
  4. Output below the socially efficient level Correct answer.

Explanation

When consumption generates spillover benefits not captured in private demand, the social marginal benefit exceeds the private marginal benefit. The unregulated market equates private benefit with cost and therefore produces less than the socially efficient quantity. A Pigouvian subsidy can close the gap.

Question 24Microeconomics

A good is non-rival in consumption when which statement holds?

  1. One person's use does not reduce the amount available to others Correct answer.
  2. People cannot be excluded from using it
  3. Its marginal cost of production is zero
  4. It is produced by a single firm

Explanation

Non-rivalry means that consumption by one person does not diminish the quantity or quality available to others, as with a broadcast signal. Non-excludability is a separate property concerning whether users can be kept out. Zero marginal production cost is related but not the definition of non-rivalry.

Question 25Microeconomics

In a competitive labor market, a profit-maximizing firm hires labor up to the point where which equality holds?

  1. The wage equals the average product of labor
  2. The wage equals the value of the marginal product of labor Correct answer.
  3. The wage equals total revenue divided by employment
  4. The wage equals the marginal cost of capital

Explanation

A competitive firm hires additional workers as long as the revenue generated by the last worker exceeds the wage. Equilibrium occurs where the wage equals the value of the marginal product, which is the marginal product multiplied by output price. Hiring beyond that point reduces profit.

Question 26Microeconomics

A consumer's budget line shifts outward parallel to its original position. Which change explains this shift?

  1. A fall in the price of one good only
  2. A rise in money income with prices unchanged Correct answer.
  3. A rise in the price of both goods by the same percentage
  4. A change in the consumer's tastes for both goods

Explanation

The budget line's intercepts equal income divided by each price, so a uniform rise in money income with prices fixed raises both intercepts by the same proportion, producing a parallel outward shift. Relative prices, which set the slope, are unchanged. Price changes alter the slope unless both prices move proportionally.

Question 27Microeconomics

At the consumer's optimum with two goods, the marginal rate of substitution between the goods equals which value?

  1. The sum of the two prices
  2. The marginal utility of money alone
  3. The ratio of the two prices Correct answer.
  4. The ratio of total incomes

Explanation

Tangency of the indifference curve with the budget line means the slope of the indifference curve, the marginal rate of substitution, equals the slope of the budget line, which is the price ratio. At that point the extra utility per unit of spending is equalized across goods.

Question 28Microeconomics

A demand curve is described as perfectly inelastic. What does this imply about its shape and the price elasticity value?

  1. A vertical line with elasticity equal to zero Correct answer.
  2. An upward-sloping line with positive elasticity
  3. A downward-sloping line with elasticity equal to one
  4. A horizontal line with elasticity equal to infinity

Explanation

Perfectly inelastic demand means quantity demanded does not respond at all to price changes, so the curve is vertical and the elasticity is zero. Any price change leaves quantity unchanged. Elasticity of infinity corresponds instead to perfectly elastic demand.

Question 29Microeconomics

Which statement correctly describes a firm operating in a perfectly competitive market?

  1. It faces a downward-sloping demand curve
  2. It sets price above marginal cost
  3. It can block entry of new firms
  4. It is a price taker facing a horizontal demand curve Correct answer.

Explanation

With many small firms selling an identical product and free entry, each firm's output is too small to affect the market price, so it takes price as given and faces a horizontal demand curve at that price. Its marginal revenue therefore equals price.

Question 30Microeconomics

A consumer's income rises and, holding prices constant, the quantity of a good demanded falls. How is this good classified?

  1. A normal good
  2. A complementary good
  3. A luxury good
  4. An inferior good Correct answer.

Explanation

A good whose demand falls when income rises is inferior, because the income effect of the increase is negative. Normal and luxury goods both show rising demand as income rises, differing only in the size of the response.

Question 31Microeconomics

A firm's total cost is 500 when it produces 10 units and 560 when it produces 12 units. What is the marginal cost of the additional output?

  1. 30 per unit Correct answer.
  2. 60 per unit
  3. 5 per unit
  4. 56 per unit

Explanation

Marginal cost equals the change in total cost divided by the change in output. Here the change in cost is 60 and the change in output is 2 units, so marginal cost is 30 per unit.

Question 32Microeconomics

A firm faces a linear downward-sloping demand curve. At the output where total revenue is maximized, what is true?

  1. Marginal revenue equals price and demand is perfectly elastic
  2. Marginal revenue is positive and demand is elastic
  3. Marginal revenue equals zero and demand is unit elastic Correct answer.
  4. Marginal revenue is negative and demand is inelastic

Explanation

Total revenue rises while marginal revenue is positive and falls once it is negative, so it peaks where marginal revenue equals zero. Along a linear demand curve that point coincides with unit price elasticity, where a percentage price change leaves revenue unchanged.

Question 33Microeconomics

A monopolist faces market demand and can charge a single price. Where does it choose output in relation to the competitive outcome?

  1. Where marginal revenue equals marginal cost, below the competitive output Correct answer.
  2. Where total revenue is maximized, above the competitive output
  3. Where average total cost is minimized, equal to the competitive output
  4. Where price equals marginal cost, above the competitive output

Explanation

The single-price monopolist maximizes profit by equating marginal revenue with marginal cost and then reading the price off the demand curve. Because marginal revenue lies below price, this output is lower and the price higher than the competitive level.

Question 34Microeconomics

Two firms sell differentiated products and each chooses its price, taking the other's price as fixed. Which model describes this strategic setting?

  1. Stackelberg competition
  2. Cournot competition
  3. Perfect competition
  4. Bertrand competition Correct answer.

Explanation

In Bertrand competition firms compete by setting prices, and each treats the rival's price as given when choosing its own. Cournot and Stackelberg models instead have firms choosing quantities, sequentially in the Stackelberg case.

Question 35Microeconomics

A consumer allocates a fixed budget between two goods. The price of the first good rises while its quantity demanded stays unchanged. Which explanation is consistent with this observation?

  1. The income and substitution effects exactly offset each other Correct answer.
  2. The good is a normal good with a strong income effect
  3. The good is a Giffen good with a dominant income effect
  4. The two goods are perfect substitutes

Explanation

A price rise triggers a negative substitution effect and, for a normal good, a negative income effect, both reducing quantity. For quantity to stay unchanged, the income effect must work in the opposite direction and exactly cancel the substitution effect, which can occur for an inferior good.

Question 36Microeconomics

A price ceiling is set below the equilibrium price in a competitive market. Which outcome follows?

  1. Demand and supply both shift outward
  2. Quantity demanded exceeds quantity supplied, creating a shortage Correct answer.
  3. The market clears at a higher price
  4. Quantity supplied exceeds quantity demanded, creating a surplus

Explanation

A binding ceiling holds price below equilibrium, so the quantity demanded at that price exceeds the quantity supplied, producing excess demand. The ceiling does not shift either curve; it creates a gap between the quantities along the existing curves.

Question 37Microeconomics

A firm's production function is Q = 4L + 2K, where L is labor and K is capital. What do the isoquants look like?

  1. Right-angled L-shapes, indicating fixed proportions
  2. Upward-sloping lines, indicating increasing returns
  3. Straight lines, indicating perfect substitutability of inputs Correct answer.
  4. Convex curves toward the origin, indicating diminishing substitution

Explanation

A linear production function has a constant marginal rate of technical substitution, equal to the ratio of the input coefficients, so isoquants are straight lines. This means the inputs are perfect substitutes in production at a fixed rate.

Question 38Microeconomics

A firm produces two goods with joint fixed costs and no economies of scope. How should it decide output levels to maximize profit?

  1. Produce equal quantities of both goods
  2. Set marginal revenue equal to marginal cost separately for each good Correct answer.
  3. Equalize average costs of the two goods
  4. Maximize total revenue across both goods combined

Explanation

When there are no economies of scope, the production decisions for the two goods are separable apart from fixed costs, which do not vary with output. Profit is therefore maximized by applying the marginal revenue equals marginal cost rule to each good independently.

Question 39Microeconomics

In a market with a negative production externality and no regulation, how does the competitive equilibrium compare with the socially efficient outcome?

  1. Output and price both equal the social optimum
  2. Output is too low while price equals the social optimum
  3. Output is too high and price too low relative to the social optimum Correct answer.
  4. Output is too low and price too high relative to the social optimum

Explanation

Firms ignore the external cost, so private marginal cost lies below social marginal cost. The competitive equilibrium therefore has more output and a lower price than the social optimum, which would require the higher social cost to be reflected in supply.

Question 40Microeconomics

A union raises wages above the competitive level in an otherwise competitive labor market. What is the predicted effect on employment?

  1. Employment falls as firms move up their labor demand curves Correct answer.
  2. Employment rises because firms substitute capital for labor
  3. Employment rises because higher wages attract more workers
  4. Employment is unchanged because labor demand is fixed

Explanation

At a higher wage, profit-maximizing firms reduce the quantity of labor hired along the downward-sloping labor demand curve, where the marginal revenue product of labor sets demand. The result is a movement up the demand curve and lower employment.

Question 41Macroeconomics

Which of the following is counted as an injection into the circular flow of income?

  1. Government spending on infrastructure Correct answer.
  2. Direct taxation of wages
  3. Imports of consumer goods
  4. Household saving

Explanation

Injections add to the circular flow and include investment, government expenditure, and exports. Government spending on infrastructure enters the flow as demand for goods and services, so it is an injection. Saving, imports, and taxation are withdrawals that leak out of the flow.

Question 42Macroeconomics

A country's nominal GDP rises by 6 percent while the GDP deflator rises by 4 percent. Real GDP therefore grows by approximately:

  1. 6 percent
  2. 10 percent
  3. 4 percent
  4. 2 percent Correct answer.

Explanation

Real GDP growth is approximately nominal growth minus the change in the price deflator. Subtracting 4 percent inflation from 6 percent nominal growth leaves about 2 percent real growth. This adjustment strips out the effect of higher prices.

Question 43Macroeconomics

The short-run aggregate supply curve is typically upward sloping because:

  1. Potential output is fixed in the short run
  2. Higher prices always reduce aggregate demand in the short run
  3. Wages adjust instantly to changes in the price level
  4. Firms respond to higher prices by expanding output when some costs are sticky Correct answer.

Explanation

With sticky wages and other input costs, a higher price level raises firms' profit margins and encourages them to produce more. This positive price-output relationship gives the short-run curve its upward slope. Once costs fully adjust, the curve becomes vertical.

Question 44Macroeconomics

Demand-pull inflation is most likely to arise when:

  1. Trade unions push up wages faster than productivity
  2. Aggregate demand grows faster than productive capacity Correct answer.
  3. The exchange rate appreciates sharply
  4. The central bank raises the policy interest rate

Explanation

Demand-pull inflation occurs when total spending outpaces the economy's ability to produce, pulling prices upward. Excess aggregate demand relative to capacity is the defining cause. Cost-push factors such as wage pressures operate through a different channel.

Question 45Macroeconomics

In the Keynesian cross, if the marginal propensity to consume is 0.75, the simple expenditure multiplier equals:

  1. 0.75
  2. 7.5
  3. 4 Correct answer.
  4. 1.33

Explanation

The simple multiplier is 1 divided by one minus the marginal propensity to consume. With an MPC of 0.75, one minus MPC is 0.25, and 1 divided by 0.25 equals 4. Each initial unit of spending generates four units of total income.

Question 46Macroeconomics

Structural unemployment refers to joblessness caused by:

  1. Seasonal changes in weather and tourism
  2. A mismatch between workers' skills and available jobs Correct answer.
  3. Short spells between leaving one job and starting another
  4. A temporary downturn in aggregate demand

Explanation

Structural unemployment arises from lasting mismatches between the skills or locations of workers and the requirements of employers. It reflects changes in technology, industry composition, or regional patterns. Demand-driven and seasonal joblessness are distinct categories.

Question 47Macroeconomics

According to the quantity theory of money, if velocity and real output are constant, a 10 percent increase in the money supply will cause:

  1. A 10 percent rise in the price level Correct answer.
  2. A 10 percent fall in the price level
  3. No change in the price level
  4. A 10 percent rise in real output

Explanation

The equation of exchange states that money times velocity equals the price level times real output. With velocity and output fixed, money and prices move proportionally. A 10 percent rise in money therefore produces a 10 percent rise in prices.

Question 48Macroeconomics

An increase in the central bank's policy interest rate is best described as:

  1. Expansionary monetary policy
  2. Contractionary monetary policy Correct answer.
  3. Contractionary fiscal policy
  4. Expansionary fiscal policy

Explanation

Interest rates are set by the central bank, so changing them is a monetary instrument. Raising the rate reduces borrowing and spending, which is contractionary. Fiscal policy instead involves government spending and taxation.

Question 49Macroeconomics

A country has a current account deficit of 40 billion and a capital and financial account surplus of 30 billion, with no statistical discrepancy. Its official reserves must have:

  1. Fallen by 70 billion
  2. Fallen by 10 billion
  3. Remained unchanged
  4. Risen by 10 billion Correct answer.

Explanation

The balance of payments must sum to zero, so the current account plus the capital and financial account plus the change in reserves equals zero. A 40 billion deficit offset by a 30 billion surplus leaves a 10 billion shortfall that reserves must cover. Reserves therefore rise by 10 billion.

Question 50Macroeconomics

The Phillips curve depicts a short-run trade-off between:

  1. Output and the money supply
  2. Inflation and the exchange rate
  3. Inflation and unemployment Correct answer.
  4. Unemployment and the interest rate

Explanation

The Phillips curve shows that lower unemployment is associated with higher inflation in the short run as demand pressure builds. This inverse relationship arises because tighter labour markets push up wages and prices. The trade-off weakens when expectations adjust.