Business and Economics MCQs

Question 1

#1

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Easy

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26 Jan 2026

What is the fundamental economic problem that necessitates the study of resource allocation?

Answer

Scarcity is the basic economic problem: the conflict between unlimited wants and limited resources. Because resources are scarce, choices must be made about how to allocate them, which forms the basis of economic study.

Question 2

#2

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Medium

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25 Jan 2026

Which capital budgeting method implicitly assumes that project cash flows are reinvested at the cost of capital?

Answer

The Net Present Value (NPV) method discounts future cash flows using the firm's cost of capital, thereby implicitly assuming that intermediate cash flows generated by the project can be reinvested at that same rate. The IRR method incorrectly assumes reinvestment at the IRR itself, which is often less realistic.

Question 3

#3

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Medium

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22 Jan 2026

What is primarily used as the discount rate for a firm’s overall free cash flow in discounted cash flow (DCF) valuation?

Answer

The Weighted Average Cost of Capital (WACC) represents the overall cost of a company's financing, including both equity and debt, weighted by their proportions in the capital structure. Since the Free Cash Flow to Firm (FCFF) is cash flow available to all investors (both debt and equity holders), WACC is the appropriate rate to discount these cash flows back to the present value to determine the company's enterprise value in a DCF valuation. The Cost of Equity (Re), often calculated using the Capital Asset Pricing Model (CAPM), is only the required return for equity holders and is a component of WACC.

Question 4

#4

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Medium

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18 Jan 2026

What is the core characteristic distinguishing Venture Capital from traditional bank debt for a startup?

Answer

Venture Capital (VC) is a form of equity financing where the investor, a venture capitalist, receives an ownership stake (equity) in the company in return for the capital. This means the return for the VC depends on the company's growth and profitability (realized via an exit like an IPO or acquisition). Traditional bank debt is a loan that must be repaid with interest regardless of the business's success or failure, and it does not involve an ownership stake.

Question 5

#5

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Medium

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18 Jan 2026

If the Marginal Propensity to Consume (MPC) is 0.8, what is the maximum potential change in equilibrium GDP from a $10 billion increase in government spending?

Answer

The formula for the spending multiplier (k) is $k = 1 / (1 - text{MPC})$. Given an MPC of 0.8, the multiplier is $k = 1 / (1 - 0.8) = 1 / 0.2 = 5$. The maximum potential change in GDP is calculated as $text{Change in GDP} = k times text{Change in Spending}$. Therefore, $text{Change in GDP} = 5 times $10 text{ billion} = $50 text{ billion}$. This represents the total effect of the initial injection plus the subsequent rounds of induced consumption.

Question 6

#6

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Medium

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18 Jan 2026

The primary capital budgeting decision rule for project acceptance requires the:

Answer

The Net Present Value (NPV) method is a core technique in financial management. The decision rule for an independent project is to accept the project if its NPV is positive (NPV > 0), as this indicates the project is expected to generate a return higher than the cost of capital and increase shareholder wealth. Option A is the rejection rule for IRR (IRR < Cost of Capital). Option B is a desirable outcome for the Payback Period, but it is not the universally preferred primary decision rule. Option D is incorrect as higher ARR is preferred, though ARR is often disregarded in favor of NPV/IRR.

Question 7

#7

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Medium

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15 Jan 2026

A company increases long-term Corporate Social Responsibility (CSR) spending. What is the most likely financial effect?

Answer

High Corporate Social Responsibility (CSR) spending, while reducing immediate cash flows (making option A and B incorrect in the short term), is strongly associated with long-term benefits. By establishing a positive reputation with stakeholders and the community, a company can reduce its risk of legal issues, boycotts, and regulatory fines. This reduction in non-financial/business risk translates into a lower overall risk profile, which in turn leads to a lower cost of capital (both equity and debt) and higher firm valuation in the long run.

Question 8

#8

By TheQuizWire

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Medium

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15 Jan 2026

What is the immediate effect of a central bank selling government bonds on money supply and interest rates?

Answer

Selling government bonds on the open market is a contractionary monetary policy action (Open Market Sales). When the central bank sells bonds, commercial banks use their reserves to purchase them, which effectively removes money from the banking system, thus reducing the money supply. A decrease in the money supply (or reserves) increases the cost of borrowing for banks, leading to a rise in market interest rates.

Question 9

#9

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Medium

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15 Jan 2026

What does the short-run Phillips Curve primarily illustrate in macroeconomics?

Answer

The short-run Phillips Curve illustrates the inverse relationship, or trade-off, between the rate of inflation and the rate of unemployment in an economy. In the short run, policymakers can often reduce unemployment by stimulating aggregate demand, but this action tends to lead to higher inflation, and vice versa. This relationship breaks down in the long run as expectations adjust, but the short-run curve captures this immediate policy dilemma.

Question 10

#10

By TheQuizWire

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Medium

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14 Jan 2026

What is the nature of the owner’s liability for business debts in a sole proprietorship?

Answer

A sole proprietorship is a business structure where the business is not a separate legal entity from its owner. This means the owner is personally responsible for all business debts and obligations, which is known as unlimited personal liability. If the business incurs debts, the owner's personal assets (like home or savings) are at risk.

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