UNIT 2 The National Economy Click here to Commence quiz 2.4 Macroeconomic Policy Test 1 © APT Initiatives Ltd.
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UNIT 2 The National Economy 2.4
Macroeconomic Policy Test 1
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AQA AS Economics Unit 2 – The National Economy Question 1
Fiscal policy is defined as a method of managing the economy through changes in… government spending and taxation.
interest rates.
exchange rates.
aggregate supply.
Correct Incorrect Incorrect Fiscal policy is defined as the use of government spending and taxation as a means of managing the economy. Hence, option A is the correct response.
Incorrect
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AQA AS Economics Unit 2 – The National Economy Question 2
A government anticipates a balanced budget compared with a budget surplus the year before. Which one of the following would bring about this change?
A fall in public spending and an increase in taxation Incorrect A rise in public spending and a fall in tax revenue An increase in public spending and a fall in tax revenue A fall in public spending and a decrease in public spending Incorrect Correct Incorrect A budget surplus occurs when public spending is less than tax revenue, and in order for there to be a balance budget the following year, either public spending has increased, or tax revenue has fallen, or both. Hence, option C is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 3
A government, wishing to increase aggregate demand, may use fiscal policy and therefore… reduce government spending. increase interest rates.
reduce income tax.
increase exchange rates.
Incorrect Incorrect Correct Incorrect Fiscal policy involves changes in government spending and taxation to manage the economy. Therefore, if the government wishes to increase aggregate demand it can reduce income tax, which will stimulate consumption. Hence, option C is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 4
An increase in income tax will … make work less attractive, and increase unemployment levels.
make work more attractive and increase employment levels.
have uncertain effects on the attractiveness of work and on employment levels.
none of the above.
Incorrect Incorrect Correct Incorrect An increase in income tax will discourage employment for some, because the benefit of working is reduced. However, others, who are anxious to secure a target income to cover their commitments, may choose to work harder. Hence, including the varying impacts on disposable incomes and therefore aggregate demand, the overall impact of an increase in income tax on working and employment is uncertain. Option C is, therefore, the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 5
By increasing spending on road infrastructure, the government can use fiscal policy to increase long-run aggregate supply. Specifically this policy will… increase aggregate demand and thereby increase unemployment.
Incorrect reduce business costs and increase our international competitiveness.
decrease tax income and allow more spending on education.
prolong a boom, which will enable prices to fall.
Correct Incorrect Incorrect Increased spending on road infrastructure will allow materials, components, and resources to move to where they are needed more easily and more quickly. This will reduce UK business costs, make our finished goods more competitive, and encourage an increase in output potential. Hence, option B is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 6
Which one of the following is most likely to be an example of a contractionary fiscal policy? An increase in interest rates An increase in income tax An increase in state pensions A reduction in Corporation Tax Incorrect Correct Incorrect Incorrect A contractionary fiscal policy involves the use of changes in the levels of taxation and government spending to reduce aggregate demand in the economy. For example, an increase in income tax will result in reduced aggregate demand and is, therefore, an example of a contractionary policy. Hence, option B is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 7
The diagram below shows the conditions of long-run aggregate supply and aggregate demand in an economy. Which of the following examples of government fiscal policy is most likely to result in a change in equilibrium from X to Y?… Increased spending on health promotion Correct Increase in vat A reduction in interest rates Incorrect Incorrect Increased spending on the justice system Incorrect
Price Level P O LRAS 1 X Y 1 LRAS 2 Y 2 Y AD 1 AD 2 Real National Output
An increase in spending on health promotion will add to aggregate demand and, in the longer term, will reduce illness absence from work, thereby increasing an economy’s potential output. Hence, option A is the correct response, since it is the only one that will shift both AD and LRAS.
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AQA AS Economics Unit 2 – The National Economy Question 8
The objective of UK monetary policy is currently to… reduce the money supply.
increase employment.
secure a target rate of inflation.
minimise inflation.
Incorrect Incorrect Correct Incorrect The objective of monetary policy is to achieve a target rate of inflation. This target rate, currently at 2%, is judged to best deliver low interest rates and economic stability, without imposing the unacceptable contractions of aggregate demand and employment that might arise with a lower target rate. Hence, option C is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 9
Which of the following circumstances might prompt the Bank of England to reduce interest rates?
There is strong growth in GDP and the trade deficit has fallen Incorrect The rate of inflation has stabilised at 3% and export revenue is increasing Unemployment is falling and the economy is booming Growth is below trend and retail sales are no longer increasing Incorrect Incorrect Correct The Bank of England will reduce interest rates when they feel inflation is on course to meet the target rate of 2%. This is more likely to be the case when economic growth is below trend and retail sales have stagnated. Hence, option D is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 10
Following a depreciation of the exchange rate, export volumes fall. This can be explained by… a fall in export prices. Incorrect high relative inflation in the UK. a fall in the price of imported goods. a boom in export markets.
Correct Incorrect Incorrect A depreciation of the exchange rate would, all other things being equal, reduce the price of UK exports. Therefore, the cause of a fall in export volumes would be unrelated to changes in exchange rates - for example as a result of increased UK inflation, which made UK exports relatively uncompetitive. Hence, option B is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 11
An economy is suffering from increasing inflation and a growing surplus on the current account of its balance of payments. These problems can best be addressed by … allowing the exchange rate to rise, and raising interest rates.
Correct raising interest rates, and allowing the exchange rate to fall.
lowering interest rates, and increasing government spending.
reducing government spending, and increasing interest rates.
Incorrect Incorrect Incorrect A rise in the exchange rate will reduce demand for our exports, and a rise in interest rates will reduce demand domestically and, by making imports cheaper, will further reduce inflationary pressure. Hence, option A is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 12
A rise in interest rates is likely to have an uneven impact across the economy because… it affects imports more than exports.
Incorrect it has less impact on some consumers than others.
it affects tax revenue more than government spending.
it affects the output of cheaper goods more than that of more expensive goods.
Correct Incorrect Incorrect A rise in interest rates will have a smaller effect on consumers with no mortgage or other borrowing, and with few savings on deposit. Hence, option B is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 13
A reduction in money supply can affect the rate of inflation by… reducing the amount of liquidity available in the banking system.
increasing interest rates.
discouraging consumption and investment. all of the above.
Incorrect Incorrect Incorrect Correct The money supply is defined as the total amount of purchasing power in the economy and, therefore, includes both cash and financial assets which can be turned into cash. Options A, B, and C represent direct and indirect ways in which a reduction in money supply reduces aggregate demand and hence the rate of inflation. Hence, option D is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 14
The monetary authorities may be reluctant to use exchange rates as a means of controlling inflation because… any changes in exchange rates will adversely affect the current account of the Balance of Payments.
Incorrect they have limited ability to determine a particular rate.
they wish to maintain our international competitiveness.
the impact of changes in interest rates and the money supply are more predictable.
Correct Incorrect Incorrect Changes in exchange rate will affect the level of aggregate demand and inflation in the economy. However, given that several factors can determine exchange rates, the ability of monetary authorities to use them to control inflation is limited and unpredictable. Hence, option B is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 15
The demand for imports into the UK from the euro area will rise if… sterling appreciates against the euro.
Correct the UK suffers a period of recession.
the euro appreciates against sterling.
UK-based businesses have become more competitive. Incorrect Incorrect Incorrect UK demand for imported products will depend on the state of the economy, the relative competitiveness of UK goods and services, and the exchange rate. For example, if sterling appreciates against the euro, imports will be cheaper and demand for them will increase. Hence, option A is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 16
Expansionary monetary policy is most likely to… shift the short-run aggregate supply curve to the left.
Incorrect be caused by reduced government spending.
reduce a deficit on the current account of the balance of payments. Incorrect Incorrect An expansionary monetary policy will be reflected in an increase in aggregate demand at all price levels. Hence, option D is the correct response.
shift the aggregate demand curve to the right.
Correct
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AQA AS Economics Unit 2 – The National Economy Question 17
A UK motor manufacturer buys components from the euro area, and sells its output in US markets. Therefore, this manufacturer will benefit most when the pound is… strong against the US dollar, and weak against the euro.
Incorrect weak against the US dollar, and weak against the euro.
weak against the US dollar, and strong against the euro.
strong against the US dollar, and strong against the euro.
Incorrect Correct Incorrect Components from the euro area will be relatively cheaper if sterling is stronger against the euro, and the finished cars will be relatively cheaper if the sterling is weaker against the US dollar. Hence, option C is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 18
Supply-side policies are typically concerned with influencing… the levels of consumption in the short-run.
Incorrect the short-run fluctuations in the rate of inflation. Short-run changes in the exchange rate.
Incorrect Incorrect Supply-side policies are designed to improve the long-run trend rate of economic growth. Hence, option D is the correct response.
the long-run trend rate of economic growth.
Correct
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AQA AS Economics Unit 2 – The National Economy Question 19
Which one of the following policies is most likely to be successful in maintaining lower levels of inflation?
An increase in VAT Incorrect Restrictions on economic immigration A reduction in unemployment benefit Depreciation of the currency Incorrect Correct Incorrect A reduction in unemployment benefits makes work relatively more attractive, and increases employment at lower wages. This increases real GDP, and reduces business costs, both of which reduce inflationary pressure. Hence, option C is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 20
A government may recognise that the underlying trend rate of economic growth can be increased by… reducing business taxes.
increasing spending on defence.
reducing interest rates.
increasing the exchange rate. Correct Incorrect Incorrect Incorrect In order to increase the trend rate of economic growth, the government needs to create an economic environment in which businesses are more likely to innovate and invest. Reduced taxes on profits provide at least some of the finance that makes this possible. Hence, option A is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 21
Independently of government, businesses may implement policies and strategies that have supply-side effects. These policies and strategies will exclude… training employees more intensively.
Incorrect advertising new products.
subcontracting non-core activities.
investing in more production processes.
Correct Incorrect Incorrect Options A, B, and D are policies which will improve business efficiency and, therefore, have supply-side effects for the economy as a whole. Option B, the correct response, is a strategy designed to increase demand rather than supply.
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AQA AS Economics Unit 2 – The National Economy Question 22
Supply-side and monetary policies may complement each other because they may both lead to… reduced inflation.
increased trend output.
reduced employment.
lower interest rates.
Correct Incorrect Incorrect Incorrect Both supply-side and monetary policies aim to reduce inflationary pressure, either directly through lower interest rates, or by improving efficiency and reducing costs. Hence, option A is the correct response.
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AQA AS Economics Unit 2 – The National Economy Question 23
Supply-side policies can increase the level of employment by… reducing inflationary pressure, through increased government spending.
Incorrect increasing output, through changes to the exchange rate.
increasing international competitiveness, through increases in aggregate demand.
Incorrect Incorrect Only option D, the correct response, accurately summarises the measure and mechanism by which supply side policies can contribute to increased employment.
increasing the incentive to work, through the tax system.
Correct
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AQA AS Economics Unit 2 – The National Economy Question 24
Which of the following is NOT a supply-side policy, designed to increase employment?
Improved information about job opportunities Incorrect Increasing the tax allowance on child care costs Removing the lowest paid from paying income tax Privatisation of healthcare Incorrect Incorrect Correct Options A to C are measures designed to increase the chances of working for those unemployed. Option D, the correct response, is a supply-side measure because it may lead to increased efficiency, but is likely to lead to a shedding of excess labour.
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AQA AS Economics Unit 2 – The National Economy Question 25
Supply-side policies differ from fiscal and monetary policies because they exclusively aim to improve macroeconomic performance by… reducing inflationary expectations.
improving the performance of particular markets.
limiting government influence in economic decision-making.
increasing employment levels, through aggregate demand.
Incorrect Correct Incorrect Incorrect Supply-side policies aim exclusively at making markets work better, in order to deliver greater productive and allocative efficiency. This outcome has wider beneficial macroeconomic consequences. Hence, option B is correct.
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