1) Aggregate demand will increase if:
a) Savings rise
Incorrect – savings are a withdrawal, so AD would fall
b) Exports fall
Incorrect – exports are an injection, so if exports fall, AD would fall
c) Imports rise
Incorrect – imports are a withdrawal, so AD would fall
d) Investment rises
Correct – investment is an injection, so if investment rises, AD will rise
2) Aggregate demand will fall if:
a) Savings rise
Correct – savings are a withdrawal, so AD would fall as the withdrawal is greater
b) Interest rates fall
Incorrect – if interest rates fall, spending is generally stimulated and AD would rise
c) Investment rises
Incorrect – investment is an injection, so if investment rises, AD will rise
d) Imports fall
Incorrect – if imports (a withdrawal) fall, spending is generally stimulated and AD would rise
3) If growth in AD is greater than the underlying trend rate of growth, this is likely to lead
to:
a) A fall in AS
Incorrect – AS is either likely to remain unchanged, assuming the economy is at full employment, or it
will rise to meet the rise in AD
b) Inflationary pressure
Correct – this is likely to create demand pull inflation
c) A balance of payments surplus
Incorrect – if AD increases, and national income is stimulated, the extra income will stimulate imports,
and exports will be unaffected, hence the balance of payments would worsen, and not improve
d) Rising unemployment
Incorrect – if AD increases, and national income is stimulated, the extra income will stimulate
consumer spending which, via a multiplier effect, will reduce unemployment, if anyone is unemployed,
rather than increase it
4) A rise in investment is likely to cause:
a) A movement along the AS curve
Incorrect – it will shift AS to the right
b) A rise in tax rates
Incorrect – tax rates are not likely to be affected by a rise in investment
c) A shift to the right in the AS curve, and a movement along the AD curve
Incorrect – there will not be a movement along the AD curve
d) A shift to the right in both the AD and AS curve
Correct – both AD and AS will shift to the right, given that investment is a determinant of both AD and
AS
5) Cost push inflation is most likely to occur if:
a) Exchanges rates rise
Incorrect – this would cause imported costs to fall, not rise
b) Exchange rates fall
Correct – lower exchange rates reduce the value of a currency and mean that imports are more
expensive when converted into the local currency, hence costs of imports rise
c) Income tax rates fall
Incorrect – this might cause demand pull inflation, but not cost push inflation
d) Interest rates fall
Incorrect – this might cause demand pull inflation, but not cost push inflation
6) A shift to the left in the AD curve is most likely to be caused by falling:
a) Imports
Incorrect – if imports fall, spending is generally stimulated and AD would rise
b) Exports
Correct – if exports, an injection, fall then AD is likely to fall, ceteris paribus
c) Tax rates
Incorrect – if tax rates fall, spending is generally stimulated and AD would rise
d) Savings
Incorrect – if savings fall, spending is generally stimulated and AD would rise
7) If a small fall in investment leads to a larger fall in national income, there is a:
a) Downward multiplier effect
Correct – the multiplier effect shows how a small change in an injection or withdrawal can
trigger a bigger final change in national income. So a fall in investment triggers a downward
multiplier effect
b) Rising savings ratio
Incorrect – this cannot be established as true
c) Downward accelerator effect
Incorrect – the accelerator effect is the ‘other way round’ – i.e. shows the effect of a change in income
on investment
d) Upward multiplier effect
Incorrect - the multiplier effect shows how a small change in an injection or withdrawal can trigger a
bigger final change in national income. But a fall in investment would not trigger an ‘upward’ multiplier
effect
8) The long run aggregate supply curve is affected by:
a) Prices
Incorrect – long run aggregate supply is not determined by changes in the price level
b) Wages
Incorrect – long run aggregate supply is not determined by changes in the wage level
c) Exchange rates
Incorrect – long run aggregate supply is not determined by changes in the exchange rate
d) Technology
Correct – improvements in technology increase the economy’s ability to produce
9) A rise in investment could be triggered by all of the following, except:
a) Falling interest rates
Incorrect - Investment is determined by a number of variables, including interest rates. A fall in
interest rates reduces the benefit (increases the opportunity cost) of keeping funds in the bank, and
increases the marginal productivity of capital, hence investment is more likely
b) Rising incomes
Incorrect - Investment is determined by a number of variables, including income. A rise in national
income will make investment more likely, and will increase via an accelerator effect
c) Falling business confidence
Correct – falling business confidence will discourage investment, rather than encourage it
d) Rising profits
Incorrect - Investment is determined by a number of variables, including business profit. A rise in
profits will make investment more likely
10) If real income per head rises in one country, the most likely result is:
a) Rising imports
Correct – imports are directly related to consumer spending which is related to income per
head
b) Falling investment
Incorrect – investment is more likely to rise, not fall
c) Rising exports
Incorrect – exports are determined by overseas income, not domestic income
d) Falling aggregate demand
Incorrect – AD is likely to rise, not fall
11) A fall in national income is most likely to cause:
a) An improving budget surplus
Incorrect – revenue will fall and spending will rise, so the budget position will worsen
b) A rising inflation rate
Incorrect – rising inflation is more likely to be associated with an increase in national income
c) Worsening of the balance of payments
Incorrect – imports are likely to fall. So the balance of payments should improve
d) Rising unemployment rate
Correct – a fall in national income could trigger an increase in demand deficient (or
‘Keynesian’) unemployment
12) If AD falls and there is a negative output gap, it is most likely that there will be a rise
in:
a) Unemployment
Correct – a negative output gap means that the economy already has spare capacity and
unemployment. If AD falls further the most likely result is unemployment.
b) Imports
Incorrect – as imports will probably fall
c) Investment
Incorrect – as investment will probably fall as business confidence falls
d) Business confidence
Incorrect – a rise in business confidence would not follow a fall in AD!
13) The accelerator effect relates to:
a) Changes in investment causing changes in income
Incorrect – this is the multiplier effect, not accelerator effect!
b) Changes in government spending leading to falling unemployment
Incorrect – this is the multiplier effect, not accelerator effect!
c) Changes in supply side policy
Incorrect – supply side policy would not directly trigger an accelerator effect
d) Changes in income causing changes in investment
Correct – the accelerator effect indicates that a small increase in national income can trigger a
larger increase in investment
14) A falling savings ratio is most likely to be caused by falling:
a) Consumer confidence
Incorrect – falling confidence would encourage more saving, not less
b) Imports
Incorrect – falling imports would increase AD (C + I + G + (X – M)), ceteris paribus, and stimulate
spending in the next time period, rather than encourage saving
c) Interest rates
Correct – falling interest rates will discourage saving and encourage spending
d) Exports
Incorrect – falling exports are more a sign of changes in overseas income, spending and saving
15) If AD is £500b, C is £400b, I is £50b, G is £40b and X is £50b, M must be:
a) + £40b
Incorrect - AD (C + I + G + (X – M))!
b) - £40b
Correct - AD (C + I + G + (X – M)), so 500 = 400 + 50 + 40 + (50 - M?), therefore: M? = 500 – 540,
which = - 40
c) + £60b
Incorrect - AD (C + I + G + (X – M))!
d) - £80b
Incorrect - AD (C + I + G + (X – M))!
16) Fiscal policy is associated with:
a) Changing interest rates
Incorrect – this is monetary policy
b) Changes in government borrowing
Correct – government borrowing is required to cover a fiscal deficit, where G > T
c) Reducing the money supply
Incorrect – this is monetary policy
d) Lowering exchange rates
Incorrect – this is monetary policy
17) An example of supply-side policy is the reduction of:
a) Marginal tax rates
Correct – one key element of supply-side policy is to provide incentives through the tax and
benefits system. Reducing marginal tax rates, i.e. the extra tax paid on extra income, will, in
theory, encourage people to work (though critics argue the effect is very small)
b) Interest rates
Incorrect – this is monetary policy
c) The money supply
Incorrect – this is monetary policy
d) The exchange rate
Incorrect – this is monetary policy
18) Structural unemployment could be worsened by:
a) A fall in tax rates
Incorrect – a fall in tax rates is likely to stimulate spending and certainly not increase any type of
unemployment
b) Immobility of labour
Correct- immobility of labour will contribute to inflexibility of the labour market in the face of
structural changes
c) A rise in the money supply
Incorrect – a rise in the money supply is likely to stimulate spending and certainly not increase
structural unemployment in the short run
d) Improved labour productivity
Incorrect – an improvement in labour productivity will create and not destroy jobs
19) The Phillips curve directly shows the relationship between:
a) Inflation and economic growth
Incorrect – what are shown on the axes?
b) Unemployment and the balance of payments
Incorrect – what are shown on the axes?
c) Interest rates and tax rates
Incorrect – what are shown on the axes?
d) Inflation and unemployment rates
Correct – the simple Phillips curve shows how rates of unemployment and inflation are
inversely related, where changes in the level of unemployment, through the effect of fiscal or
monetary expansion on the labour market, affect wages and inflation. The Phillips curve
indicates that policies to reduce unemployment may be in conflict with policies to reduce
inflation.
20) If the economy is at full employment, the most likely effect of an increase in the
money supply is:
a) A fall in exports
Incorrect – exports are largely determined by overseas income in the short run, not by changes in the
money supply
b) A rise in unemployment
Incorrect – a rise in unemployment is not likely to follow an increase in the money supply
c) A rise in imports
Correct – a rise in the money supply will stimulate spending, either because of the increased
availability of money and credit, or because of a fall in interest rates, or both. Hence imports
are likely to rise
d) A fall in investment
Incorrect – a rise in the money supply will stimulate spending, either because of the increased
availability of money and credit, or because of a fall in interest rates, or both. Hence investment is
likely to rise as firms invest in new equipment and plant to produce more goods.