C9 - Macro-Economics (5-15 Qs with C8) BC Flashcards
The Trade Balance is given as:
A) The sum of visible trades
B) The total of Britain’s visible and invisible trades
C) Britain’s Balance of Payments
D) Transactions carried out in financial assets
B - The total of Britain’s visible and invisible trades
The trade balance is defined as the sum of visible and invisible trade. Visible trade refers to the import and export of physical goods. Invisible trade refers to the flow of services. The trade balance therefore represents exports less imports of goods and services.
Which of the following is/are likely to lead to an increase in demand for sterling?
1. British exporters increase sales in Japan
2. A French manufacturer builds a factory in Britain
3. The number of Canadian tourists visiting British increases
A) All of the above
B) 1 and 2 only
C) 2 only
D) 1 and 3 only
A - All of the above
In National Income Accounting the difference betwen GDP and GNP is?
A) GNP is GDP plus Net Property Income from abroad
B) GNP is GDP plus deprecitation
C) GNP is GDP plus taxes less subsidies
D) GDP is GNP net of transfer payments
A - GNP is GDP plus Net Property Income from abroad
Gross domestic product (GDP) and gross national product (GNP) are both ways to measure the total value of a country’s goods and services, but they differ in how they calculate that value:
* GDP - Measures the value of all goods and services produced within a country’s borders, by citizens and non-citizens. GDP includes the output of factories owned by foreign companies, but not the income earned by foreign factors within the country.
* GNP - Measures the value of all goods and services produced by a country’s citizens, both domestically and abroad. GNP includes income from overseas investments by a country’s residents, but not foreign investment within a country’s borders.
GDP is the most commonly used economic indicator, especially for comparing countries. However, GNP may be a better metric for countries with substantial foreign investments. A large difference between a country’s GNP and GDP can indicate a high level of integration into the global economy.
The following statements relate to national accounting aggregates.
1. Gross Domestic Product at factor cost excludes the value of indirect taxes
2. National Income includes the cost of transfer payments
3. Gross National Product includes net property income from abroad
Which of the above is correct?
A) 1 and 2 only
B) 2 and 3 only
C) 1 and 3 only
D) All of the above
C - 1 (Gross Domestic Product at factor cost excludes the value of indirect taxes) and 3 (Gross National Product includes net property income from abroad)
Gross domestic product (GDP) is a monetary value that measures the total market value of all goods and services produced by a country or region in a specific time period. GDP is a key indicator of a country’s economic health and growth.
Gross National Product (GNP) is a measure of the total value of all goods and services produced by a country’s residents and businesses, regardless of where they are produced. It’s calculated by adding a country’s GDP to the income earned by its residents from foreign investments, and subtracting the income earned by foreign residents within the country.
GNP is one of the most common ways to measure a country’s economic health. It’s different from Gross Domestic Product (GDP), which measures the value of all goods and services produced within a country’s borders, regardless of who owns the means of production.
A UK fund manager manages a Euro portfolio worth £3.5m when the EU/GBP exchange rate is 0.75. At the end of the period the fund is worth £3.6m when the EUR/GBP rate is 0.80.
What is the Euro percentage return?
A) +12.85
B) -3.57
C) +3.70
D) -6.67
B: -3.57
((£3.6m/0.80)/(£3.5m/0.75)) -1 = -0.0357, hence the return in EUROs is -3.57%
CHECK BOOK AGAIN AS I AM GETTING 0.0971
A country is said to be internal and external balance when:
A) The PSNCR and the capital account of the balance of payments aere both zero
B) Private savings euqals private investment and exports of goods equal imports of goods
C) Aggregate demand is at full employment and the current account of the balance of payments balances
D) Inflation is zero and the exchange rate is stable
PSNCR stands for Public Sector Net Cash Requirement
C - Aggregate demand is at full employment and the current account of the balance of payments balances
Which of the following is/are included as invisible items on the current account of the balance of payments?
1. Spending on training in the UK by overseas students
2. Government aid to a lesser developed country
3. Returns on an investment made abroad by a UK resident
A) All of the above
B) 2 and 3 only
C) 1 and 2 only
D) 2 only
A - All of the above
Invisible items are services.
Which of the following items constitutes a leakage from the circular flow of income of an economy?
A) The purchase of domestically produced good by a domestic company
B) The purchase of domestically produced good by a foreign company
C) The payment of value added tax on goods sold in the domestic market
D) Government aid to companies
C - The payment of value added tax on goods sold in the domestic market
Foreign factors are excluded, whereas tax is a leakage.
In the circular flow of income model, leakage refers to money that leaves the economy, or is withdrawn from the flow of income. This can include taxes, savings, and imports. VAT is a type of leakage because it reduces the flow of income.
The Spot Exhange rate is £1 : $1.50, the eurodollar rate is 5% and the Eurosterling rate is 10%
What is the forward rate?
A) 1.4114
B) 1.4318
C) 1.5050
D) 1.5714
B - 1.4318
Forward = Spot x ((1+r quoted)/(1+r base)
So $1.5000 x (1.05 / 1.10) = $1.4318
In the classical model of the economy what effect would a change in the nominal Money Supply have?
A) A fall in rate of interest
B) Increased output and employment
C) A reduction in the real money supply
D) An equi-proportionate change in wages and prices and no change in output and employment.
D - An equi-proportionate change in wages and prices and no change in output and employment.
Prices and wages are fully flexible under the classical economic theory.
Classical economic theory is a school of economic thought that originated in the late 18th century and was based on the idea that a free market would value commodities through price discovery. It was developed shortly after the rise of Western capitalism and was the dominant economic theory in Great Britain until around 1870. Some key ideas of classical economic theory include: Free markets, Labor-based value, Supply-side perspective, Circular flow of production, Profit and Optimal training.
The International Fisher Effect implies:
A) The relationship between forward and spot exchange rates is driven by the two country’s interest rate differentials
B) The price of the same goods are equal (in real terms) across countries
C) The relationship between forward and spot exchange rates is driven by the difference in inflation rates between the two countries
D) In the absence of restrictions, real interest rates between countries must be equal
D - In the absence of restrictions, real interest rates between countries must be equal
The International Fisher Effect hypothesis states if investors can choose where they invest without restriction that the real interest rate will be the same everywhere.
The long term Phillips curve shows that:
A) The inflation/unemployment trade-off continues
B) There is no long run inflation/unemployment trade off
C) The short run phillips curve is irrelevant
D) In the long run unemployment can be kept below the natural rate with no inflation
B - There is no long run inflation/unemployment trade off
The LRPC illustrates that there is no trade-off between inflation and unemployment in the long run. This is because the short-run trade-off between the two variables eventually adjusts out.
Which of the following theories when combined lead to conclusion that the best estimate of future spot exchange rates is the current forward rate?
1. Interest rate parity (IRP)
2. Purchasing power parity (PPP)
3. International Fisher effect
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) All of the above
D - All of the above
If purchasing power parity, the International Fisher Effect and Interest rate parity all hold then the future exchange rate will equal the forward rate. In practice only one relationship (interest rate parity) holds in both the short and long run.
- IRP is a theory that describes the relationship between the interest rates and exchange rates of two countries. It states that the difference in interest rates between two countries should be equal to the difference between their forward and spot exchange rates.
- PPPs are currency conversion rates that try to equalize the purchasing power of different currencies by eliminating price level differences between countries. PPPs are calculated by comparing the price of a basket of goods and services in one country to the price of the same basket in another country. If a hamburger costs £2 in London and $4 in New York, the PPP exchange rate is 1 pound to 2 U.S. dollars.
Assuming output and employment remain constant, then 1% rise in the money supply will lead to which of the following:
A) A 1% rise in inflation
B) A 1% rise in the real money supply
C) A 1% fall in inflation
D) A 1% fall in interest rates
A - A 1% rise in inflation
If output of the economy is constant then 1% increase in the money supply leads to a 1% increase in prices. This is known as the quantity theory of money.
The quantity theory of money (MV=PT) states that changes in (nominal) money supply lead to equal and proportional changes in the price level (inflation)
Consider the following statements about inflation:
1. If prices rise faster than expected, borrowers gain at the expense of lenders
2. If inflation is fully anticipated, the real rate of interest equals the nominal rate
3. If the money supply is fixed, there will be no inflation
A) 1 only
B) 2 and 3 only
C) 1 and 3 only
D) 1 and 2 only
A - 1 (If prices rise faster than expected, borrowers gain at the expense of lenders)
An increase in interest rates which results from an increase in government spending is called:
A) Crowding out
B) Crowding in
C) Multiplier
D) Income effect
A - Crowding Out
Expansionary fiscal policy means increasing government expenditure and reducing taxes (AKA running a budget deficit) to stimulate aggregate demand. One criticism of this is that a budget deficit will need to be funded by issuing govenment bonds. This increase in demand for loanable funds causes interest rates to rise, which in turn may reduce (crowd out) private sector investment and cause consumption to fall as the marginal propensity to save increase.
Which of the following is an example of cyclical unemployment?
A) A textile worker made redundant becauase of permenant fall in the demand for UK Textiles
B) A building worker temporarily laid off because of bad weather
C) A manufacturer worker made redundant during a recession
D) A car worker made redundant because of the introduction of robots
C - A manufacturer worker made redundant during a recession
Cyclical unemployment is also known as Kensyian unemployment
- Seasonal unemployment: This type of unemployment occurs when there are changes in the weather or in the nature of work in certain industries, such as agriculture, tourism, or retail.
- Structural unemployment: This type of unemployment occurs when a company’s demand for new skills doesn’t match the skills of its employees. It can be caused by technological changes, globalization, or policy and regulations.
An open market operation between domestic money and domestic bonds designed to neutralise the tendency of Balance of Payment imbalances to change the domestic money supply is known as?
A) Immunisation
B) Neutralisation
C) Funding
D) Sterilisation
D - Sterilisation
Changes in money supply can be offset by the pricess of sterilisation which involves selling government bonds to reduce the money supply.
If the EUR/GBP 6 months forward quote is EUR 1.2410/1.2450 and the 6 month forward premium is 47/45, what is the spot quote?
A) EUR 1.2880 / 1.2900
B) EUR 1.2457 / 1.2495
C) EUR 1.2860 / 1.2920
D) EUR 1.1960 / 1.1980
B - 1.2457 / 1.2495
Forward Rate = Spot Rate - Premium / + Discount
Rule of thumb: If the forward adjustment descends from bid to ask (left to right) deduct it from the spot price. This is market convention for quoting a ‘premium’.
However, in this example we need to work backwards from the forward quote. So Spot Rate = Forward Rate + Premium / - Discount.
1.2410 + 0.0047 = 1.2457, 1.2450 + 0.0045 = 1.2495.
A cross rate is defined as:
A) The difference between the bid and offer price
B) The rate used in a swap agreement calculated as the difference between the current fixed and the variable interest rate
C) The fee payable for participating in an uncrossing auction
D) A non-US Dollar foreign exchange rate between two countries
D - A non-US Dollar foreign exchange rate between two countries
Cross currency rate is an exchange rate between two international currencies in context with valuation with a third common currency. USD is usually accepted as the third currency.
In a closed economy with no government sector the marginal prosensity to save (MPS) is 0.2. What are the marginal prosensity to consume (MPC) and multiplier respectively?
A) 0.8 / 5
B) 5 / 1.25
C) 0.5 / 5
D) 0.8 / 1.25
A - 0.8 / 5
The marginal prospensity to consume (MPC) is how much of each additional £ of income spent rather than saved. Note that 1-MPC = MPS.
So 1 - 0.2 (MPS) = 0.8 MPS. 1/0.2 = 5 multiplier (like yield mulipliers)
All other things being equal if a proportionate tax was imposed on personal disposable income, would there be:
1. A decrease in aggregate demand
2. An increase in aggregate demand via the multiplier
3. An increase in the steepness of the consumption curve
4. A decrease in the steepness of the consumption curve
A) 1 and 3 only
B) 1 and 4 only
C) 2 and 3 only
D) 2 and 4 only
B - 1 (decrease in aggregate demand) and 4 (decrease in the steepness of the consumption curve)
Higher taxes will reduce aggregate demand. Higher taxes reduce consumers disposal income and as a result consumption expenditure.
Aggregate demand (AD) = Consumption (C) + investment spending (I) + government spending (G) + Exports - imports
Which of the following is NOT true regarding the natural rate of employment?
A) Such unemployment is completely voluntary
B) It includes cyclical unemployment
C) It includes frictional unemployment
D) It includes structural unemployment
B - It includes cyclical unemployment is NOT TRUE
Natural rate of employment does not include cyclical unemployment
- Cyclical unemployment is a type of unemployment that occurs when the economy’s business cycle changes, leading to job losses
- Frictional unemployment is a short-term period of unemployment that occurs when people are voluntarily changing jobs or entering the workforce. It’s also known as search unemployment.
- Structural unemployment is a type of long-term unemployment that occurs when there’s a mismatch between the skills of the unemployed and the skills needed by employers. It can be caused by a number of factors, including: technological changes, economic changes, and Industry development.
Assuming that the International Fisher Effect applies, the £ interest rate is 7% and the inflation is 3% in the UK. If the US interest rate is 6%, what is US inflation?
A) 1%
B) 2%
C) 3%
D) 4%
B - 2%
Using the International Fisher Effect equation (1.06/1.07) = (1 + USi/1.03), hence (1.06/1.07) x 1.03 = 1.02m so US inflation is 2%.
Which of the following is likely to be the principle objective of a government running a large Public Sector Net Cash Requirements (PSNCR) as a matter of policy?
A) Combating inflation by breaking into a wage-price spiral
B) Increasing employment by stimulating demand for domestic products
C) Bringing about equilibrium in the balance of payments by stimulating demand for exports
D) Supporting the sterling exchange rate by purchasing sterling via the Bank of England
B - Increasing employment by stimulating demand for domestic products
Fiscal policy may be used to stimulate expansion or contraction of the economy, hence the budget surplus or deficit (PSNCR) policy.
Which of the following is a measure of the value of the multiplier in a closed economy with no government economic involvement?
1. 1 / (1-MPC)
2. 1 / MPS
3. Change in Y / Change in I
A) 1 only
B) 2 only
C) All of the above
D) 1 and 2 only
C - All of the above
- The formula M=1/(1-MPC) is used to calculate the economic multiplier, where M is the multiplier and MPC is the marginal propensity to consume.
- The formula for the multiplier effect in a two-sector economy is K=1/MPS, where K is the multiplier and MPS is the marginal propensity to save. This means that the value of the multiplier varies inversely with the value of MPS. A higher MPS results in a smaller multiplier, and a lower MPS results in a larger multiplier.
- In economics, the formula for the investment multiplier is K= Change Y / Change in I where Y is the change in GDP and I is the change in investment. The multiplier effect is the theory that an increase in investment leads to an increase in GDP. The multiplier effect is greater than one, meaning that the national income and product increase by more than the increase in investment.
If the US dollar was quoted at a premium to sterling on the forward foreign exchange markets, then the forward quote should be:
A) Added to the spot rate
B) Deducted from the spot rate
C) The same as the spot rate
D) Impossible to say given from the information
B - Deducted from the spot rate
Remember, Premiums are deducted and discounts are added to the spot (opposite if you are given the forward rate and trying to get the spot).
According to the Phillips curve, what would be the effect of an increase in employment?
A) There would be a corresponding reduction in inflation
B) The Phillips curve would shift to the right
C) Inflation would increase
D) There would be a temporary reduction in inflation
C - Inflation would increase
The Phillips curve demonstrates an empirical observation that inflation rates and unemployment appear to be inversely related (see-saw).
In a consumption function of the form C = a + c YPD where YPD = personal disposable income, what would be the impact on the consumption function of a decrease in taxation?
A) No change at all
B) It increases the slope of the consumption function
C) It shifts the position of the consumption function
D) The slope and intercepts of the consumption function are altered.
B - It increases the slope of the consumption function
C=a+cYPD states that consumption comprises of a = autonomous consumption (spend on necessities regardless income) and then a linear function of disposal income multiplied by the marginal prospensiy to consume. Changes in automonous consumption will cause parallel shifts in consumption and as a result aggregate demand. Changes in tax will impact disposal income and hence the slope of the consumption function. A reduction in tax rate means greater disposal income at any given level of GDP and hence greater consumption. Note that the slope will increase in this situation.
If the UK and USA expected inflation rates are 3% and 5% respectively, what are the US nominal interest rates if UK nominal rate is 6%.
A) 8.1%
B) 4.0%
C) 2.0%
D) 7.1%
A - 8.1%
The International Fisher equation states that the inflation rate differential should be equal to the interest rate differential, hence; (1+iq/1+ib)=(1+Rq/1+Rb).
Rearrange to solve for Rq (US rates):
(1.05/1.03) x 1.06 = 1.08058 = 8.1%
Which of the following is an example of an injeton into the circular flow of income?
A) Imports
B) Savings
C) Taxes
D) Government expenditure
D - Government expenditure
* Import is domestic money is spent on foreign goods, so taken out of the economy
* Savings are money held, so taking out of circulation
* Taxes are a leakage of the cicular flow of economy
The following expression represents a consumption function: C = a + bYd
What does the b represent?
A) Average Propensity to Consume
B) Marginal Propensity to Consume
C) The level of autonomous consumption
D) The level of consumption when income is zero
B - Marginal Propensity to Consume
C = a + b Yd where a=autonomous consumption, b = MPC and Yd = disposable income.
An investor in the common stock of companies in a foreign country may wish to hedge against the X of the investor’s home currency, and can do so by Y the foreign currency in the forward market.
With X and Y being:
A) Depreciation / Selling
B) Appreciation / Purchasing
C) Appreciation / Selling
D) Depreciation / Purchasing
C - Appreciation / Selling
Selling foreign currency in a forward markets locks the investor into a guaranteed exchange rate for converting the overseas currency back into domestic currency (this is referred to hedging the exchange rate risk)
In finance, a hedge is an investment or strategy that reduces the risk of loss in other investments.
The visible trade in the current account of the UK balance of payments includes receipts:
1. In respect of exports of capital goods
2. Representing exports of capital
3. Representing profits on capital investment overseas.
Which of the above is TRUE?
A) All of the above
B) 1 and 3 only
C) 1 only
D) None of the above
C - 1 (In respect of exports of capital goods) only
Capital goods e.g. machinery
Which of the following will NOT necessarily reduce a balance of payments deficit?
A) An improvement in the terms of the trade
B) The imposition of import quotas
C) An increase in domestic interest rates relative to those in demand
D) Increased productivity in an import substitute industry
A - An improvement in the terms of the trade
A better trade agreement is likely to increase the balance of payments deficit.
An excess of aggregate demand leads to inflation called:
A) Cost Push inflation
B) Cost Pull inflation
C) Demand Push inflation
D) Demand Pull inflation
D - Demand Pull inflation
Inflation is defined as increases in the price level as measured by changes in the consumer price index (CPI). The causes of inflation can be numerous but broadly include DEMAND PULL inflation and COST PUSH inflation.
* DEMAND PULL inflation is caused by increases in aggregate demand. When aggregate demand grows at a quicker rate than aggregate supply prices will rise. Demand Pull inflation is often associated with inappropriately expansive fiscal or monetary policy.
* COST PUSH inflation results from the cost of production increasing (this is often caused by global input prices increasing). An increase in the cost of production means that firms will be willing to supply fewer goods and services at each price (firms profits margins have been reduced) causing aggreagte supply to shift to the left.
Keynesian unemployment is described as:
A) Involuntary and due wage and price stickiness
B) Voluntary unemployment
C) The level of unemployment associated with the labour market in equilibrium
D) An excessively high Benefits:Earnings ratio
A - Involuntary and due wage and price stickiness
Keynesian unemployment refers to a demand deficiency brought about by the lack of flexibility of wages and prices required to restore classical full employment.
Keynesian unemployment is a type of unemployment that occurs when there isn’t enough demand for goods and services to employ everyone who is available and willing to work. It’s also known as demand-deficient unemployment or cyclical unemployment.
According to the quantity theory of money, if the Gross Domestic Product (GDP) is £6 trillion and M1 money supply is £800 billion, the velocity of the money supply is:
A) 0.133
B) 1.153
C) 6.500
D) 7.500
D - 7.500
Using Fisher’s Quantity Theory of Money:
Money Supply x Velocity = Gross Domestic Product (P x T)
Therefore,
£800B x velocity = £6,000B
Rearranged: Velocity = £6,000B / £800B = 7.5
The spot rate of dollars against sterling is 1.846 - 1.854 with 3 month forward rates of 0.25c pm - 0.22c pm
How much would you expect to receive in sterling in 3 months if you sell 50,000 dollars forward?
A) 26,937
B) 27,001
C) 27,049
D) £27,122
B - £27,001
As we want to sell $ forward, we want the offer rate i.e. BID (to sell dollar to you) TO OFFER (to buy dollars from you) being left to right, so second number in spot rate is taken.
Forward rate = $1.854 - $0.0022 = $1.8518
$50,000/1.8518 = £27,001
“Crowding out” occurs when:
A) The government attemptes to improve the balance of payments by giving incentives to exporters; this discourages private sector investment
B) Government borrowing to finance reflationary expenditure drives up interest rates and discourages private sector investment
C) An increase in the money supply due to government spending causes inflation, destablising the economy and discouraging investment
D) Government employment incentives lead to low productivity, uncompetitive exports and therefore a worsening trade balance, with a consequent deflationary effect.
B - Government borrowing to finance reflationary expenditure drives up interest rates and discourages private sector investment
Crowding out is an economic theory that describes how increased government spending can lead to a decrease in private sector spending. This can happen when the government increases taxes or borrows money, which can lead to higher interest rates and reduced income. When the cost of borrowing increases, the private sector is less likely to spend.
Crowding out can also occur when the government expands its involvement in a particular sector of the economy, which can affect the rest of the market. For example, if a local government increases its IT workforce, it can lead to higher wages for IT workers, which can make it more difficult for private sector companies to hire them.
What is natural employment?
A) The rate of unemployment which prevails hen the economy is in equilibrium
B) The rate of unemployment which prevails when the economy is level, because the economy is never in equilibrium
C) People who do not want to work
D) Natural level of people moving between jobs
A - The rate of unemployment which prevails hen the economy is in equilibrium
The natural rate of unemployment is the lowest rate of unemployment that a stable economy can sustain, and it’s compatible with a steady inflation rate. It’s the result of voluntary or real economic forces, such as workers moving between jobs, or when technology or automation replaces jobs.
The natural rate of unemployment is calculated by adding frictional and structural unemployment, and then dividing that sum by the total unemployment rate.
The velocity of money is the:
A) Rate at which the money supply expands
B) Multiple by which the increase in govenment expenditures will casue GDP to expand
C) Average number of times a pound is used to purchase goods and services included in the GDP
D) National income divided by currency in ciculation
C - Average number of times a pound is used to purchase goods and services included in the GDP
The velocity of money estimates the movement of money in an economy—in other words, the number of times the average pound changes hands over a single year. A high velocity of money indicates a bustling economy with strong economic activity, while a low velocity indicates a general reluctance to spend money.
If the real risk-free rate of interest is 3%, inflation is expected to be 5%, and the money supply is estmated to be growing at 4.5%, what is the nominal risk free rate of interest?
A) 13.6%
B) 7.63%
C) 8%
D) 8.15%
D - 8.15%
Fisher’s equation: (1+Rreal = 1.03) = (1+Rnominal)(1+Rinflation = 1.05).
Rearranged: (1.03 x 1.05) - 1 = 0.0815 = 8.15%
The nominal risk-free rate of interest is the yield on a risk-free asset without the effects of inflation. It’s a theoretical rate that investors require for a financial instrument with no risk of inflation. The nominal risk-free rate is different from the real risk-free rate, which is the required return on a zero-risk financial instrument that takes inflation into account. The relationship between the two is shown in the equation above.
In 2021, which of the following was the approximate share of the USA in the global gross demestic product?
A) 30%
B) 20%
C) 22%
D) 50%
C - 22%
The USA was around 22% of the world output.
Top 10 as of 2023 being (Country GDP by Capita (i.e. per person)/Share of Global GDP):
1. United States $74,554 / 25.32%
2. China $12,604 / 17.86%
3. Japan $33,850 / 4.21%
4. Germany $48,429 / 4.05%
5. India $2,375 / 3.37%
6. United Kingdom $45,038 / 3.05%
7. France $41,989 / 2.77%
8. Russia $15,390 / 2.23%
9. Canada $55,120 / 2.13%
10. Italy $33,721 / 2.00%
SOURCE: https://www.worldometers.info/gdp/gdp-by-country/
Gross Domestic Product (GDP) is best described as:
A) Output produced by factors of production owned and located within an economy
B) Output produced by factors of production within an economy irrespective of the location of ownership
C) Equal to the gross national product (GNP) plus domestic ownership of foreign factors of production
D) Always less than the GNP for all countries
A - Output produced by factors og production owned and located within an economy
The location and ownership of factors of production is key here:
* GDP - “Made in the UK”
* GNP - “Made by British firms in the UK and abroad”
* GNP is GDP PLUS net property income from abroad
The factors of production are the resources used to produce goods and services. They are land, labor, capital, and entrepreneurship.
National income…
A) …is always LESS han the net nartional product
B) …equals GNP at FACTOR COST LESS capital depreciation
C) …equals GNP at MARKET PRICE LESS capital depreciation
D) …is GDP plus the net proeprty income from abroad
B - National income…equals GNP at FACTOR COST LESS capital depreciation
This involves removing the impact of indirect taxes and capital depreciation
National income is the total value of goods and services produced in a country over a specific period of time. It’s also known as gross national income (GNI) or gross domestic product (GDP).
Consider the following statements
1. The multiplier is always LESS than one
2. The multiplier is the ratio of change in equilibrium output to aggregate demand (AD) changes
3. The multiplier is the ratio of the GNP to GDP in any given year
Which of the following is/are correct?
A) Only 1 in true
B) All of the above are true
C) Only 2 is true
D) Only 1 and 2 are true
C - Only 2 (The multiplier is the ratio of change in equilibrium output to aggregate demand (AD) changes)
Multiple can take values greater than 1.
A closed economy is one which:
A) There are no monopolies
B) The is no government interference
C) There is no foreign trade
D) There is no market mechanism
C - There is no foreign trade
Closed economy refers to lack of openess to international trade. A closed economy is a country that doesn’t trade or exchange capital and labor with other countries. The goal of a closed economy is to be self-sufficient, producing everything a country’s citizens need within its borders.
Characteristics No imports or exports, No financial exchanges with other countries, No movement of capital or labor, and Everything consumed is produced within the country.
Examples Japan between the 1600s and 1850s, Spain in the 1940s and 1950s, Albania in the late 1970s to mid-1980s, and North Korea.
If, in a closed economy, the marginal prospensity to save if 0.1, the value of the multiplier is:
A) 0.1
B) 0.9
C) 1.0
D) 10.00
D - 10.00
Multiplier: 1/1-(c-e), with c being MPC and e being marginal propensity to import.
SO: 1/1-[1-0.1]-0 = 10
MPS = 1 - MPC, so the above equation could also be written as 1/MPS so 1/0.1 as it is the simple form of the equation which doesn’t require any adjustments to MPC.
MPC = Marginal prospensity to Consume
The marginal propensity to import (MPM) is the ratio of the change in imports to the change in income.
If, in an open economy, with no government sector, the marginal propensity to consume domestic goods is 0.6 and the marginal propensity to import is 0.2, then the value of the multiplier is:
A) 1.67
B) 1.25
C) 5.01
D) 0.67
A - 1.67
Multiplier: 1/1-(c-e), with c being MPC and e being marginal propensity to import. “No government sector” is referring to no adjustments made for tax to the multiplier
SO: 1/1-(0.6-0.2) = 1.67
An equal increase in both government spending and taxation is known as:
A) The public sector borrowing requirement
B) The full employment budget surplus
C) A balanced budget change
D) The fiscal deficit
C - A balanced budget change
Fiscal policy can help automatically stabilise the aggregate level of output in an economy because:
A) Monetary policy is redundant
B) Tax revenue rises with output, leading to larger budget surplus (or small deficit)
C) Economic growth is insensitive to tax changes
D) The multiplier is less than one
B - Tax revenue rises with output, leading to larger budget surplus (or small deficit)
Taxes rise as output naturally rises naturally increaseing the budget surplus/reducing the decifit
Fiscal policy is a government’s spending and tax policy, while monetary policy is a central bank’s policy on interest rates and money supply. Both policies are used to manage a country’s economy.
The use of monetary and fiscal policy to stabilise aggregate demand (AD) is known as:
A) Demand management
B) An independent monetary policy
C) Supply-side economics
D) A balance budget change
A - Demand management
Using both monetary (bank - interest rates & money suply) and fiscal (government - spending / tax) is Demand Management.
- Demand management refers to using the tools of monetary and fiscal policy to influence AD;
- Supply-side economics is influencing aggregate SUPPLY of output through measures such as training or tax changes
- A balanced budget change is an equal change in government revenue (tax) and expenditure
The money multiplier relates the change in the money supply to changes in:
A) Government expenditure
B) Narrow money
C) Wide money
D) The monetary base
D - The monetary base
Money stock = Money multiplier x Monetary Base
This involves understanding the exact definition of differency definitions on ‘money’. The monetary base is that portion of commercial banks’ reserves which are maintained at the central bank plus the total currency circulating with the public.
- Narrow money is a measure of the money supply that includes physical currency and highly liquid assets. It’s also known as M1
- Broad/wide money is a term used to describe a wider definition of money that includes less liquid assets, like savings deposits and long-term deposits. It’s also known as M3.
‘Open market operations’ by a central bank involve:
A) Setting a new discount rate for the market
B) Changing the monetary base by buying AND selling securities on the open market
C) Changing the monetary base by selling securities on the open market
D) Deregulating financial markets
B - Changing the monetary base by buying AND selling securities on the open market
The monetary base can be increased or decreased by the central bank by buying or selling government securities which is known as Open Market operations.
Independent central banks may be responsible for:
1. Banknote printing
2. Monetary policy
3. Banking supervision
4. Taxation policy
Which of the above is TRUE?
A) Only 2 is true, the rest are false
B) 1, 2 and 3 are true but 4 is false
C) 2 and 3 are true but 1 and 4 are false
D) All of the above are true
B - 1 (banknote printing), 2 (monetary policy) and 3 (banking supervision) are true but 4 (tax policy) is false
Taxaxtion policy is fiscal policy which is dealt with by the government not the central bank
In the UK, the Bank of England (BoE) is responsible for:
1. Monetary policy
2. Banknote printing
3. Bank supervision
4. Government funding
Which of the above is true?
A) All are true
B) 1 is true, but the rest is false
C) 1, 2 and 3 are true but 4 is false
D) All are false
C - 1 (monetary policy), 2 (banknote printing) and 3 (bank supervision) are true but 4 (government funding) is false
UK Treasury funds include Treasury bills, gilts, and the Treasury Reserve. These funds are used to finance government operations and manage public spending.
In the classical model of output and inflation:
1. Wages are fully flexible, but prices are not
2. Wages and good prices are fully flexible
3. Changes in the money supply have no impact on real variables
4. Output is fixed at the full employment level
Which of the above is/are true?
A) 1 and 4 are true, but 2 and 3 are false
B) All are FALSE
C) 1 is FALSE and the rest are true
D) 4 is TRUE and the rest are false
C - 1 (Wages are fully flexible, but prices are not) is FALSE and the rest are true
Prices and wages are both fully felxible and monetary policy does not chnage output, which remains at full employment.
Real variables are economic measurements that have been adjusted for inflation. They are used to compare economic measures over time, such as wages, interest rates, and GDP.
‘Classical’ unemployment refers to that part of the labour force which is:
A) Between jobs
B) Unemployed due to structural changes in the economy
C) Unemployment due to real wages being too low
D) Unemployment due to real wages being too high
D - Unemployment due to real wages being too high
- Classical unemployment refers to real wages (and expectations by employees) not adjusting downwards, so too high relative to production.
- A and B answers involve frictions in the system being Frictional and Strutural unempoyment respectively
- C where labour is cheap would not involve classical unemployment
Consider the following statements:
1. Keynesian unemployment in involuntary
2. Keynesian unemployment is due to the slow adjustment of wages and prices
3. Keynesian unemployment is not related to aggregate demand (AD) deficiency
Which of the above is/are correct?
A) 1 and 3 are true, but 2 is flase
B) All three are false
C) 1 and 2 are true but 3 is false
D) 2 and 3 are true but 1 is false
C - 1 (involuntary) and 2 (slow adjustment to wages) are true but 3 (not related to AD deficiency) is false
Keynesian unemployment (AKA Cyclical or Demand-Deficiency unemployment) occurs when there isn’t enough demand for goods and services to employ everyone who is willing and able to work.
Examples of Keynesian unemployment being the COVID-19 pandemic:
The pandemic caused a sharp decrease in demand for many goods and services, leading to widespread job losses.
Monetarists believe that the long-term Phillips curve is:
A) Horizontal for all real interest rates
B) Vertical for all inflation rates at the natural rate of unemployment
C) Dependent solely on monetary surprises
D) Downward sloping to the right
B - Vertical for all inflation rates at the natural rate of unemployment
In the long run for any inflation the level of unemployment is fixed at the natural rate.
Consider the following statements:
1. The long and short term Phillips curves intersect at the natural rate of unemployment
2. The Fisher hypothesis relates to the level of inflation to the level of unemployment
3. The natural rate of unemployment includes both voluntary and involuntary unemployment
Which of the above is/are correct?
A) 1 is true, but 2 and 3 are false
B) All are false
C) 1 and 2 are true but 3 is false
D) 1 and 3 are true but 2 is false
A - 1 (ST & LT Phillips cross at natural rate) is true, but 2 (fisher relates to inflation to unemploymet) and 3 (natural rate includes voluntary and involuntary) are false
- The Fisher hypothesis relates to the real rate of interest to the nominal rate of inflation.
- The natural rate of unemployment is the unemployment rate that occurs when the labor market is in equilibrium, and it includes frictional and structural unemployment.
Consider the following statements:
1. The sum of visible and invisible trade is the trade balance
2. The surplus on the current account is always greater than the deficit on the capital account
3. The current account is the cross-border flow of goods and services
Which of the above is/are correct?
A) 1 and 3 are true but 2 is false
B) 3 is false, but 1 and 2 are true
C) 1 is true, the rest is false
D) All are true
A - 1 (Trade balance = visible and invisble) and 3 (current account = cross-border flow of goods and services) are true but 2 (suplus current account > deficit capital account) is false
- The surplus/deficit on the capital account always equals the deficit/surplus on the current account
- Current account is the cross border-flow of goods, services and other net income from abroad
- Capital account is the flow of transactions in financial assets
- Visible trade is physical goods
- Invisible trade is services (banking, tourism, investing, intellectual property and consulting)
Which one of the following iterms is included in the invisible part of the UK current account balance?
A) The purchase of a US factory by a UK firm
B) The export of computers produced by IBM in the UK
C) The import of car components in the UK by a Japanese car maker
D) Insurance services provided by UK firms to overseas clients
D - Insurance services provided by UK firms to overseas clients
- Visible trade is physical goods
- Invisible trade is services (banking, tourism, investing, intellectual property and consulting)
Consider the following statements:
1. Under purchasing power parity (PPP) theory, nominal exchange rates move so as to offset differential output growth rates
2. Sterilisation is the process by which domestic money and bonds are exchanged so as to neutralise the balance of payments’ impact on the domestic money supply
3. Perfect capital mobility involves large changes in expected returns, lending to small flows of funds between assets
Which of the above is/are correct?
A) 2 and 3 are true, but 1 is false
B) 1 is true but the rest are false
C) 2 is true but the rest are false
D) 1 and 2 are true but 3 is false
C - 2 (Sterilisation) is true but the rest are false
- PPP refers to the differential INFLATION rates not growth rates
- Perfect capital mobility involves small changes in expected returns and large flows of funds. Perfect capital mobility is a situation where capital can be moved between countries without incurring any costs. This means that the risk-adjusted returns to capital would be the same in every country.
Balance of payments is the difference in all money entering and exiting a country over a defined period (such as a quarter or a year)
Which of the following statements is correct:
A) Monetary policy is effective with a fixed exchange rate and perfect mobile capital
B) Monetary policy is useful in the short term under floating exchange rates
C) Fiscal policy is more effective under floating than under fixed exhanges rates
D) Purchasing power parity (PPP) always holds
B - Monetary policy is useful in the short term under floating exchange rates
- PPP does not always hold
- Fixed exhange rates: Fiscal is effective, monetary is ineffective
- Floating exhange rates: short-term monetary policy, but fiscal is less effective
An analyst has no ready source of expected inflation for the UK economy, but believes the international Fisher effect always holds true. The economic division of her bank tells her that the US inflation rate is expected to be 1.50% over the next year. Sher observes that US and UK Government one-year bonds are currently yielding 4% and 5.5% respectively. Given this information, what estimate could the analyst derive of the market’s view of expected inflation in the UK?
A) 2.96%
B) 2.76%
C) 3.06%
D) 2.86%
A - 2.96%
IFE:
((1 + R£)/(1+E(i£)) = (((1 + R$)/(1+E(i$))
SO
(1.055/((1+E(i£)) = 1.04/1.015
(1.055/((1+E(i£)) = 1.0246
(1.055/((1+E(i£)) = 1.055/1.0246
(1.055/((1+E(i£)) = 1.0296
Expected UK inflation E(i£) = 2.96%
Real interest rates should be equal in both countries. In the USA, the real interest rate is:
x = (1+0.004) / (1 + 0.015) = 2.46%
Thus the UK real rate should be: 1.055 / x = 2.96%
The International Fisher Effect (IFE) is an economic theory that predicts how exchange rates between countries change based on interest rate differences. It states that the difference between the nominal interest rates of two countries is roughly equal to the expected change in the exchange rate between their currencies.
Suppose that the one-year £/US$ forward exchange rate is US$1.63 = £1, and the one-year interest rates in the UK and USA are 6% and 4% respectively. Using the concept of interest rate parity (IRP) between forward premiums and national interest rates, what is the implied current £/US$ spot exchange rate?
A) 1.60
B) 1.65
C) 1.66
D) 1.70
C - 1.66
Interest parity:
(F/E) = (1 + UK interest rate) / (1 + US interest rate)
OR spot rate:
E = 1.63 x (1.06 / 1.04) = US$1 1.66 per £
