Chapter 2: Macro-Economic Environment

Question 1

Which of the following is a lagging economic indicator?

A. GDP
B. The unemployment rate
C. Index of consumer expectations
D. Retail sales

Answer 1

B. The Unemployment is a lagging economic indicator. GDP and retail sales are coincident indicators. Index of consumer expectations is a leading indicator.

Question 2

Ignoring any external intervention, how will increases in the money supply affect interest rates?

A. Increase interest rates
B. Decrease interest rates
C. Interest rates will not be affected
D. Interest rates could rise or fall

Answer 2

B. If the supply of money increases, all else being equal, interest rates in theory will fall.

Question 3

Assuming the velocity and the total number of transactions stay constant, what would be the effect of a 1% increase in the money supply according to the Fisher equation?

A. 1% inflation
B. 2% inflation
C. No change in prices
D. Cannot be determined

Answer 3

A. 1% inflation.

The Fisher equation is MV=PT. If V and T stay constant, and M goes up, P must also go up by the same level.

Question 4

Nathan has identified an economic indicator that has little effect on the economy. What term best describes this indicator?

A. Countercyclic
B. Mesocyclic
C. Excyclic
D. Acyclic

Answer 4

D. Acyclic.

Acyclic indicators have little effect on the economy.

Question 5

Which of the following would be true if the UK enjoyed full employment?

A. Everyone who wants a job has a job
B. Everyone of working age is working whether they want to or not
C. All those unemployed could get a job if they wished
D. Some involuntary unemployment can exist

Answer 5

D. Some involuntary unemployment can exist.

Full employment could exist even when there are those who are unemployed because they are moving jobs or because they are re-training in order to rejoin the workforce.

Question 6

Which of the following is not one of the four economic factors of production?

A. Capital
B. Land
C. Labour
D. Productivity

Answer 6

D. Capital, land, labour, and enterprise are the four factors of production.

Question 7

If exports are greater than imports, what effect will this have?

A. Current account will increase
B. Current account will decrease
C. Capital account will increase
D. Capital account will decrease

Answer 7

A. Current account will increase.

Exports (X) and imports (I) create our current account, which is calculated as:
X - I = current account.
If exports are greater than imports the current account will increase.
The capital account, however, looks at the investment position.

Question 8

GDP is equal to consumer spending and what else?

A. Plus investment, minus government spending, plus exports, minus imports
B. Minus investment, plus government spending, plus imports, minus exports
C. Plus investment, plus government spending, plus imports, minus exports
D. Plus investment, plus government spending, plus exports, minus imports

Answer 8

D. GDP = Consumer spending + Investment + Government spending + Exports - Imports

Gross domestic product is the amount of production within a geographical area, such as the UK. It ignores any production overseas, even if it was performed by a UK entity. It does, however, include production by overseas entities within the UK.

Question 9

Which of the following products/companies are typically counter cyclical?

A. Car manufacturers
B. House builders
C. Low value goods
D. Laptops

Answer 9

C. Low value goods.

The demand for low value or inferior goods is counter-cyclical. As the economy improves people tend to spend more money on quality good eschewing the inferior good. In times of hardship the demand for inferior goods increases.

Question 10

If the cost of labour rises, which of the following is incorrect?

A. There will be a substitution effect
B. The quantity demanded of labour will decrease
C. The relative price of capital will be expensive
D. If productivity increases, the demand for labour will stay the same

Answer 10

C. Substitution could occur where, for example, machines replace people. However, if productivity increases - and the demand for that production increases - then the demand for labour will remain the same.

The relative price of capital will become cheaper.

Question 11

According to the Quantity Theory of Money, which component(s) are assumed to be constant?

A. P & V
B. T only
C. T & V
D. M & V

Answer 11

C. T (all transactions) and V (velocity of money)

Using the quantity theory of money, price growth can, in theory, be slowed (disinflation) or even reversed (deflation) through changes to the money supply. This assumes that output and velocity of circulation of the money supply remain constant.

Question 12

In relation to the Primary, Secondary and Tertiary sectors, which of the following is CORRECT?

A. Healthwise Health Clubs are in the Secondary sector
B. DAX Mining are not in the Primary sector
C. Goldings Jewellery are in the Secondary sector
D. Lloyd West Bank are not in the Tertiary sector

Answer 12

C. Goldings Jewellery are in the Secondary sector.

Primary sector industries grow/extract the raw materials.
Secondary sector industries use the raw materials in manufacturing.
Tertiary industries provide services.

Question 13

The increase in the ageing population and the decrease in younger people can cause a strain on the economy. Which of the following are problems associated with this demographic shift?

I. Decrease in tax receipts by the government
II. Increase in benefit payments
III. Increase in health provision
IV. Decrease in labour force

A. I and II
B. I, II and III
C. III and IV
D. I, II, III and IV

Answer 13

D. I, II, III, and IV.

Fewer young people means fewer people in employment, creating a decrease in workforce (both skilled and unskilled) and a decrease in tax receipts. The increase in the older population increases benefit payments (pensions, etc.) and health provisions.

Question 14

All of the following statements about the UK population are true, EXCEPT:

A. There was a significant increase in population throughout the 20th century
B. Population growth is expected to level off in the 21st century
C. From the 1990s the natural change has overtaken net migration as a major factor in population growth
D. For most years in the 20th century births have exceeded deaths

Answer 14

C. Up to the 1990s natural change was the significant factor in population growth. Since then, net migration has been the dominant factor in the UK.

Natural population change is when the number of live births is greater than the number of deaths during the time considered.

Question 15

Which of the following is a leading economic indicator?

A. The unemployment rate
B. GDP
C. Building permits
D. Industrial Production

Answer 15

C. Building permits.

Building permits are a leading indicator. The unemployment rate is a lagging indicator. GDP and Industrial Production are Coincident indicators.

Question 16

Which of the following are valid explanations for the inequality of income and wealth in the UK?

I. Differences in pay in different jobs and industries
II. Increasing relative incomes of people dependent on state benefits
III. Effects of unemployment
IV. Changes to direct and indirect taxes

A. I, II only
B. I, II, III only
C. I, III, IV only
D. I, II, III, IV

Answer 16

C. I, III and IV only.

High-growth and knowledge-based high growth industries have enjoyed above-average increases in pay and earnings. Pay is also better in those areas where skill shortages are apparent, namely: financial; business services; and IT industries.

On the other hand, the public-sector service jobs have seen a decline in relative pay levels.

State welfare benefits paid to pensioners and lone households with children tend to fall in this category and as these households are reliant on welfare benefits, that is index-linked, their relative pay has fallen over time.

Unemployment is a key cause for relative poverty where real incomes have fallen back as a result of one or more members in the household losing their jobs and some entirely reliant on state welfare.

Changes to direct and indirect taxes are designed to equalise pay and to address inequalities resulting from externalities, but changes can increase relative poverty as well. The top marginal rate of tax fell from 83% in 1979 to 40% in 1988, and in 2009 was raised to 50% for those with incomes above £150,000 and is now 45%. The basic rate has come down from 33% in 1979 to 20% today and these tax deductions allow people in work to keep more of their pay. However the fall in the progressive nature of the UK tax regime has highlighted some inconsistencies where people on above-average incomes have disproportionately gained from the tax base.

Question 17

Which of the following is true of quantitative easing?

I. It acts as a lever pushing down borrowing costs
II. It involves selling bonds to the markets
III. It has a long-term threat of rising interest rates

A. I and II
B. II and III
C. I and III
D. I only

Answer 17

C. I and III.

Quantitative easing does act like a lever to push down borrowing costs and does carry the long-term risk that interest rates may rise. It involves buying bonds i.e. adding cash into the markets rather than selling bonds which effectively takes cash from the markets.

Question 18

Excess aggregate demand leads to what type of inflation?

A. Cost-push inflation
B. Cost-pull inflation
C. Demand-push inflation
D. Demand-pull inflation

Answer 18

D. Demand-pull inflation.

An increase in aggregate demand results in too much money chasing too few goods; the result is inflation. Because demand is pulling the prices up, the effect is known as DEMAND-PULL INFLATION. Cost-push inflation is when production costs in factories lead to higher prices and inflation.