Chapter 2 Questions

Question 1

If exports outstrip imports, which of the following best describes the effect on the current account?

A
It will reduce the trade deficit or increase the trade surplus

B
It will increase the trade deficit or reduce the trade surplus

C
It will bring the current account in line with the capital account

D
It will take the current account out of line with the capital account

Answer 1

Explanation - Correct Answer: A
Exports (X) bring money into the economy. Imports (M) take money out of the economy. If X > M, then we have a net inflow to the economy. This will reduce the deficit or increase the surplus.

Question 2

Which of the following are implications of an ageing population?

IA greater percentage of the population over the state pension age (SPA)
IIA decrease in the dependency ratio
IIIFirms offer flexible working practices
IVShortage of workers, leading to wage inflation A
I, II only

B
I,II,III only

C
I,III,IV only

D
I,II,III,IV

Answer 2

Explanation - Correct Answer: C
There will be a greater percentage of the population over the state pension age (SPA), over 65 years of age.
The SPA for women increased from 60 to 65 in the years leading up to 2018, the same as men, and since 2020, the SPA for both sexes has been 66.
This means that there will be an increase in the dependency ratio with a smaller percentage of active workers in the society supporting a greater number leaving the workforce.
The ageing factor means that there will be more people claiming benefits, such as state pension benefits and other age related benefits if their health deteriorates in old age. At the same time, there will be less people working to pay income taxes to service these increased burdens on the state.
Government as a result will have to increase spending on health care and pensions provisions. Those in work will have to continue to pay even higher taxes. This increased level of taxation may create disincentives to work and for firms to invest that could impact in a negative way on productivity and economic growth.
Shortages of workers could push wages up leading to wage inflation. Alternatively, firms may have to respond to a worsening labour shortage problem, by encouraging more people to enter the workforce through flexible working practices.

Question 3

In relation to the Primary, Secondary and Tertiary sectors, which of the following is correct?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 3

Explanation - Correct Answer: C
Primary sector industries grow/extract the raw materials.
Secondary sector industries use the raw materials in manufacturing.
Tertiary industries provide services.

Question 4

Based on the Fisher equation, a change in the level of the money supply will have a direct influence on which variable?

A
Interest rates

B
Velocity of circulation

C
Inflation

D
Taxation

Answer 4

Explanation - Correct Answer: C
The Fisher equation can be used to demonstrate that the money supply has a direct influence on the level of inflation

Question 5

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 5

Explanation - Correct Answer: D
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.

Question 6

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 6

Explanation - Correct Answer: A
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 7

A country’s international trade is expressed in what measure?

A
GDP

B
Balance of payments

C
Monetary policy

D
Fiscal policy

Answer 7

Explanation - Correct Answer: B
The balance of payments is made up of both the current account (imports minus exports) and the capital account (looking at the investment position of the country).

Question 8

A reduction of aggregate demand would be caused by which of the following?

A
Reduction in unemployment

B
Reduction in government spending

C
Reduction in proportion of income saved

D
Increase in PSNCR

Answer 8

Explanation - Correct Answer: B
All other answers lead to an increase in demand, an increase in the number of people in work, an increase in income spent on consumption rather than saving, and an increase in the amount of money borrowed by the government because it has increased its spending. Because government spending is a large component of any economy, any reduction would cause a drop in aggregate demand.

Question 9

What index is used as the official measure of inflation in the UK?

A
Retail Prices Index

B
Consumer Inflation Index

C
Retail Inflation Index

D
Consumer Prices Index

Answer 9

Explanation - Correct Answer: D
The CPI is the name used in the UK for the Harmonised Index of Consumer Prices (HICP), a standard European-wide measure of inflation.

Question 10

Which of the following is incorrect in describing the UK population?

A
The UK population grew significantly during the 20th century

B
The UK population is expected to grow significantly during the 21st century

C
Until the mid 1990s, the natural increase in population was the primary cause of growth

D
In general, in the 20th century there were more births than deaths in the UK

Answer 10

Explanation - Correct Answer: B
Growth in population in the UK is slowing.

Question 11

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

A
Car manufacturers

B
House builders

C
Low value goods

D
Laptops

Answer 11

Explanation - Correct Answer: C
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 12

Which of the following is closest to the calculation of National Income?

A
GDP - Capital consumption

B
GNP + Capital consumption

C
GDP + Capital consumption

D
GNP - Capital consumption

Answer 12

Explanation - Correct Answer: D
National Income = GNP - Capital Consumption.

Question 13

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 13

Explanation - Correct Answer: D
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 14

In comparing the age structure of the UK, current day, to thirty years ago, which of the following is correct?

A
The proportion of the population aged below 16 has decreased, whilst the proportion of the population aged above 65 has stayed constant

B
The proportion of the population aged above 65 has increased, whilst the proportion of the population aged below 16 has stayed constant

C
The proportion of the population aged below 16 has decreased, whilst the proportion of the population aged above 65 has increased

D
The proportion of the population aged below 16 has increased, whilst the proportion of the population aged above 65 has increased

Answer 14

Explanation - Correct Answer: C
We are, in the UK, looking at an ageing population. This has an impact on health services, pension funds and the working population.

Question 15

Which of the following is an expansionary fiscal policy?

A
Collecting more in taxes

B
Lowering interest rates

C
Increasing public spending financed by borrowing

D
Raising interest rates

Answer 15

Explanation - Correct Answer: C
Raising interest rates and collecting more taxes will reduce the amount of money in the economy. Although lowering interest rates will lead to an increase in money supply, and is considered an expansionary policy; it is a monetary poliy, not a fiscal policy.
Increasing public spending, funded through issuing gilts and not an increase in taxation, is an expansionary fiscal policy.

Question 16

Which of the following is a lagging economic indicator?

A
GDP

B
The unemployment rate

C
Index of consumer expectations

D
Retail sales

Answer 16

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

Question 17

Which of the following would be considered a problem with fiscal policy?

A
It cannot be used to promote an expansionary policy

B
There is a time lag between implementation and the effect being felt

C
It affects short term money supply only and will not have a lasting effect

D
It leaves the state of the economy in the hands of the companies

Answer 17

Fiscal policy is government control over the economy to promote both expansionary and contractionary policies. It is a medium to long term policy that suffers from time lag. This time lag can be separated into three forms: recognition, implementation and impact.

Question 18

[1040257] All of the following statements about the UK population are true, EXCEPT:
AThere was a significant increase in population throughout the 20th century BPopulation growth is expected to level off in the 21st century CFrom the 1990s the natural change has overtaken net migration as a major factor in population growth DFor most years in the 20th century births have exceeded deaths

Answer 18

The correct answer is: C - From the 1990s the natural change has overtaken net migration as a major factor in population growth
Explanation
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.

Question 19

1047087] According to the Fisher equation, assuming that the velocity of circulation and number of transactions remain constant, what would a 4% rise in the money supply lead to?
AA 4% fall in the level of interest rates BA 4% rise in unemployement CA 4% fall in GDP growth DA 4% rise in inflation

Answer 19

The correct answer is: D - A 4% rise in inflation
Explanation
Based on the Fisher equation: MV = PT.
Where,
M = Money supply V = Velocity of circulation P= Price levels T = Number of transactions
and assuming that V and T are constant, a change in the money supply will have a direct and equal effect on the level of inflation.