Chapter 2 - The Macro-Economic Environment Flashcards
Which of the following is NOT considered a long-term global economic trend?
A) Ageing population
B) Rising living standards
C) Declining service sector
D) Technological advancements
Answer: C) Declining service sector
Explanation: The service sector is growing globally due to shifts in consumer demand and economic development. Other options represent key long-term economic trends.
Which factor primarily determines the productivity of capital and labor in an economy?
A) Monetary policy decisions
B) Inflation rates
C) Technological advancements
D) Government spending levels
Answer: C) Technological advancements
Explanation: Technology drives productivity by improving efficiency and output per worker. While policies influence the economy, technology is the fundamental driver of productivity growth.
What typically occurs during the early recovery phase of the business cycle?
A) Interest rates increase
B) Unemployment rises
C) Inflation is at its peak
D) Industrial production expands rapidly
Answer: D) Industrial production expands rapidly
Explanation: The early recovery phase sees a surge in industrial production as businesses respond to increasing consumer demand.
Which of the following indicators is a leading economic indicator?
A) GDP growth
B) Stock market performance
C) Unemployment rate
D) Consumer price index (CPI)
Answer: B) Stock market performance
Explanation: Stock markets often predict economic activity because investors base their decisions on expected future earnings and growth.
An expansionary fiscal policy is most likely to include which of the following?
A) Raising interest rates
B) Increasing government spending
C) Increasing tax rates
D) Reducing the money supply
Answer: B) Increasing government spending
Explanation: Expansionary fiscal policy aims to boost economic activity through higher government spending and lower taxation.
Which asset class is most sensitive to changes in interest rates?
A) Equities
B) Commodities
C) Fixed income securities
D) Real estate
Answer: C) Fixed income securities
Explanation: Bond prices are inversely related to interest rates; when rates rise, bond prices fall due to reduced demand.
What is the main tool used by central banks in a contractionary monetary policy?
A) Reducing government borrowing
B) Increasing interest rates
C) Increasing public spending
D) Raising minimum wage levels
Answer: B) Increasing interest rates
Explanation: Higher interest rates make borrowing more expensive, slowing down economic activity and reducing inflationary pressures.
A weakening domestic currency generally benefits which type of investor?
A) Domestic bondholders
B) Export-oriented businesses
C) Import-heavy retailers
D) Fixed-income investors
Answer: B) Export-oriented businesses
Explanation: A weaker domestic currency makes exports cheaper for foreign buyers, boosting demand for goods and services from exporting firms.
The dependency ratio is a key measure in assessing the economic impact of demographic shifts. What does the dependency ratio specifically refer to in the context of an ageing population?
A) The proportion of the population that is under the age of 18 compared to those over 65.
B) The percentage of government spending allocated to pensions and healthcare relative to total GDP.
C) The number of people of non-working age (both young and elderly dependents) compared to those of working age.
D) The percentage of retirees who receive a state pension compared to those who rely solely on private savings.
Answer: C
Explanation: The dependency ratio refers to the number of dependents (both young and elderly) compared to the working-age population. A high dependency ratio can strain public resources due to increased pension and healthcare costs.
Economic Consequences of an Ageing Population
Which of the following is NOT a likely economic consequence of an ageing population?
A) Increased government expenditure on pensions and healthcare.
B) A decrease in the working-age population, potentially leading to labour shortages.
C) Lower demand for private sector investment due to a reduced consumer base.
D) Higher taxation on the working population to support growing state welfare costs.
Answer: C
Explanation: While an ageing population affects labour supply and government spending, it does not necessarily reduce private sector investment due to a smaller consumer base. In fact, older populations can drive demand in specific industries like healthcare and financial services.
When comparing living standards across different countries, which of the following measures provides the most comprehensive assessment?
A) Real GDP per capita, as it adjusts for inflation and measures total economic output per person.
B) Actual Individual Consumption (AIC), as it includes all goods and services consumed by households, regardless of payment source.
C) The Pareto Index, as it directly measures the breadth of income and wealth distribution across a population.
D) The poverty rate, as it reflects the percentage of the population struggling to meet basic needs.
Answer: B
Explanation: AIC is considered one of the best measures of living standards because it captures all goods and services consumed by individuals, including those provided by the state. GDP per capita alone does not account for disparities in wealth distribution or the role of public services.
Which of the following best explains why an ageing population may lead to higher taxation in the UK?
A) Increased automation reduces the need for a large working population, but government spending on healthcare remains high.
B) More people become eligible for state pensions while the working population that funds these payments declines.
C) The government prioritises pensioners over younger generations, leading to higher pension-related taxes.
D) The UK has an ageing population, but immigration offsets the financial burden, so taxation does not necessarily increase.
Answer: B
Explanation: As more people reach retirement age, the dependency ratio rises, meaning fewer workers pay income tax while pension and healthcare costs increase
Which factor is least likely to contribute to the decline of the UK’s manufacturing sector?
A) Growth of high-tech and high value-added services
B) Deindustrialisation and shift towards a service-based economy
C) Declining levels of automation in manufacturing industries
D) Increased competition from lower-wage economies
Answer: C
Explanation: Automation has increased productivity and efficiency in manufacturing, but the shift towards services and competition from low-cost economies has driven deindustrialisation
What is the most significant concern with the increasing correlation between bond and equity prices in the UK market?
A) It reduces opportunities for portfolio diversification.
B) It increases government intervention in financial markets.
C) It leads to higher interest rates and inflation.
D) It allows investors to better predict market trends.
Answer: A
Explanation: Traditionally, equities and bonds move in opposite directions, providing diversification. However, increased correlation reduces this benefit, exposing investors to greater risk
How does globalisation most directly influence the UK economy?
A) It reduces demand for domestic labour.
B) It makes the UK economy more dependent on international markets.
C) It leads to lower trade deficits due to increased exports.
D) It decreases the impact of fiscal and monetary policy.
Answer: B
Explanation: Globalisation integrates the UK into international markets, making it more sensitive to external economic changes and trade relationships
What is a key reason why GDP per capita may not accurately reflect living standards across different countries?
A) It does not account for currency fluctuations.
B) It includes government spending, which may not benefit individuals directly.
C) It does not consider variations in purchasing power or social welfare provisions.
D) It is based solely on financial transactions and ignores non-monetary factors.
Answer: C
Explanation: GDP per capita does not adjust for cost-of-living differences, purchasing power, or government-provided services, which can significantly affect living standards
Which economic indicator is most likely to be a leading indicator of future economic growth?
A) Inflation rate
B) Unemployment rate
C) Stock market indices
D) Government debt levels
Answer: C
Explanation: Stock market indices tend to reflect investor expectations and can provide an early signal of future economic growth or downturns
How does an increase in the dependency ratio affect long-term economic growth?
A) It stimulates growth by increasing consumer spending.
B) It slows growth due to higher government spending on pensions and healthcare.
C) It has no effect as productivity levels remain stable.
D) It encourages investment in automation, leading to higher economic output.
Answer: B
Explanation: A higher dependency ratio means fewer workers support more dependents, increasing the tax burden and reducing funds available for productive investment
Why is measuring productivity growth crucial in evaluating a country’s long-term economic potential?
A) It directly determines the level of foreign direct investment.
B) Higher productivity increases GDP without requiring additional labour input.
C) It reduces the impact of inflation on the economy.
D) It leads to higher wage growth without increasing costs for businesses.
Answer: B
Explanation: Productivity growth allows an economy to expand output without increasing labour or capital input, making it a key driver of long-term growth
What is the primary challenge of forecasting economic cycles?
A) Governments often manipulate data to influence forecasts.
B) The factors driving economic cycles are constantly changing and interdependent.
C) Inflation rates are unpredictable and impact all economic variables.
D) Central bank policies remove the need for forecasting.
Answer: B
Explanation: Economic cycles are influenced by multiple dynamic factors, making accurate predictions difficult
What is a primary criticism of the 60/40 portfolio allocation model in modern markets?
A) It does not account for economic growth cycles.
B) It assumes equities and bonds always provide diversification benefits.
C) It requires active management to be effective.
D) It relies too heavily on short-term market trends.
Answer: B
Explanation: The 60/40 model assumes stocks and bonds move in opposite directions, but increasing correlation between them has weakened its diversification benefits
How does protectionism typically affect global trade?
A) It reduces domestic inflation by controlling import prices.
B) It increases employment in the short term but reduces economic efficiency in the long term.
C) It encourages foreign investment by stabilising local industries.
D) It makes economies more resilient to external shocks.
Answer: B
Explanation: Protectionist policies can temporarily boost local industries but often lead to inefficiencies and retaliatory trade barriers
What impact does monetary tightening generally have on asset prices?
A) It reduces demand for riskier assets like equities and increases bond yields.
B) It causes inflation to rise, increasing the attractiveness of equities.
C) It stimulates economic activity by reducing the cost of borrowing.
D) It makes cash and money market instruments less attractive.
Answer: A
Explanation: Higher interest rates reduce liquidity, making equities less attractive while increasing bond yields
What is the main driver of inflation in an ageing population?
A) Increased government borrowing
B) Reduced consumer demand
C) Labour shortages and rising wages
D) Increased private sector investment
Answer: C
Explanation: Fewer workers lead to labour shortages, pushing up wages and contributing to inflation
How does deglobalisation impact financial markets?
A) It reduces economic volatility by making countries more self-sufficient.
B) It increases transaction costs and reduces investment efficiency.
C) It makes global recessions less severe.
D) It leads to lower inflation due to reduced demand for imports.
Answer: B
Explanation: Reduced global integration increases costs and reduces efficiency, making investment less attractive
Which of the following best describes stagflation?
A) A period of declining GDP and falling prices
B) High inflation combined with slow or negative growth
C) Rising wages with stable interest rates
D) A prolonged period of deflation
Answer: B
Explanation: Stagflation is characterised by stagnant economic growth alongside persistent inflation, making policy responses challenging
Which of the following is the most significant long-term economic risk of an ageing population?
A) Increased government borrowing leading to higher inflation
B) A shrinking tax base reducing fiscal sustainability
C) Higher consumer spending causing demand-pull inflation
D) Declining property values due to lower demand for housing
Answer: B
Explanation: As the working-age population declines, fewer workers contribute taxes while pension and healthcare costs rise, creating fiscal pressure
How does a rising dependency ratio most likely impact monetary policy?
A) It forces central banks to increase interest rates to manage inflation.
B) It reduces the effectiveness of monetary policy as consumption patterns change.
C) It leads to more frequent currency devaluations.
D) It increases government influence over central bank decisions.
Answer: B
Explanation: A higher dependency ratio shifts economic activity towards government spending and away from private consumption and investment, reducing the traditional effectiveness of monetary policy
Why might the UK’s living standards ranking be lower when measured by GDP per capita compared to Actual Individual Consumption (AIC)?
A) The UK has lower income inequality than other EU countries.
B) Public services like healthcare are largely state-funded, distorting GDP per capita.
C) The UK has a relatively young population with high employment rates.
D) The UK government subsidises housing more than other EU countries.
Answer: B
Explanation: GDP per capita does not reflect government-provided services, whereas AIC includes public services like healthcare, which are state-funded in the UK
Which of the following is the most likely outcome if the UK’s working-age population declines significantly?
A) Lower unemployment due to reduced competition for jobs
B) Increased government intervention in financial markets
C) Higher real wages but weaker long-term economic growth
D) Increased reliance on monetary policy over fiscal policy
Answer: C
Explanation: A shrinking workforce leads to wage increases due to labour shortages, but economic growth weakens due to lower productivity and output
What is a key risk of relying on GDP per capita as the sole measure of economic well-being?
A) It does not account for currency fluctuations.
B) It fails to consider how wealth is distributed among citizens.
C) It excludes economic activity from the informal sector.
D) It assumes all government spending is productive.
Answer: B
Explanation: GDP per capita provides an average that does not reflect income inequality, which can significantly affect overall economic well-being
Why has deindustrialisation led to greater regional economic inequality in the UK?
A) Manufacturing industries were heavily concentrated in specific regions.
B) The UK government prioritised London over regional economies.
C) Service sector jobs pay significantly less than manufacturing jobs.
D) The UK has strict labour laws that prevent economic mobility
Answer: A
Explanation: The decline of manufacturing disproportionately affected regions that relied on it, while the service sector grew primarily in London and the South East
What is the primary reason why service sector expansion does not always lead to productivity gains?
A) The sector is too reliant on foreign investment.
B) Many service jobs require face-to-face interaction, limiting efficiency improvements.
C) Wages in the service sector are typically lower than in manufacturing.
D) Services do not contribute to economic output in the same way as goods production.
Answer: B
Explanation: Unlike manufacturing, where automation and efficiency improvements can rapidly increase output, many service jobs depend on direct human interaction
Why does a higher participation rate in pension savings not necessarily solve the ageing population problem?
A) Pension funds are not always invested in productive assets.
B) It does not address the fundamental issue of a shrinking workforce.
C) Private pensions are often subject to market volatility.
D) Government pension schemes cannot be fully privatised.
Answer: B
Explanation: While increased pension savings help with individual retirement planning, they do not resolve the macroeconomic challenge of fewer workers supporting retirees
Which factor is least likely to contribute to long-term inflationary pressures in an ageing population?
A) Increased healthcare demand
B) Rising pension costs
C) Higher government borrowing
D) Increased automation in labour markets
Answer: D
Explanation: While healthcare and pension costs drive inflation, automation can increase productivity and reduce labour costs, helping to offset inflationary pressures
What is the most significant downside of increasing the state pension age as a policy response to an ageing population?
A) It disproportionately affects lower-income workers in physically demanding jobs.
B) It leads to lower consumer spending among retirees.
C) It increases income inequality by favouring wealthier individuals.
D) It reduces government tax revenues from pensioners.
Answer: A
Explanation: Raising the state pension age disproportionately impacts workers in manual labour jobs who may not be physically able to work longer
How does a high dependency ratio impact labour markets?
A) It leads to higher wages and increased job competition.
B) It reduces investment in education and workforce training.
C) It increases the cost of hiring foreign workers.
D) It encourages greater workforce participation among retirees.
Answer: A
Explanation: A high dependency ratio results in fewer workers, leading to increased competition for skilled labour and rising wages
What is a key reason why the UK’s service sector has grown faster than its manufacturing sector?
A) The government has actively subsidised service industries.
B) Labour costs in the UK are too high for competitive manufacturing.
C) Knowledge-based industries have higher profit margins and global demand.
D) Consumer preferences have shifted away from manufactured goods.
Answer: C
Explanation: The service sector, particularly finance and technology, benefits from high-profit margins and global demand, whereas manufacturing faces cost competition
What is the primary reason why UK productivity growth has been sluggish in recent years?
A) Declining foreign investment
B) A shift towards lower-productivity service jobs
C) High inflation reducing economic efficiency
D) Reduced research and development spending
Answer: B
Explanation: Many service jobs, particularly in retail and hospitality, have lower productivity compared to high-tech or manufacturing industries
Why is the shift from a primary/secondary sector economy to a service-based economy often linked with wage stagnation?
A) Service jobs typically offer lower wages and fewer benefits.
B) The financial sector dominates wage growth statistics.
C) Government regulation suppresses wage growth in services.
D) Manufacturing wages rise faster due to technological improvements.
Answer: A
Explanation: Many service sector jobs, particularly in retail and hospitality, offer lower wages and limited career progression
Which demographic trend is most likely to support long-term economic growth?
A) A falling birth rate
B) A higher proportion of elderly dependents
C) Rising workforce participation among women and older workers
D) A declining working-age population
Answer: C
Explanation: Increased participation from women and older workers helps counteract labour shortages and supports economic growth
Which of the following is NOT a component of the GDP expenditure approach?
A) Private consumption
B) Government spending
C) Imports
D) Transfer payments
✅ Answer: D) Transfer payments
📖 Explanation: GDP is calculated using the expenditure approach as GDP = C + I + G + (X - M), where C is private consumption, I is investment, G is government spending, and X - M is net exports. Transfer payments (e.g., pensions, welfare benefits) are not included because they do not represent actual production of goods or services.
Which of the following economic indicators is considered a lagging indicator?
A) Unemployment rate
B) Stock market performance
C) Business confidence index
D) Retail sales growth
✅ Answer: A) Unemployment rate
📖 Explanation: Lagging indicators reflect changes in the economy that occur after a trend has been established. The unemployment rate often lags behind economic trends because businesses react to economic downturns by reducing their workforce after the economy has already slowed.
How does a rising dependency ratio typically affect an economy?
A) Increases government tax revenues
B) Reduces pressure on healthcare and pension systems
C) Leads to higher fiscal deficits if government spending increases
D) Boosts workforce productivity
✅ Answer: C) Leads to higher fiscal deficits if government spending increases
📖 Explanation: The dependency ratio represents the proportion of dependents (young and elderly) compared to the working population. A rising dependency ratio means fewer workers supporting more retirees, increasing government expenditures on pensions and healthcare, potentially leading to higher fiscal deficits.
What is the main limitation of using GDP per capita as a measure of living standards?
A) It does not account for differences in population size
B) It ignores income inequality and non-monetary factors such as health and education
C) It fails to adjust for inflation
D) It only measures government spending
✅ Answer: B) It ignores income inequality and non-monetary factors such as health and education
📖 Explanation: GDP per capita only measures average economic output per person but does not consider income distribution, quality of healthcare, education, or environmental factors, which are crucial in assessing actual living standards.
A sudden increase in the money supply is most likely to cause which of the following effects in the short term?
A) An increase in unemployment
B) A decrease in inflation
C) A depreciation in the currency’s exchange rate
D) A reduction in GDP growth
✅ Answer: C) A depreciation in the currency’s exchange rate
📖 Explanation: Increasing the money supply generally reduces interest rates, making domestic assets less attractive to foreign investors, leading to capital outflows and a weaker currency. Over time, it may also lead to higher inflation.
What is a primary disadvantage of using CPI as a measure of inflation?
A) It includes volatile items like food and energy
B) It fails to account for changes in consumer spending habits
C) It overstates inflation consistently
D) It does not include housing costs
✅ Answer: B) It fails to account for changes in consumer spending habits
📖 Explanation: The Consumer Price Index (CPI) uses a fixed basket of goods, meaning it does not adjust for substitutions when consumers switch to cheaper alternatives, potentially overstating the true cost of living.
If an economy is operating at full employment, what is the most likely impact of a sustained increase in aggregate demand?
A) An increase in output without inflation
B) Deflation
C) Demand-pull inflation
D) Structural unemployment
✅ Answer: C) Demand-pull inflation
📖 Explanation: When an economy is at full employment, an increase in aggregate demand does not lead to higher output (since resources are already fully utilized), but instead pushes up prices, resulting in demand-pull inflation.
Which of the following economic theories suggests that government intervention is necessary to manage economic fluctuations?
A) Classical Economics
B) Keynesian Economics
C) Monetarism
D) Rational Expectations Theory
✅ Answer: B) Keynesian Economics
📖 Explanation: Keynesian economics, developed by John Maynard Keynes, argues that government intervention (e.g., fiscal stimulus) is necessary to stabilize economic cycles, particularly during recessions.
What is the impact of a negative output gap?
A) Inflationary pressures increase
B) Unemployment rises above the natural rate
C) The economy overheats
D) Interest rates rise
✅ Answer: B) Unemployment rises above the natural rate
📖 Explanation: A negative output gap occurs when actual GDP is below potential GDP, indicating unused capacity and higher unemployment.
The Phillips Curve suggests a trade-off between which two economic variables?
A) Inflation and unemployment
B) Economic growth and fiscal deficits
C) Interest rates and currency exchange rates
D) Money supply and GDP growth
✅ Answer: A) Inflation and unemployment
📖 Explanation: The Phillips Curve illustrates an inverse relationship between inflation and unemployment—as unemployment decreases, inflation tends to rise.
If a country’s trade deficit widens, which of the following is the most likely consequence?
A) The country’s currency will appreciate due to higher demand for imports
B) Domestic inflation will decrease due to lower import prices
C) There will be downward pressure on the currency’s exchange rate
D) The central bank will raise interest rates to counteract the deficit
✅ Answer: C) There will be downward pressure on the currency’s exchange rate
📖 Explanation: A widening trade deficit means a country is importing more than it exports, leading to higher demand for foreign currencies and a depreciation of the domestic currency due to increased capital outflows.
What would be the most appropriate monetary policy response to stagflation?
A) Lower interest rates to boost economic growth
B) Raise interest rates to combat inflation
C) Maintain interest rates at current levels to avoid worsening either inflation or unemployment
D) Implement direct wage controls to suppress inflation
✅ Answer: C) Maintain interest rates at current levels to avoid worsening either inflation or unemployment
📖 Explanation: Stagflation is a combination of high inflation and high unemployment, making traditional monetary policies ineffective. Raising interest rates would control inflation but worsen unemployment, while lowering rates would stimulate growth but worsen inflation.
Which of the following best describes the impact of quantitative easing (QE) on financial markets?
A) It directly reduces fiscal deficits by increasing government revenue
B) It reduces bond yields, increases asset prices, and stimulates lending
C) It causes deflation due to excess liquidity in the banking system
D) It decreases money supply growth and slows economic expansion
✅ Answer: B) It reduces bond yields, increases asset prices, and stimulates lending
📖 Explanation: QE involves central banks purchasing government bonds, which lowers yields, boosts asset prices, and encourages lending by increasing bank reserves.
Which economic theory argues that individuals and businesses make decisions based on their expectations of future policies?
A) Monetarism
B) Supply-Side Economics
C) Rational Expectations Theory
D) Keynesian Economics
✅ Answer: C) Rational Expectations Theory
📖 Explanation: Rational Expectations Theory suggests that people make economic decisions based on their expectations of future policies, making government interventions less effective.
What is the most likely effect of a persistent current account surplus on an economy?
A) Strong downward pressure on the domestic currency
B) A net outflow of capital from the country
C) Higher inflation due to excess demand for domestic goods
D) An accumulation of foreign currency reserves
✅ Answer: D) An accumulation of foreign currency reserves
📖 Explanation: A current account surplus means a country exports more than it imports, leading to higher demand for its currency and an accumulation of foreign reserves as a result.
What is the primary reason why central banks target inflation at around 2% rather than 0%?
A) A low but positive level of inflation encourages consumer spending and investment
B) Inflation below 2% leads to excessive wage growth
C) 0% inflation prevents economic growth from exceeding its potential
D) Deflationary pressures increase when inflation is at 2%
✅ Answer: A) A low but positive level of inflation encourages consumer spending and investment
📖 Explanation: Central banks target a small positive inflation rate (typically 2%) because it encourages spending and investment, preventing deflationary spirals where consumers delay purchases expecting lower prices.
What is a key risk of an economy operating above its potential GDP?
A) Increased productivity due to greater workforce participation
B) Rising structural unemployment
C) Accelerating inflation due to excess demand
D) A stronger domestic currency due to increased competitiveness
✅ Answer: C) Accelerating inflation due to excess demand
📖 Explanation: When an economy operates above potential GDP, demand exceeds supply, leading to inflationary pressures.
Which of the following is a characteristic of cost-push inflation?
A) It occurs when demand for goods and services outstrips supply
B) It results from higher production costs, such as wages and raw materials
C) It is always accompanied by a rise in employment levels
D) It leads to an increase in the currency’s purchasing power
✅ Answer: B) It results from higher production costs, such as wages and raw materials
📖 Explanation: Cost-push inflation occurs when rising production costs (e.g., wages, materials) force businesses to increase prices, reducing purchasing power.
What is the key purpose of the Taylor Rule in monetary policy?
A) To determine the appropriate level of fiscal stimulus in an economy
B) To set interest rates based on inflation and economic output
C) To regulate government debt levels
D) To measure the effectiveness of central bank interventions
✅ Answer: B) To set interest rates based on inflation and economic output
📖 Explanation: The Taylor Rule is a formula that suggests optimal interest rates based on inflation and economic output, helping central banks manage economic stability.
If a country’s real GDP growth is 3% and its inflation rate is 5%, what is the nominal GDP growth rate?
A) -2%
B) 2%
C) 3%
D) 8%
✅ Answer: D) 8%
📖 Explanation: Nominal GDP growth is calculated as:
NominalGDPGrowth = RealGDPGrowth + InflationRate
=3%+5%=8%
Which of the following best explains the concept of deglobalisation?
A) The continued expansion of international trade and investment
B) The reduction in global trade, cross-border investment, and supply chain integration
C) The increased interdependence of economies due to technology and digital trade
D) The shift of manufacturing industries from developed to developing countries
✅ Answer: B) The reduction in global trade, cross-border investment, and supply chain integration
📖 Explanation: Deglobalisation refers to a reversal or slowdown in global economic integration, leading to reduced international trade, investment, and supply chain reliance, often due to political tensions, tariffs, and protectionism.
Which global trend is most responsible for reshoring and nearshoring strategies by multinational corporations?
A) The rise of artificial intelligence in the workforce
B) The shift from fossil fuels to renewable energy
C) Supply chain disruptions and geopolitical instability
D) The expansion of free trade agreements
✅ Answer: C) Supply chain disruptions and geopolitical instability
📖 Explanation: Recent geopolitical tensions, trade wars, and the COVID-19 pandemic have exposed vulnerabilities in global supply chains, leading many firms to relocate production closer to home to reduce dependency on foreign suppliers.
What is a key impact of sustained negative interest rates in major economies?
A) Increased savings and reduced borrowing
B) Higher costs of capital for businesses
C) Depreciation of the domestic currency and potential asset bubbles
D) Stronger economic growth due to higher investor confidence
✅ Answer: C) Depreciation of the domestic currency and potential asset bubbles
📖 Explanation: Negative interest rates reduce the attractiveness of a currency, leading to depreciation. They also encourage excessive borrowing and speculative investment, potentially creating asset bubbles.
What is a significant downside of central banks using quantitative easing (QE) over extended periods?
A) Reduction in government debt levels
B) Deflationary pressures in the economy
C) Distortion of asset prices and increased income inequality
D) Strengthening of the banking sector due to higher interest rates
✅ Answer: C) Distortion of asset prices and increased income inequality
📖 Explanation: QE injects liquidity into financial markets, boosting stock and real estate prices, which disproportionately benefits wealthier individuals who hold more assets, increasing inequality.
How does an ageing global population typically impact economic growth?
A) Higher GDP growth due to increased consumer spending
B) Increased productivity and innovation
C) Lower economic growth due to shrinking workforce and higher dependency ratios
D) A reduction in healthcare costs and pension liabilities
✅ Answer: C) Lower economic growth due to shrinking workforce and higher dependency ratios
📖 Explanation: An ageing population leads to fewer workers, higher pension costs, and increased healthcare expenses, putting pressure on public finances and reducing economic growth.
Which of the following is a key driver of the shift towards a multipolar world economy?
A) The decline of the global middle class
B) The rise of emerging economies such as China and India
C) Increased dominance of Western multinational corporations
D) The expansion of the US dollar as the world’s reserve currency
✅ Answer: B) The rise of emerging economies such as China and India
📖 Explanation: A multipolar world economy refers to a global economic structure with multiple powerful economies (e.g., China, India, EU) rather than being dominated by the US and Western economies.
Which of the following is NOT a typical impact of high government debt-to-GDP ratios?
A) Reduced ability to use fiscal stimulus during recessions
B) Higher interest rates due to increased borrowing needs
C) Increased investor confidence in government bonds
D) Potential for sovereign debt crises in weaker economies
✅ Answer: C) Increased investor confidence in government bonds
📖 Explanation: High debt-to-GDP ratios raise concerns about a country’s ability to service its debt, potentially leading to higher borrowing costs and reduced investor confidence.
What is a likely economic impact of sustained high energy prices?
A) Lower inflation and increased consumer spending
B) Higher costs of production leading to inflationary pressures
C) Increased profitability for all sectors of the economy
D) Stronger economic growth due to increased government tax revenues
✅ Answer: B) Higher costs of production leading to inflationary pressures
📖 Explanation: High energy prices raise costs for businesses, leading to higher prices for goods and services, contributing to inflation.
What is a primary risk of a prolonged trade war between major economies?
A) Increased trade volumes and economic efficiency
B) Strengthening of globalisation and free trade agreements
C) Disruptions in global supply chains and reduced GDP growth
D) Decreased government intervention in markets
✅ Answer: C) Disruptions in global supply chains and reduced GDP growth
📖 Explanation: Trade wars increase tariffs, disrupt supply chains, and reduce global trade, leading to slower economic growth.
Which global trend has contributed most to the rise of digital currencies?
A) Decreasing global trade volumes
B) Growing distrust in traditional financial institutions and fiat currencies
C) Increased regulation of global financial markets
D) Declining role of central banks in economic policy
✅ Answer: B) Growing distrust in traditional financial institutions and fiat currencies
📖 Explanation: Cryptocurrencies and digital assets have gained popularity as alternatives to government-issued money, especially following financial crises and inflation concerns.
Which of the following best describes the relationship between economic cycles and inflation?
A) Inflation is always lowest at the peak of an economic cycle
B) Inflation tends to rise during the expansion phase and fall during the contraction phase
C) Inflation remains constant throughout all phases of the business cycle
D) Inflation is only affected by external supply-side shocks and not by economic cycles
✅ Answer: B) Inflation tends to rise during the expansion phase and fall during the contraction phase
📖 Explanation: During expansion, rising demand puts upward pressure on prices (inflation), while during contraction, lower demand reduces inflationary pressures. Central banks often adjust monetary policy in response to these cyclical changes.
What typically happens to unemployment during the different phases of the business cycle?
A) It remains constant across all phases
B) It increases during expansion and decreases during contraction
C) It decreases during expansion and increases during contraction
D) It is only influenced by government intervention and not by the business cycle
✅ Answer: C) It decreases during expansion and increases during contraction
📖 Explanation: As economic activity expands, businesses hire more workers, reducing unemployment. Conversely, during a downturn, businesses cut costs, leading to job losses and higher unemployment.
What is the main distinguishing factor between a recession and a depression?
A) A recession is defined as negative GDP growth for two consecutive quarters, while a depression is a prolonged and severe recession
B) A recession only affects the financial sector, while a depression affects all sectors
C) A recession is driven by demand shocks, while a depression is caused by supply shocks
D) A recession leads to higher stock market prices, whereas a depression leads to lower prices
✅ Answer: A) A recession is defined as negative GDP growth for two consecutive quarters, while a depression is a prolonged and severe recession
📖 Explanation: A recession is a temporary economic decline, while a depression is a prolonged and more severe downturn that results in sustained high unemployment and deep reductions in economic activity.
Which of the following indicators is most commonly used to identify the peak of an economic cycle?
A) Rising interest rates and inflationary pressures
B) Falling consumer confidence and business investment
C) Declining GDP for two consecutive quarters
D) A sudden increase in government spending
✅ Answer: A) Rising interest rates and inflationary pressures
📖 Explanation: Peaks occur when economic growth reaches its highest point before slowing down. Inflation and interest rates tend to rise at this stage as central banks try to control overheating economies.
Which phase of the economic cycle is characterized by declining GDP, rising unemployment, and falling inflation?
A) Expansion
B) Peak
C) Contraction
D) Recovery
✅ Answer: C) Contraction
📖 Explanation: The contraction phase involves a decline in economic activity, rising unemployment, and falling inflation due to reduced demand for goods and services.
Which of the following economic indicators is considered a leading indicator of economic cycles?
A) Unemployment rate
B) GDP growth
C) Stock market performance
D) Inflation rate
✅ Answer: C) Stock market performance
📖 Explanation: Stock markets are forward-looking and often react in advance to expected economic changes, making them a leading indicator of economic cycles.
What role do automatic stabilisers play in the business cycle?
A) They amplify economic fluctuations by increasing government spending during expansions and reducing it during recessions
B) They help smooth out economic fluctuations by increasing government spending during downturns and reducing spending during booms
C) They cause stagflation by simultaneously increasing inflation and unemployment
D) They only work when fiscal policy is actively adjusted by the government
✅ Answer: B) They help smooth out economic fluctuations by increasing government spending during downturns and reducing spending during booms
📖 Explanation: Automatic stabilisers, such as unemployment benefits and progressive taxation, help counteract economic fluctuations without direct government intervention.
How does the output gap relate to the business cycle?
A) A positive output gap occurs when actual GDP is below potential GDP
B) A negative output gap indicates an economy is overheating
C) A positive output gap suggests inflationary pressures due to excess demand
D) The output gap is irrelevant to economic cycles
✅ Answer: C) A positive output gap suggests inflationary pressures due to excess demand
📖 Explanation: When actual GDP exceeds potential GDP, resources are stretched, causing inflationary pressures. A negative output gap occurs when the economy operates below its full capacity.
Which of the following policies would a government most likely implement during a deep recession?
A) Increasing interest rates to control inflation
B) Cutting government spending to reduce budget deficits
C) Implementing tax cuts and increasing public spending
D) Selling government bonds to withdraw money from circulation
✅ Answer: C) Implementing tax cuts and increasing public spending
📖 Explanation: Expansionary fiscal policy, including tax cuts and increased government spending, stimulates economic activity during a recession.
What is the key characteristic of a K-shaped recovery following an economic downturn?
A) All sectors of the economy recover at the same rate
B) Some industries and income groups recover quickly while others continue to struggle
C) The economy experiences an immediate and strong rebound followed by another downturn
D) The recovery is driven entirely by government stimulus
✅ Answer: B) Some industries and income groups recover quickly while others continue to struggle
📖 Explanation: A K-shaped recovery occurs when different parts of the economy recover at different rates, often widening economic inequality.
Which of the following is the best leading indicator for predicting economic growth?
A) GDP growth rate
B) Consumer Price Index (CPI)
C) Purchasing Managers’ Index (PMI)
D) Government budget deficit
✅ Answer: C) Purchasing Managers’ Index (PMI)
📖 Explanation: PMI measures business activity in manufacturing and services sectors, making it a strong leading indicator for future economic growth. GDP is a lagging indicator.
What does a declining yield curve typically indicate about future economic activity?
A) Economic expansion and higher inflation
B) Economic slowdown or potential recession
C) Increased consumer spending and business investment
D) Immediate rise in interest rates
✅ Answer: B) Economic slowdown or potential recession
📖 Explanation: An inverted yield curve (short-term rates higher than long-term rates) suggests that investors expect slower growth and potential recession.
Which economic indicator is most commonly used to measure inflationary pressures in an economy?
A) Unemployment rate
B) Gross Domestic Product (GDP)
C) Consumer Price Index (CPI)
D) Current account balance
✅ Answer: C) Consumer Price Index (CPI)
📖 Explanation: CPI tracks changes in the prices of a basket of consumer goods and services, making it the most widely used measure of inflation.
What is the primary distinction between CPI and the Retail Price Index (RPI)?
A) CPI includes mortgage interest payments, while RPI does not
B) RPI includes housing costs such as mortgage interest, while CPI does not
C) CPI is always higher than RPI due to its calculation method
D) RPI is only used for government fiscal policy, while CPI is used for inflation targeting
✅ Answer: B) RPI includes housing costs such as mortgage interest, while CPI does not
📖 Explanation: The key difference is that RPI includes mortgage interest payments, which makes it more sensitive to interest rate changes than CPI.
A sharp increase in which of the following indicators would most likely signal rising inflationary pressures?
A) Unemployment rate
B) Money supply growth
C) Trade deficit
D) Government spending
✅ Answer: B) Money supply growth
📖 Explanation: A rapid increase in money supply can lead to higher demand for goods and services, pushing up inflation.
If the Labour Force Participation Rate declines, what is the likely effect on the unemployment rate, assuming no change in employment?
A) Unemployment rate increases
B) Unemployment rate decreases
C) No effect on unemployment rate
D) Inflation rate rises
✅ Answer: B) Unemployment rate decreases
📖 Explanation: If fewer people participate in the labour force, the number of job seekers falls, artificially reducing the unemployment rate.
What is the economic significance of the Output Gap?
A) It measures the difference between real and nominal GDP
B) It indicates the difference between potential GDP and actual GDP
C) It tracks the variance between government revenue and spending
D) It measures the surplus or deficit in the current account
✅ Answer: B) It indicates the difference between potential GDP and actual GDP
📖 Explanation: A positive output gap suggests the economy is overheating, while a negative output gap signals underutilized economic capacity.
Which of the following would most likely cause a worsening of the trade balance?
A) Depreciation of the domestic currency
B) Increase in domestic interest rates
C) Fall in global commodity prices
D) Higher tariffs on imported goods
✅ Answer: B) Increase in domestic interest rates
📖 Explanation: Higher interest rates can strengthen the domestic currency, making exports more expensive and imports cheaper, worsening the trade balance.
The Misery Index is a combination of which two economic indicators?
A) Inflation rate and GDP growth
B) Unemployment rate and inflation rate
C) Interest rates and consumer spending
D) Public debt and money supply
✅ Answer: B) Unemployment rate and inflation rate
📖 Explanation: The Misery Index measures economic distress by combining inflation and unemployment, reflecting economic hardship.
Which indicator is most commonly used to assess consumer sentiment and economic confidence?
A) Gross Domestic Product (GDP)
B) Consumer Confidence Index (CCI)
C) Money supply (M2)
D) Current account balance
✅ Answer: B) Consumer Confidence Index (CCI)
📖 Explanation: CCI gauges consumer attitudes toward current and future economic conditions, influencing spending and investment decisions.
A country experiencing stagflation is likely to have which combination of economic conditions?
A) High inflation and high economic growth
B) Low inflation and high unemployment
C) High inflation and high unemployment
D) Low inflation and low unemployment
✅ Answer: C) High inflation and high unemployment
📖 Explanation: Stagflation is an unusual economic situation where inflation remains high despite stagnant economic growth and high unemployment.
A high Producer Price Index (PPI) suggests what future economic impact?
A) Decreased consumer spending
B) Increased inflationary pressures
C) Lower unemployment rate
D) A rising trade surplus
✅ Answer: B) Increased inflationary pressures
📖 Explanation: PPI measures the cost of goods at the producer level, and rising PPI often leads to higher consumer prices.
A country’s fiscal deficit increases. What is the likely short-term effect on economic growth?
A) Lower inflation
B) Increased GDP growth
C) Higher interest rates
D) Lower consumer confidence
✅ Answer: B) Increased GDP growth
📖 Explanation: A larger fiscal deficit often results from increased government spending, which can stimulate short-term economic growth.
The Phillips Curve illustrates the relationship between which two variables?
A) Inflation and employment
B) GDP growth and trade balance
C) Money supply and interest rates
D) Taxation and government spending
✅ Answer: A) Inflation and employment
📖 Explanation: The Phillips Curve shows an inverse relationship between inflation and unemployment, suggesting that higher inflation is associated with lower unemployment.
How does a rising Gini coefficient affect an economy?
A) It indicates increased economic equality
B) It signals higher income inequality
C) It reflects a growing trade surplus
D) It shows rising business investment
✅ Answer: B) It signals higher income inequality
📖 Explanation: A rising Gini coefficient means wealth and income distribution are becoming more unequal.
Which indicator is considered a lagging indicator of economic performance?
A) Stock market index
B) Industrial production
C) Corporate profits
D) Housing starts
✅ Answer: C) Corporate profits
📖 Explanation: Corporate profits reflect past business performance, making them a lagging indicator.
What impact would a rapid rise in a country’s Unit Labour Costs (ULC) likely have on its international competitiveness?
A) Increase in exports due to higher productivity
B) Decrease in exports as domestic goods become more expensive
C) No impact, as labour costs are not a key determinant of competitiveness
D) Improvement in the country’s trade balance due to increased labour demand
✅ Answer: B) Decrease in exports as domestic goods become more expensive
📖 Explanation: Unit Labour Costs (ULC) measure the cost of labour required to produce one unit of output. If ULC rises rapidly, domestic products become less competitive internationally, reducing exports.
Which of the following economic indicators is most commonly used to assess a country’s productivity levels?
A) Labour Force Participation Rate
B) GDP per capita
C) Real GDP per hour worked
D) Gini Coefficient
✅ Answer: C) Real GDP per hour worked
📖 Explanation: Productivity is best measured by real GDP per hour worked, as it reflects efficiency and output per unit of labour input.
If a country experiences a persistent current account deficit, which of the following is the most likely long-term consequence?
A) A depreciation of the domestic currency
B) A fall in domestic interest rates
C) An increase in foreign exchange reserves
D) A rise in global demand for the country’s exports
✅ Answer: A) A depreciation of the domestic currency
📖 Explanation: A prolonged current account deficit means a country is importing more than it exports, leading to downward pressure on its currency as demand for foreign currencies increases.
A significant rise in housing starts is most likely to indicate which of the following?
A) An impending slowdown in the construction sector
B) A decrease in business confidence
C) A strengthening economy and expected economic growth
D) A decline in consumer demand for housing
✅ Answer: C) A strengthening economy and expected economic growth
📖 Explanation: Housing starts are a leading economic indicator, as increased construction suggests strong consumer confidence and economic expansion.
Which of the following is a key characteristic of expansionary fiscal policy?
A) Reduction in government spending and higher taxation
B) Increase in government spending and lower taxation
C) Reduction in central bank interest rates and tighter monetary supply
D) Increase in capital gains tax to reduce private investment
✅ Answer: B) Increase in government spending and lower taxation
📖 Explanation: Expansionary fiscal policy aims to boost economic activity by increasing government spending and reducing taxes to encourage consumption and investment.
If a central bank raises the reserve requirement for commercial banks, what is the most likely immediate effect?
A) Increased lending by commercial banks
B) Higher money supply in the economy
C) Lower interest rates
D) Reduced credit availability and slower economic growth
✅ Answer: D) Reduced credit availability and slower economic growth
📖 Explanation: Higher reserve requirements mean banks must hold more funds in reserve, reducing the amount available for lending, tightening monetary conditions.
In a liquidity trap, what happens when the central bank attempts to lower interest rates further?
A) Interest rates drop, stimulating borrowing and investment
B) Interest rates become negative, forcing banks to lend more
C) Lower interest rates have little to no effect on spending and investment
D) Inflation increases significantly due to excess liquidity
✅ Answer: C) Lower interest rates have little to no effect on spending and investment
📖 Explanation: In a liquidity trap, interest rates are already very low, and additional cuts fail to stimulate economic activity as consumers and businesses prefer to hold cash rather than invest or spend.
Which of the following is NOT considered an automatic stabiliser in fiscal policy?
A) Progressive income tax
B) Unemployment benefits
C) Infrastructure spending programs
D) Means-tested welfare programs
✅ Answer: C) Infrastructure spending programs
📖 Explanation: Automatic stabilisers are fiscal mechanisms that naturally adjust with economic fluctuations, whereas infrastructure spending requires deliberate government intervention.
If an economy is experiencing stagflation, which policy response is the most difficult to implement successfully?
A) Expansionary fiscal policy
B) Contractionary fiscal policy
C) Expansionary monetary policy
D) A combination of fiscal tightening and monetary easing
✅ Answer: D) A combination of fiscal tightening and monetary easing
📖 Explanation: Stagflation (high inflation and stagnation) creates a policy dilemma—tightening fiscal policy can slow the economy further, while easing monetary policy may worsen inflation.
The crowding-out effect refers to which of the following?
A) Government spending reducing private sector investment by driving up interest rates
B) High consumer demand leading to increased imports
C) Increased corporate taxes reducing business expansion
D) The impact of fiscal policy being diminished by monetary policy actions
✅ Answer: A) Government spending reducing private sector investment by driving up interest rates
📖 Explanation: When the government borrows heavily, interest rates may rise, making it more expensive for businesses to borrow and invest.
What is the primary objective of monetary policy in most developed economies?
A) Maximising employment
B) Controlling inflation
C) Reducing budget deficits
D) Increasing economic growth at all costs
✅ Answer: B) Controlling inflation
📖 Explanation: Most central banks, such as the Bank of England, focus on price stability by managing inflation within a target range.
What is a potential risk of prolonged expansionary monetary policy?
A) Increased unemployment
B) Deflation
C) Rising asset bubbles and long-term inflationary pressures
D) Permanent reduction in government debt
✅ Answer: C) Rising asset bubbles and long-term inflationary pressures
📖 Explanation: Keeping interest rates low for too long can lead to excessive speculation in financial and real estate markets, increasing inflation risks.
Which of the following fiscal policy measures is most effective in stimulating short-term economic growth?
A) Cutting corporate tax rates
B) Increasing investment in public infrastructure
C) Raising income tax thresholds
D) Reducing welfare benefits
✅ Answer: B) Increasing investment in public infrastructure
📖 Explanation: Public infrastructure projects create immediate employment and stimulate demand, leading to a short-term boost in GDP.
How does quantitative easing (QE) primarily influence financial markets?
A) By reducing government debt through direct bond purchases
B) By increasing the money supply, lowering bond yields, and stimulating lending
C) By raising short-term interest rates to encourage savings
D) By directly injecting cash into the real economy through government spending
✅ Answer: B) By increasing the money supply, lowering bond yields, and stimulating lending
📖 Explanation: QE involves central banks purchasing assets (mainly bonds), reducing yields and encouraging banks to lend more.
Which of the following would be an example of a contractionary fiscal policy?
A) Reducing VAT on consumer goods
B) Cutting welfare spending
C) Increasing infrastructure spending
D) Lowering the base interest rate
✅ Answer: B) Cutting welfare spending
📖 Explanation: Reducing government expenditure is a classic contractionary fiscal policy measure to curb inflation and reduce deficits.
What is the main purpose of forward guidance in monetary policy?
A) To directly set future inflation rates
B) To influence market expectations about future interest rates
C) To stabilise exchange rates by controlling capital flows
D) To ensure central banks never change their policy stance
✅ Answer: B) To influence market expectations about future interest rates
📖 Explanation: Forward guidance signals the likely direction of future monetary policy to help businesses and investors make informed decisions.
If a central bank raises its policy rate, what immediate effect is expected on the bond market?
A) Bond yields will decrease
B) Bond prices will increase
C) Bond prices will decrease
D) No impact, as bond markets are independent of interest rates
✅ Answer: C) Bond prices will decrease
📖 Explanation: Higher interest rates make existing bonds with lower yields less attractive, causing their prices to fall.
A significant appreciation of a country’s currency due to monetary policy changes would likely result in which of the following?
A) Increased exports and reduced imports
B) Higher inflation due to increased import costs
C) A reduction in export competitiveness
D) A rise in GDP due to stronger manufacturing output
✅ Answer: C) A reduction in export competitiveness
📖 Explanation: A stronger currency makes exports more expensive and less competitive internationally.
Which fiscal policy tool is most effective in addressing a recession caused by weak aggregate demand?
A) Increasing government borrowing to fund public spending
B) Raising interest rates to encourage savings
C) Reducing government debt through spending cuts
D) Selling government bonds to absorb excess liquidity
✅ Answer: A) Increasing government borrowing to fund public spending
📖 Explanation: Expansionary fiscal policy, such as deficit spending, helps boost demand and economic activity during recessions.
Which of the following is most likely to lead to a fall in bond prices?
A) A decrease in central bank interest rates
B) Rising inflation expectations
C) A weakening domestic currency
D) A downgrade in a country’s credit rating
✅ Answer: B) Rising inflation expectations
📖 Explanation: Higher inflation erodes the real value of bond returns, causing investors to demand higher yields, which leads to falling bond prices.
If the risk-free rate increases, how would this typically affect equity valuations?
A) Price-to-earnings (P/E) ratios would increase
B) Discounted cash flow valuations would rise
C) Stock prices would decline
D) Dividend yields would fall
✅ Answer: C) Stock prices would decline
📖 Explanation: A higher risk-free rate increases the discount rate used in valuation models, reducing the present value of future earnings and lowering stock prices.
A country experiences a sustained period of currency appreciation. Which asset class is likely to benefit the most?
A) Domestic equities
B) Export-driven industries
C) Government bonds
D) Commodities
✅ Answer: C) Government bonds
📖 Explanation: A stronger currency reduces imported inflation and supports lower interest rates, making bonds more attractive.
Which of the following is NOT a major factor influencing real estate as an asset class?
A) Interest rates
B) Population growth trends
C) Equity market volatility
D) Government infrastructure investment
✅ Answer: C) Equity market volatility
📖 Explanation: While real estate can be affected by financial markets, its performance is primarily driven by interest rates, demographic trends, and government policies.
Which of the following factors is most likely to reduce the appeal of commodities as an asset class?
A) Rising global interest rates
B) Supply chain disruptions
C) Increased geopolitical tensions
D) A weaker US dollar
✅ Answer: A) Rising global interest rates
📖 Explanation: Higher interest rates increase the opportunity cost of holding non-yielding assets like commodities, reducing investor demand.
Which statement best explains the relationship between GDP growth and equity market performance?
A) Equity markets always rise when GDP grows
B) Equity markets lead GDP growth rather than react to it
C) A slowdown in GDP growth has no impact on equity returns
D) High GDP growth always leads to higher corporate profits
✅ Answer: B) Equity markets lead GDP growth rather than react to it
📖 Explanation: Stock markets are forward-looking and typically price in expectations of future economic conditions before GDP data is released.
Which macroeconomic condition is most favourable for corporate bond investors?
A) Rising inflation and economic expansion
B) Falling inflation and stable interest rates
C) High GDP growth and aggressive monetary tightening
D) Stagflation with rising bond yields
✅ Answer: B) Falling inflation and stable interest rates
📖 Explanation: Lower inflation preserves the real value of bond payments, while stable interest rates reduce interest rate risk.
How do negative real interest rates typically affect asset allocation decisions?
A) Increase demand for cash and money market instruments
B) Encourage higher allocations to fixed-income securities
C) Drive investors towards real assets such as commodities and real estate
D) Reduce investor appetite for riskier assets
✅ Answer: C) Drive investors towards real assets such as commodities and real estate
📖 Explanation: Negative real interest rates erode the purchasing power of cash and bonds, making real assets more attractive as stores of value.
How does fiscal policy primarily impact equity markets?
A) By affecting consumer demand and corporate profitability
B) By directly setting stock prices through government intervention
C) By determining central bank interest rate decisions
D) By reducing the impact of market speculation
✅ Answer: A) By affecting consumer demand and corporate profitability
📖 Explanation: Fiscal policy influences disposable income and business investment, which drive corporate revenues and earnings.
Which of the following is a key risk to infrastructure investment as an asset class?
A) Short-term volatility in financial markets
B) Rising interest rates increasing borrowing costs
C) Weak correlation with government policies
D) High liquidity relative to other fixed-income assets
✅ Answer: B) Rising interest rates increasing borrowing costs
📖 Explanation: Infrastructure projects often rely on heavy borrowing, so rising interest rates increase financing costs, reducing profitability.
