Test

Question 1

If an investor has savings in fixed-interest deposit accounts, what impact will rising inflation have on these investments?

Select one:

a. The level of interest paid will rise but not always in line with increases in inflation.
b. The real value of the amount invested will not be affected.
c. The real value of the amount invested will be eroded.
d. The level of interest paid will rise in line with increases in inflation.

Answer 1

c. The real value of the amount invested will be eroded.

chapter reference 3E6D

Question 2

What occurs when investors lose sight of fundamental values and buy shares or other assets because they expect prices to continue to rise?

Select one:

a. A financial peak.
b. A financial expansion.
c. A financial bubble.
d. A financial boom.

Answer 2

. A financial bubble.

chapter reference 3A3

Question 3

Garth, Phil and John are discussing economics over a pint at their local. John thinks Phil was wrong to include tax reductions as an example of fiscal policy and also that Garth was wrong including quantitative easing as an example of monetary policy. Who was right?

Select one:

a. Both Garth and Phil.
b. Phil only.
c. John.
d. Garth only.

Answer 3

a. Both Garth and Phil.

chapter reference 3D1/3D2

Question 4

Gross domestic product growth rates for the UK are +1.1%, -0.8.% and -0.1% respectively for the previous three quarters. The UK is now technically in a:

Select one:

a. recession.
b. slump.
c. contraction.
d. slowdown.

Answer 4

a. recession.

chapter reference 3C

Question 5

The British Pound is rising against the American Dollar. What will be the impact on a UK company’s profits where the majority of their business is exporting to the USA?

Select one:

a. They will fall.
b. They will steadily rise.
c. There will be no impact.
d. They will sharply rise.

Answer 5

a. They will fall.

chapter reference 3E7B

Question 6

If the Bank of England announced that the rate of inflation was 1% under their target level, what would this mean in practice?

Select one:

a. CPI was 2%.
b. CPI was 1%.
c. RPI was within 1% of CPI.
d. RPI was 1.5%.

Answer 6

b. CPI was 1%.

chapter reference 3D2

Question 7

Investors must be aware of international developments when allocating money for investments, because foreign markets generally:

Select one:

a. move in step with each other.
b. have no impact on the UK.
c. move totally independent of the UK.
d. move in the opposite direction to the UK.

Answer 7

a. move in step with each other.

chapter reference 3A2

Question 8

What impact should falling interest rates usually have on the economy?

Select one:

a. They boost the economy.
b. They promote tighter public spending.
c. They have no impact on the economy.
d. They reign in a booming economy.

Answer 8

a. They boost the economy.

chapter reference 3E6

Question 9

Which account in the context of balance of payments, deals with foreign investments in the UK, UK investment abroad and loans?

Select one:

a. Current.
b. Invisible.
c. Visible.
d. Capital.

Answer 9

d. Capital.

chapter reference 3F

Question 10

If ‘broad money’ growth is being experienced in the UK, then this usually indicates that:

Select one:

a. interest rates are rising.
b. consumer spending is increasing.
c. lending activity has increased.
d. inflation is likely to fall.

Answer 10

c. lending activity has increased.

chapter reference 3E

Question 11

If the UK were to export large quantities of crude oil, this would have a:

Select one:

a. positive impact on the balance of payments capital account.
b. positive impact on the balance of payments current account.
c. negative impact on the balance of payments current account.
d. negative impact on the balance of payments capital account.

Answer 11

b. positive impact on the balance of payments current account.

chapter reference 3F1

Question 12

Within the UK economy, there is a growth of money supply as measured by M0 and M4. What impact is this most likely to have, if any, on UK interest rates?

Select one:

a. It will have no impact.
b. They will reduce short-term.
c. They will rise.
d. They will fall long-term.

Answer 12

c. They will rise.

chapter reference 3E

Question 13

If the UK was heading into a recession, the fiscal policies available to the government are:

Select one:

a. increasing public spending and reducing taxation.
b. decreasing public spending only.
c. decreasing public spending and reducing taxation.
d. reducing taxation only.

Answer 13

a. increasing public spending and reducing taxation.

chapter reference 3D1

Question 14

A Japanese company is looking to establish a new factory in the UK. Assessing this decision in isolation, what would be the likely change in the exchange rate between UK Sterling and Japanese Yen?

Select one:

a. Both Sterling and Yen would weaken at the same rate.
b. Sterling would weaken and Yen would appreciate.
c. Both Sterling and Yen would appreciate at the same rate.
d. Sterling would appreciate and Yen would weaken.

Answer 14

d. Sterling would appreciate and Yen would weaken.

chapter reference 3E7

Question 15

An economy’s gross domestic product for the first three quarters of the year is £1 billion, £1.2 billion and £1.1 billion respectively. After quarter three the economy is said to be:

Select one:

a. contracting.
b. in recession.
c. in a depression.
d. in a trough.

Answer 15

a. contracting.

chapter reference 3C

Question 16

Under quantitative easing the Bank of England purchases gilts. As a result, the total demand for gilts:

Select one:

a. decreases, leading to a reduction in gilt yields.
b. decreases, leading to an increase in gilt yields.
c. increases, leading to a reduction in gilt yields.
d. increases, leading to an increase in gilt yields.

Answer 16

c. increases, leading to a reduction in gilt yields.

chapter reference 3A1A

Question 17

Recently, the UK inflation rate was 2.1%. The following month, the UK inflation rate was 1.8%. What term is used to describe this change?

Select one:

a. Inflation.
b. Disinflation.
c. Deflation.
d. Stagflation.

Answer 17

b. Disinflation.

chapter reference 3E2

Question 18

Seve has a portfolio which includes UK shares, cash and fixed-interest securities. Over the next two years inflation is predicted to rise, which would typically:

Select one:

a. have no impact on his cash holdings.
b. be supportive for his equity holdings.
c. be supportive for his fixed-interest holdings.
d. be negative for his equity holdings.

Answer 18

b. be supportive for his equity holdings.

chapter reference 3E4

Question 19

Which measure is LEAST likely to stimulate the UK economy?

Select one:

a. Use quantitative easing.
b. Increase levels of taxation.
c. Reduce interest rates.
d. Reduce income tax.

Answer 19

b. Increase levels of taxation.

chapter reference 3D2/3E

Question 20

When an economy is booming, this is most likely to result in a:

Select one:

a. fall in the price of equities.
b. rise in unemployment.
c. fall in interest rates.
d. rise in property values.

Answer 20

d. rise in property values.

chapter reference 3C

Question 21

What combination of measures taken by the Bank of England in 2009 was intended to boost the UK economy?

Select one:

a. Quantitative easing and low interest rates.
b. Low inflation and high interest rates.
c. Quantitative easing and low inflation.
d. Low inflation and low interest rates.

Answer 21

a. Quantitative easing and low interest rates.

chapter reference 3A1A

Question 22

A country has witnessed a rapid growth in the amount of money circulating in the economy, as measured by M4. This is a sign that:

Select one:

a. there are fewer coins in circulation.
b. there are fewer notes in circulation.
c. the demand for loans is falling.
d. inflationary pressures are building up.

Answer 22

d. inflationary pressures are building up.

chapter reference 3E

Question 23

Candice owns fixed-interest securities. If interest rates were to rise, their:

Select one:

a. yield and their value will both increase.
b. value will decrease and their yield will increase.
c. yield and their value will both decrease.
d. value will increase and their yield will decrease.

Answer 23

b. value will decrease and their yield will increase.

chapter reference 3E6B

Question 24

In the first quarter of an economic year, the UK suffers negative growth. In which other quarter[s], if any, would it also need to experience negative growth before the UK was deemed to be in recession?

Select one:

a. Either quarter two or quarter three.
b. Quarter two only.
c. Any two other quarters.
d. Quarters two and three.

Answer 24

b. Quarter two only.

chapter reference 3C

Question 25

In the immediate aftermath of the 2011 Tsunami in Japan, the yen surged almost 5% against the US dollar. What action was then taken in the currency markets and by whom?

Select one:

a. The Bank of Japan acted alone by increasing interest rates.
b. The Bank of Japan and other central banks bought yen to avoid further deflationary pressures.
c. The Bank of Japan and other central banks sold yen to avoid further deflationary pressures.
d. The Bank of Japan acted alone and sold yen to deflate the economy.

Answer 25

c. The Bank of Japan and other central banks sold yen to avoid further deflationary pressures.

chapter reference 3A1A

Question 26

What impact will a rise in interest rates typically have on the price of existing fixed-interest securities, and why?

Select one:

a. The price will fall as people can only obtain a lower yield from new fixed-interest securities.
b. The price will rise as people can obtain a higher yield from new fixed-interest securities.
c. The price will fall as people can obtain a higher yield from new fixed-interest securities.
d. The price will rise as people can only obtain a lower yield from new fixed-interest securities.

Answer 26

c. The price will fall as people can obtain a higher yield from new fixed-interest securities.

chapter reference 3C1A

Question 27

The ageing population in the UK is most likely to result in:

Select one:

a. a boost for the financial services and leisure sectors.
b. a decline in the service sector generally.
c. a greater proportion of wealth being spent on the manufacturing industry.
d. less emphasis on controlling inflation.

Answer 27

a. a boost for the financial services and leisure sectors.

chapter reference 3A4

Question 28

In a boom period of an economic cycle, the most likely impact on the price of gilts is that they will:

Select one:

a. stay the same as they were in a recession.
b. rise.
c. fall.
d. rise and then level out.

Answer 28

c. fall.

chapter reference 3C1A

Question 29

If the M0 measure of money supply is increasing rapidly, this could indicate that:

Select one:

a. the demand for loans is growing.
b. the demand for loans is decreasing.
c. deflationary pressures are building up.
d. inflationary pressures are building up.

Answer 29

d. inflationary pressures are building up.

chapter reference 3E

Question 30

The GDP of the UK rose in quarter 1, before falling in quarter 2. If the GDP rises again in quarter 3, the UK economy is said to be:

Select one:

a. fluctuating.
b. recessing.
c. expanding.
d. stagnating.

Answer 30

c. expanding.

chapter reference 3C

Question 31

In a recession it is most likely that the price of equities will:

Select one:

a. fall as will the price of gilts.
b. fall as will the yield on gilts.
c. rise as will the yield on gilts.
d. rise as will the price of gilts.

Answer 31

b. fall as will the yield on gilts.

chapter reference 3C1A/3C1B

Question 32

In the recovery phase of a business cycle, the economic conditions are characterised by:

Select one:

a. high interest rates and low inflation.
b. low interest rates and high inflation.
c. high interest rates and high inflation.
d. low interest rates and low inflation.

Answer 32

d. low interest rates and low inflation.

chapter reference 3C

Question 33

Over the past year, GDP has moved as follows: quarter one £3.5bn, quarter two £4.2bn, quarter three £4.1bn, quarter four £4bn. This shows that:

Select one:

a. if the next quarter shows another fall, the economy is in recession.
b. in quarter three the economy was contracting and in quarter four it was in recession.
c. in quarter three the economy peaked and in quarter four it was contracting.
d. the economy is expanding overall.

Answer 33

b. in quarter three the economy was contracting and in quarter four it was in recession.

chapter reference 3C

Question 34

In practice, the impact of technological changes on a nation’s economic performance is best seen by:

Select one:

a. the number of new products produced within an accounting year.
b. the proportion of the national output devoted to research and development.
c. the proportion of e-commerce to traditional retail output.
d. its ability to incorporate international advances into economic production.

Answer 34

d. its ability to incorporate international advances into economic production.

chapter reference 3A5

Question 35

Using only monetary policy, what measure could the Bank of England use to stimulate the economy during a recession?

Select one:

a. Quantitative easing.
b. Increase government expenditure.
c. Sell nationalised industries.
d. Reduce VAT.

Answer 35

a. Quantitative easing.

chapter reference 3E

Question 36

If the Bank of England chooses to tighten monetary policy this is most likely to lead to a:

Select one:

a. fall in asset prices and businesses will invest less.
b. fall in asset prices although businesses will invest more.
c. rise in asset prices although business will invest less.
d. rise in asset prices and businesses will invest more.

Answer 36

a. fall in asset prices and businesses will invest less.

chapter reference 3D2

Question 37

If the Bank of England decides to sell securities this will typically:

Select one:

a. increase the money supply and decrease short-term interest rates.
b. reduce the money supply and increase short-term interest rates.
c. reduce the money supply and decrease short-term interest rates.
d. increase the money supply and increase short-term interest rates.

Answer 37

b. reduce the money supply and increase short-term interest rates.

Correct, chapter reference 3E

Question 38

The difference between the government’s expenditure and revenues is known as the public sector net cash requirement [PSNCR]. The PSNCR is likely to increase:

Select one:

a. in a growing economy.
b. during recession.
c. when unemployment is falling.
d. when tax revenues are growing.

Answer 38

b. during recession.

chapter reference 3C

Question 39

In the UK, Peter receives interest at an annual rate of 1.2% on his savings. In Italy, Bertina receives 1.4%. The annual rates of inflation are 1.1% and 2.0% respectively. This indicates that:

Select one:

a. Bertina receives the highest real interest rate.
b. Peter receives the highest real interest rate.
c. they both receive the same nominal interest rate.
d. Peter receives the highest nominal interest rate.

Answer 39

b. Peter receives the highest real interest rate.

chapter reference 3E4A

Question 40

If there is a sudden and unexpected rise in the rate of inflation, what is the most likely impact on the value of fixed-interest securities and equities respectively?

Select one:

a. The value of both fixed-interest securities and equities will rise.
b. The value of both fixed-interest securities and equities will fall.
c. The value of fixed-interest securities will fall, and the value of equities will rise.
d. The value of fixed-interest securities will rise, and the value of equities will fall.

Answer 40

c. The value of fixed-interest securities will fall, and the value of equities will rise.

chapter reference 3E5/3E5A

Question 41

As a means of expanding the money supply, the government may prefer to increase its spending rather than reduce taxation because:

Select one:

a. government spending will reduce the budget deficit.
b. a reduction in taxation will not benefit more affluent people.
c. more of the money is likely be spent on domestically produced goods and services.
d. a reduction in taxation may result in an increase in exports.

Answer 41

c. more of the money is likely be spent on domestically produced goods and services.

chapter reference 3D1

Question 42

What could quantitative easing involve?

Select one:

a. Forcing banks to lend more money.
b. The Bank of England selling gilts to the banks.
c. The Bank of England purchasing large quantities of gilts.
d. Lowering of taxation, particularly indirect taxation.

Answer 42

c. The Bank of England purchasing large quantities of gilts.

chapter reference 3A1A

Question 43

In the typical contraction period of an economic cycle, output growth slows:

Select one:

a. and inflation falls, meaning the Bank of England is keen to cut interest rates.
b. and inflation falls, meaning the Bank of England is reluctant to cut interest rates.
c. but inflation remains high, meaning the Bank of England is reluctant to cut interest rates.
d. but inflation remains high, meaning the Bank of England is keen to cut interest rates.

Answer 43

c. but inflation remains high, meaning the Bank of England is reluctant to cut interest rates.

chapter reference 3C

Question 44

The combination of low interest rates and adoption of quantitative easing in UK since 2009 was intended to:

Select one:

a. dampen down economic activity, accepting the risk of inflation falling below the Bank of England’s target of 2%.
b. provide the economy with a boost and reduce the risk of inflation falling below the Bank of England’s target of 2%.
c. provide the economy with a boost whilst accepting the risk of inflation falling below the Bank of England’s target of 2%.
d. dampen down economic activity thereby reducing the risk of inflation increasing beyond the Bank of England’s target of 2%.

Answer 44

b. provide the economy with a boost and reduce the risk of inflation falling below the Bank of England’s target of 2%.

chapter reference 3A1A

Question 45

A fall in the value of the pound will typically lead to a[n]:

Select one:

a. decrease in the profitability of exports and a decrease in the share price of major exporters.
b. increase in the profitability of exports and an increase in the share price of major exporters.
c. decrease in the profitability of exports and an increase in the share price of major exporters.
d. increase in the profitability of exports and a decrease in the share price of major exporters.

Answer 45

b. increase in the profitability of exports and an increase in the share price of major exporters.

chapter reference 3E7

Question 46

The UK government is most likely to use fiscal policy to influence the level of economic activity in a:

Select one:

a. period of economic strength, when it might be used to reduce taxation.
b. recession, when it might be used to cut taxation.
c. recession, when it might be used to reduce spending.
d. period of economic strength, when it might be used to increase spending.

Answer 46

b. recession, when it might be used to cut taxation.

chapter reference 3D1