Past Year MCQ – AS Topic 5

1. The diagram shows the original aggregate demand AD1 and aggregate supply LRAS1 for
an economy.

What could explain the shifts in aggregate demand to AD2 and aggregate supply to
LRAS2?

A an increase in government expenditure on health and education

B an increase in government expenditure on pensions

C an increase in income tax

D an increase in interest rates

2. A newly-built public sector engineering training college received poor inspection reports.
The government ceased to pay the college the money that it had usually received as its
annual grant. Which types of government policy does this statement imply?

A fiscal and monetary policies only

B fiscal and supply-side policies only

C fiscal, monetary and supply-side policies

D monetary and supply-side policies only

3. A government is faced with rising inflation. It wishes to reduce inflationary pressure while
avoiding a rise in unemployment. Which action is most likely to meet its needs?

A an increase in employment taxes

B an increase in laws to promote competition

C an increase in the budget surplus

D an increase in the exchange rate

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4. In March 2014, Sweden had a change in its Consumer Price Index of −0.6%. Which
combination of policies might the government use to restore price stability?

A increase interest rates and increase indirect taxes

B increase interest rates and reduce government expenditure

C reduce government spending and increase income tax

D reduce interest rates and increase government expenditure

5. China had US$155 billion current account surplus in 2012. Which combination of policies
might the Chinese Government use to restore equilibrium?

A Decrease income tax and raise the value of the Chinese currency, the Yuan.

B Increase income tax and lower the value of the Chinese currency, the Yuan.

C Increase subsidies to Chinese firms and reduce income tax.

D Increase tariffs on imports and increase income tax.

6. An economy has a high rate of inflation and a balance of payments deficit.

Which policy change would help to reduce the balance of payments deficit without making
inflation worse?

A a devaluation of the currency

B a reduction in government spending

C the imposition of import quotas

D the removal of import tariffs

7. In an attempt to correct a balance of trade deficit, the government of Indonesia has

decided to employ expenditure-dampening methods. Which policy would best fit this
description?

A introducing quotas on imported goods

B raising income tax rates

C subsidising home-produced goods

D taxing imported goods

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8. Which policy, adopted by a government with the intention of reducing the rate of inflation,
might cause a greater deficit on the balance of payments?

A higher foreign exchange rates for its currency

B higher interest rates for domestic customers

C higher subsidies to domestic producers

D higher tax rates on consumer incomes

9. A country faces twin problems of deflation and a current account deficit on the balance of
payments. It decides to run a budget deficit and to lower interest rates. Which effects are
these measures likely to have on its twin problems?

10. A government’s budget deficit was reduced. What might have caused this?

A a decrease in the revenue from vehicle tax

B an increase in the rate of subsidy given to libraries

C a purchase of two warships for the national defence

D a sale of a publicly owned energy company to the private sector

11. Why might a government seek to reduce a current account surplus on the balance of
payments?

A to lower inflation

B to lower unemployment

C to raise the economic growth rate

D to raise the exchange rate

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12. What would be classified as a supply-side policy measure?

A a law to alter the power of trade unions

B a reduction in the government’s fiscal deficit

C an open market sale of securities

D the imposition of a tariff on imported goods

13. Country X is an open economy with a fixed exchange rate. Which combination of fiscal
and monetary policies would be most effective in reversing a deflation?

14. What is a deflationary fiscal measure?

A reducing interest rates

B reducing the money supply

C increasing taxes

D increasing government expenditure

15. In an economy, prices are rising. The government wishes to limit further increases in
prices. Which policies would it be likely to use?

A decrease goods and services (sales) tax and put a quota on cheap imports

B decrease income tax and decrease interest rates

C increase interest rates and decrease government spending

D withdraw industry subsidies and impose a minimum wage

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16. Policies to correct a balance of payments deficit fall into two categories: expenditure-
dampening policies and expenditure-switching policies. Which pair of policies are
classified correctly?

17. The US Federal Reserve has a stable price (2% inflation) target and a full employment (5
to 5.2% unemployment) target. The diagram shows the inflation rate and unemployment
rate that existed between 2007 and 2014.

What can be concluded about the performance of Federal Reserve economic policy, 2007
to 2014?

A The continuing deflation meant failure in the inflation target.

B The inflation target was achieved less frequently than the employment target.

C The least successful period for economic policy was experienced in 2007.

D The nearest to complete policy success was achieved in 2008.

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18. A government is faced with rising inflation. It wishes to reduce inflationary pressure while
avoiding a fall in output.

Which action is most likely to meet its needs?

A an increase in laws to promote competition

B an increase in taxation

C an increase in the budget surplus

D an increase in the exchange rate

19. A government increases the basic rate of income tax to finance additional spending on
apprenticeships and training. Which types of macroeconomic policy are being used?

20. What is an example of expansionary monetary policy?

A the central bank buying government bonds in the money market

B the central bank causing an appreciation of the country’s foreign exchange rate

C the central bank increasing controls on credit lending

D the central bank increasing the minimum lending rate of interest

21. In 2012, the Indian Government stated that it aimed to reduce its budget deficit to 5.1%
of GDP. Which policy is most likely to help this aim?

A a decrease in import tariffs

B a decrease in the rate of interest

C an increase in the sale of state-owned assets

D an increase in government pension payments

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22. Which policy is most likely to help to correct an adverse balance on the current account
of the balance of payments?

A abolishing tariffs

B devaluing the currency

C reducing direct taxes

D reducing indirect taxes

23. A government reduced the tax on company profits from 28% to 20%. Which statement
best describes this policy?

A It is both a contractionary fiscal policy and a supply-side policy.

B It is both an expansionary fiscal policy and a supply-side policy.

C It is both an expansionary fiscal policy and an expansionary monetary policy.

D It is both an expansionary monetary policy and a supply-side policy.

24. What is an example of an expenditure-dampening policy?

A an increase in income tax rates

B an increase in the level of import tariffs

C an upward revaluation of the exchange rate

D the introduction of import quotas

25. An economy is currently operating close to its full employment level of national income.

Which combination of macro-economic policies would be most likely to have net

deflationary effects?

A a 10% cut in the standard rate of income tax and a 5% devaluation of the currency

B a 10% cut in the standard rate of income tax and a 5% revaluation of the currency

C a 10% rise in the standard rate of income tax and a 5% devaluation of the currency

D a 10% rise in the standard rate of income tax and a 5% revaluation of the currency