CAIE O SET- 4.

1 CW MCQ - QA
4 Government and the macro economy

B-2023 / 2024 S- /70 P -

© Copyright. PRACTICE PAPERS by Imran Haque

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1 What would a government reduce as part of an expansionary monetary policy to increase
employment?

A government spending
B the money supply
C the rate of interest
D unemployment benefit

2 What is an aim of government policy?

A income tax
B interest rates
C stable prices
D unemployment

3 The table shows the amount of tax to be paid at different weekly incomes.

Which statement describes the system of income tax as income rises over this range?

A It is progressive throughout.
B It is proportional then becomes progressive.
C It is proportional then becomes regressive.
D It is regressive throughout.

4 An economy is experiencing two consecutive quarters of negative economic growth. What is this
economy experiencing?

A budget deficit
B inflation
C recession
D trade deficit

5 What is included in the calculation of a consumer prices index (CPI)?

A the price of a basket of goods and services

B the price of exports and the price of imports
C the value of the currency on international markets
D the wages of consumers

6 There was a fall in investment spending by businesses in the third quarter of 2015. What would be
the likely result of this?

A an increase in economic growth

B an increase in exports
C an increase in incomes
D an increase in unemployment

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7 The table shows units of output, value of output and number of people employed in an industry over
three years.

What can be concluded from the table?

A Inflation has increased.

B Productivity has increased.
C Profit has increased.
D Working population has increased.

8 Which is a supply-side policy?

A increasing interest rates

B increasing taxation
C providing training courses
D selling government bonds

9 A government has the following revenue.

What is the total amount of indirect tax revenue?

A $140 m B $200 m C $240 m D $270 m

10 The table shows the change in Gross Domestic Product (GDP) of four countries. Which country has
experienced a recession?

11 What determines the weights in the consumer prices index (CPI)?

A the average income received by the various households

B the average increase in the prices of the different goods
C the proportion of income spent by the average household on particular goods
D the proportion of income that the average household saves

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12 When is a tax progressive?

A when some goods have a higher tax than others

B when the rate of tax increases as income increases
C when the tax is linked to the rate of inflation
D when the tax is on incomes rather than on goods or services

13 A government intends to improve skills by offering free training to school leavers at age 16 until
they reach 18 years. It proposes to pay for this by taxing the profits of firms. Which policies do these
proposals involve?

14 In trying to achieve one of its aims a government may make it difficult to achieve another aim.
What is an example of this conflict?

A Achieving a more even distribution of income may prevent a rise in the average standard of living.
B Achieving an increase in economic growth may prevent full employment.
C Achieving full employment may prevent stable prices.
D Achieving stable prices may prevent a current account surplus on the balance of payments.

15 The charts relate to the Financial Statement of the government of New Zealand for 2014.

What can be concluded?

A Expenditure on welfare was higher than the combined expenditure on education and health.
B The government was $2.8 billion in surplus.
C The largest source of the government’s income was from direct taxation.
D The number of business corporations was very small.

16 A newspaper reported that a country’s economy had grown by 3% during the last year. What must
have increased in that year?

A costs of production
B gross domestic product
C unemployment
D wage levels

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17 The information below refers to an economy for a financial year.
government expenditure = $2866 million, government revenue = $1940 million
What was the budget balance of the government in that year?

A $926 million in deficit

B $4806 million in deficit
C $926 million in surplus
D $4806 million in surplus

18 A government wishes to try to make the distribution of income in the country more equal. Which
policy would be most likely to achieve this?

A reducing housing subsidies

B reducing indirect tax on food
C reducing inheritance tax
D reducing tax on the dividends on stocks and shares

19 Which policy combination will be the most effective if a government wishes to increase the level
of employment?

A decrease general taxation and decrease the rate of interest

B decrease general taxation and increase the rate of interest
C increase general taxation and decrease the rate of interest
D increase general taxation and increase the rate of interest

20 What is meant by deflation?

A a fall in the general price level

B a fall in the international value of a currency
C a fall in the rate of inflation
D a fall in the real value of money

21 What is the change in GDP per head, after taking account of price increases (real change),
between 2000 and 2013?

A from $15 to $125

B from $1250 to $1333
C from $1333 to $1250
D from $1333 to $1500

22 A government wishes to stimulate economic recovery. Which action will assist this?

A decreasing government investment

B decreasing income tax
C increasing indirect taxation
D increasing interest rate

23 What is an expansionary monetary policy?

A a decrease in the interest rate

B a decrease in the rate of value added tax
C an increase in the power of trade unions D an increase in the standard rate of income tax

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24 A government decides to make two changes to its taxation policies. It lowers the tax on petrol and
raises the tax on food. How do these changes affect the regressive nature of the taxes?

25 The table shows a government’s receipts from taxation.

What is the total amount of revenue raised by indirect taxes?

A $95 m B $300 m C $400 m D $495 m

26 What is Gross Domestic Product (GDP) divided by to calculate GDP per head?

A net migration
B the birth rate
C the total population
D the working population

27 Who is made worse off during a period of deflation?

A cash holders B creditors C debtors D fixed income earners

28 The table gives information about three economic indicators in four countries.

What may be concluded from this information?

A Countries with higher inflation have higher interest rates.

B Countries with higher interest rates have lower unemployment.
C The country with the lowest inflation had the highest unemployment.
D The country with the lowest unemployment had the lowest inflation.

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29 What must result when a country experiences economic growth?

A a higher Gross Domestic Product

B a lower rate of inflation
C a surplus on the balance of trade
D an improved standard of living for everybody

30 A government fixes the rate of income tax at $0.20 per dollar earned. What describes this type of
taxation?

A indirect B progressive C proportional D regressive

Q1 The government of Slovenia has introduced a range of supply-side policy measures to influence
the country’s inflation rate. Among other factors affecting the economy is a change in trade union
membership and strength.

(a) Identify two price indices. [2]

CPI - consumer price index

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RPI - retail price index
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(b) Explain two supply-side policy measures. [4]

Education and training : education makes a labour more innovative and

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waste less, while training makes a labour skilled. The labour becomes
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more productive and hence supply of goods and services increase.
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Privatisation : privatisation increases the efficiency of firms thus
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output increases. The number of firms in private sector increases,
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therefore competition increases and overall supply increases.

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(c) Analyse why a government may want to reduce its country’s inflation rate. [6]

With a rise in inflation the consumers experience a fall in living standard

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since most consumers are of fixed and low income, they experience a fall
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in distribution of income. Since goods and services become unaffordable
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they end up buying less. So inflation needs to be reduced.
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Inflation creates uncertainty. Since prices are often fluctuating and rising,
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it makes difficult for producer to calculate cost of production and hence
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selling price. With a chance for both loss or profit, the producers may
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decide to invest less since the prices are always unstable. So output falls.
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Inflation increases the price of local goods. Since local goods become
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expensive, it is difficult to sell them abroad. Local goods loses
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competitiveness in international market. Whereas imported goods will seem

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cheaper. So export falls and import rises, balance of payment worsens.

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(d) Discuss whether or not increasing the strength of trade unions will benefit an economy. [8]

A strong trade union will have higher bargaining power for wages. So a
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higher wage will increase living standard and more spending in the economy
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will increase demand.
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Along with wages trade union will try to improve the working conditions.
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This will increase morale and workers will be more productive. This will
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increase output and hence economic growth.

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Strong trade unions will force employers to provide benefits like health
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and may arrange different training schemes. A healthy worker miss less days
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of work and skilled worker will waste less and be innovative. All
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contributes to increased output and long lasting benefit for economy.
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A strong trade union may have irrational demands and try to force the
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employers to fulfill them. In many cases they will go for strike or
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vandalism creating loss of output and capital.
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Higher wages decreases investment and hence slows economic growth. Higher
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wages also discourages FDI. Higher wages prevents firms to grow large.
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In the longer time this will create unemployment as firms may shift to
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capital intensive production.
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(e) Discuss whether or not increased government spending will increase economic growth. [8]

Government spending on infrastructure will lead to economic growth or

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productive potential of a country. With better infrastructure new firms
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will be set up. Existing firms will expand. More output can be produced
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since cost of production will decrease.
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Government spending on education and training will increase human capital
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of the labours. They will be more innovative and productive. Less resources

will be wasted and quantity and quality of goods and services will increase
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and thus output of the country will increase.
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Government can spend on research and developement. This can include various
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sectors of the economy. This increases efficiency and more use of technology
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in production. Government can fund futuristic projects and encourage the
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use of more tools and advanced method of production.
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However if government spends on arms and ammunition or on the military, it
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is considered a wasteful expenditure in many cases. This spending do not
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directly or indirectly affects economic growth. Rather this expense creates

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burden for the economy since the people is taxed higher.

Government spending in economy can add higher supply of money in the economy.
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e.g. higher spending on government service holders. This directly

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contributes nothing to economy rather increase consumer spending and demand
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leading to inflation.
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(f) Define regressive tax. [2]

A lower rate of tax imposed on higher income group, compared to a higher

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rate of tax imposed on lower income group.
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(g) Analyse why a government imposes taxes. [6]

Imposing taxes is the main source of government revenue. Government uses

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this money to spend on public goods and services and other necessary
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purposes. e.g. infrastructure, security, benefits
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Tax such as direct tax can decrease disposable income and decrease demand
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in the economy. As demand decreases, spending falls and thus there is a
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decrease in demand pull inflation.
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Taxing the rich and distributing the money among the poor can reduce income
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inequality in a country. As government taxes the rich, the money collected
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is used to provide health and housing for the poor, improve public
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services and thus increasing average living standard of the population.

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(h) Explain how a stock exchange could encourage economic growth. [4]

Stock exchange makes a listing of firms who have high potential too grow
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and is in need for large amount of finance. They provide a market place
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for firms where they can raise finance from general public. As a firm
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expands it can produce more and hence contribute to economic growth.
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Stock exchange provides a place for investment and also helps the idle
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money in economy to be used for a better purpose, which can give an output
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or return of investment. As more investment and idle money is poured in,

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it increases economic growth.

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