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The economic environment - self-test

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1

Trade barriers

In what ways have the reductions in trade barriers boosted international trade?

a)
b)
c)
d)
Yes, that's correct. Well done. Freer trade results from a reduction in trade barriers (protectionism).No, that's not right. The correct answer is B. A has been seen in just a few developing countries but even when volumes have increased the values have not always grown in the same proportion. C is not something which conventionally happens when barriers, of which tariffs are one, are lowered. D is one of the old reasons given for keeping trade barriers in place.Your answer has been saved.
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2

Supply-side policies

What is the main aim of the policies known as 'supply-side'?

a)
b)
c)
d)
Yes, that's correct. Well done. Supply-side policies are intended to increase the potential output of an economy by improving productivity.No, that's not right. The correct answer is B. A might arise if the economy becomes more productive, efficient and competitive but it is not the main aim of these policies. C is often one of the casualties of these policies as they also focus on making labour more mobile and flexible. D is one of their long-term aims but not the main focus of the entire range of policies.Your answer has been saved.
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3

Interest rate rise

Why might an interest rate rise be bad for business?

a)
b)
c)
d)
Yes, that's correct. Well done. If interest rates rise, this will make the cost of servicing any debts greater by raising the firm's interest payments. This will mean an increase in fixed costs.No, that's not right. The correct answer is C. If interest rates rise, this will make the cost of servicing any debts greater by raising the firm's interest payments. This will mean an increase in fixed costs. A is unlikely to be the case, though if the firm operates in a very competitive market any increase in its cost base might affect its competitiveness. B is also not thought to be directly influenced by interest rate changes as fixed costs tend to involve the assets that have been bought with borrowed funds. Hence they are more vulnerable to interest rate changes. If anything the pound will rise in value as speculators will want to hold it within their portfolios.Your answer has been saved.
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4

Demand-pull inflation

Which of the following definitions describes demand-led or demand-pull inflation?

a)
b)
c)
d)
Yes, that's correct. Well done. This is a good definition of demand-pull inflation.No, that's not right. The correct answer is B. A refers to cost push inflation and C is describing the 'monetarist' interpretation of inflation. D is the expectations theory of consumers actually causing prices to rise as they buy in expectations of future price rises.Your answer has been saved.
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5

Short term interest rates

Why might a business be worried by increases in the short term rates of interest?

a)
b)
c)
d)
Yes, that's correct. Well done. Cash may become 'tight' and financing the business will cost more.No, that's not right. The correct answer is C as cash may become 'tight' and financing the business will cost more. A might arise if exports are being financed by loans or if the business exports a large amount of its output but it is not normally a major cause for concern by most domestic firms. B might take place as housing costs will increase for most borrowers, however, we are dealing with 'probables' only and so C is the only near certainty. D is probably the opposite of what will take place. An increase in interest rates is liable to attract funds of a speculative nature into the UK.Your answer has been saved.
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6

Changes in exchange rates

In what way might an increase in the value of the affect a UK-based company that exports some of its output?

a)
b)
c)
d)
Yes, that's correct. Well done. The price will rise as overseas buyers will have to change more of their currency to buy the pounds with which to buy UK exports.No, that's not right. The correct answer is A as price will rise as overseas buyers will have to change more of their currency to buy the pounds with which to buy UK exports. B is what we hope will not happen, especially if the goods are not very price elastic. Let's hope the non-price factors continue to make the UK exports look attractive to buyers. C is against the fundamentals of both the EU and WTO, so it is very unlikely to take place. D would be a 'very' unusual move by as UK government as it would force up the price of UK exports.Your answer has been saved.
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7

Supply-side policies

How might supply-side policies help reduce unemployment?

a)
b)
c)
d)
Yes, that's correct. Well done. This is exactly what many of the supply-side policies are designed to achieve.No, that's not right. The correct answer is D as this is exactly what many of the supply-side policies are designed to achieve. A is a good definition of monetary policy, whilst B refers to fiscal or tax policy. C is an attempt to affect the prices of imports and exports.Your answer has been saved.
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8

Changes in government policy

Why might changes in government policies affect the business cycle?

a)
b)
c)
d)
Yes, that's correct. Well done. This is what government intervention into the economy is designed to achieve.No, that's not right. The correct answer is B as this is what government intervention into the economy is designed to achieve. A might be the opinion of some but is not the reason why a government introduces new policies. C this might be a correct observation though not of either all policy or why they are introduced. D is not the reason we are looking for but it is worth remembering that the one main area of business behaviour the EU does have influence in is competition.Your answer has been saved.
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9

Business cycle - boom

What is meant by the term boom?

a)
b)
c)
d)
Yes, that's correct. Well done. This is just what a boom is.No, that's not right. The correct answer is A as this is just what a boom is. B is a downturn within the economy and C is a recession. D is describing what is known as cyclical unemployment.Your answer has been saved.
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10

Increase in short-term interest rates

Which of the following would be directly affected by an increase in short term interest rates?

a)
b)
c)
d)
Yes, that's correct. Well done. House prices are closely linked to interest rates - many houses are bought on a mortgage.No, that's not right. The correct answer is C as house prices are closely linked to interest rates - most houses are bought on a mortgage. A would be part of fiscal policy and not monetary, which is what we are testing. B would also be part of fiscal policy. D is not correct, though the authority to change short-term interest rates sometimes rests with the central bank in some economies.Your answer has been saved.
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11

GNP

What is meant by the term Gross National Product?

a)
b)
c)
d)
Yes, that's correct. Well done. House prices are closely linked to interest rates - most houses are bought on a mortgage.No, that's not right. The correct answer is D as GNP refers to all income generated by the country including income generated overseas. A is describing our exports and B refers to the Gross Domestic Product (GDP) which does not . C is the sums paid by countries under the Common External Tariff regulations of the EU.Your answer has been saved.
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12

Budget deficit

A budget deficit is when

a)
b)
c)
d)
Yes, that's correct. Well done. This will result in a budget deficit.No, that's not right. The correct answer is C as this will result in a budget deficit. A is the opposite and is known as a budget surplus. B is just a change in government fiscal policy as is D.Your answer has been saved.
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