Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
   1. AD/AS - self-test questions
   2. Short questions
   3. Data response (1)
   4. Data response (2)
   5. Long questions
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

AD/AS - self-test questions

1

Shifts in aggregate demand Which of the following would NOT cause a shift in AD? a) A reduction in income tax b) A reduction in interest rates c) An increase in government spending d) A fall in the cost of production Yes, that's correct. Well done. This would not shift the aggregate demand curve, but would shift the aggregate supply curve.No, that's not right. The correct answer is D. All of the others would be a possible cause of a shift in AD.Your answer has been saved.

2

Shifts in aggregate demand Choose appropriate phrases from the drop down boxes below to complete the explanation of shifts of an aggregate demand curve and movements along aggregate demand curves. When the price level in the economy changes there will a Choose... left movement along right the aggregate demand curve. If the price level increases, there will be a movement upwards and to the left on the aggregate demand curve. If there is a decrease in the price level, then there will be a movement downwards to the right. However, if factors other than the price level change then the whole aggregate demand curve will shift, either to the right or to the left. For example, if there is a reduction in income tax, then the aggregate demand curve will shift to the Choose... left movement along right. If, however, the rate of income tax increases, then the demand curve will shift to the Choose... left movement along right. Your answer has been saved.

3

Shifts in aggregate supply Which of the following would NOT cause a SHIFT in AS? a) The level of government spending b) The costs of the factors of production c) Incentives d) The structure of the economy Yes, that's correct. Well done. This would not cause a shift in the aggregate supply curve.No, that's not right. The correct answer is A as this is not normally associated with a shift in AS. The others, plus technology and factor mobility would all be possible causes of a shift in AS.Your answer has been saved.

4

Shifts in aggregate supply If the price of imports rose, caused by a change in the value of the pound then the AS would shift to the: a) right b) left c) vertically d) not at all Yes, that's correct. Well done. The aggregate supply curve would shift to the left. The price of imports has risen and this would raise firm's costs making them less willing to supply.No, that's not right. The correct answer is B. A would show an increase in AS whereas we are analysing a fall. C is not possible on the diagrams we use and D is not right as the curve will shift.Your answer has been saved.

5

Shifts in aggregate supply Which of the following might have caused the shift in aggregate supply shown in the diagram below? Tick all the answers that apply. a) An improvement in technology b) A depreciation of the exchange rate c) An increase in costs d) A reduction in government expenditure e) A cut in income tax f) An increase in wage levels a) Yes, you have chosen the correct option. An improvement in technology will shift the aggregate supply curve to the right.a) No, you have not chosen the correct option. An improvement in technology will shift the aggregate supply curve to the right.b) Yes, you have chosen the correct option. A depreciation of the exchange rate will increase import prices and so raise firm's costs.b) No, you have not chosen the correct option. A depreciation of the exchange rate will increase import prices and so raise firm's costs.c) Yes, you have chosen the correct option. An increase in costs will shift the aggregate supply curve to the right.c) No, you have not chosen the correct option. An increase in costs will shift the aggregate supply curve to the right.d) Yes, you have chosen the correct option. A reduction in government expenditure will affect aggregate demand.d) No, you have not chosen the correct option. A reduction in government expenditure will affect aggregate demand.e) Yes, you have chosen the correct option. A cut in income tax will affect aggregate demand.e) No, you have not chosen the correct option. A cut in income tax will affect aggregate demand.f) Yes, you have chosen the correct option. An increase in wage levels will increase firm's costs and therefore shift the aggregate supply curve to the left.f) No, you have not chosen the correct option. An increase in wage levels will increase firm's costs and therefore shift the aggregate supply curve to the left.

6

Determinants of exports A key determinant of exports is: a) The industrial base of the economy b) The number of people in work c) The political beliefs of the government d) The role of the central bank Yes, that's correct. Well done. We need to have an efficient business sector to make the products others want to buy.No, that's not right. The correct answer is A as we need to have an efficient business sector to make the products others want to buy. B might help us to produce exports but then much would depend on the productivity of the workforce. C is not normally thought to affect exports as any government promotes overseas sales. D is related to monetary policy and not exports.Your answer has been saved.

7

Shifts in aggregate supply and demand Which of the following would cause the shift shown in the diagram below? Tick all the answers that apply. a) The government increase interest rates b) The Chancellor increases tax-free allowances in his budget c) The rate of value-added tax is increased d) Controls on the level of bank lending are relaxed e) The government allows tax relief on R&D spending f) The rate if income tax is reduced a) Yes, you have chosen the correct option. An increase in interest rates will reduce aggregate demand and shift the curve to the left.a) No, you have not chosen the correct option. An increase in interest rates will reduce aggregate demand and shift the curve to the left.b) Yes, you have chosen the correct option. An increase in tax-free allowances will boost disposable income and shift aggregate demand to the right.b) No, you have not chosen the correct option. An increase in tax-free allowances will boost disposable income and shift aggregate demand to the right.c) Yes, you have chosen the correct option. If the rate of VAT is increased this will reduce aggregate demand and shift the curve to the left.c) No, you have not chosen the correct option. If the rate of VAT is increased this will reduce aggregate demand and shift the curve to the left.d) Yes, you have chosen the correct option. Relaxing lending controls will boost aggregate demand and shift the curve to the right.d) No, you have not chosen the correct option. Relaxing lending controls will boost aggregate demand and shift the curve to the right.e) Yes, you have chosen the correct option. This is a supply-side policy and so will shift the aggregate supply curve.e) No, you have not chosen the correct option. This is a supply-side policy and so will shift the aggregate supply curve.f) Yes, you have chosen the correct option. A reduction in income tax will boost aggregate demand and shift the curve to the right.f) No, you have not chosen the correct option. A reduction in income tax will boost aggregate demand and shift the curve to the right.

8

AD/AS analysis When using AD/AS analysis to illustrate changes within an economy, which of the following would NOT need to be considered when looking at changes to economic growth? a) Increased labour productivity b) More efficient use of the capital stock c) Increased availability of social capital d) Developing a more efficient capital and finance sector Yes, that's correct. Well done. This might result from greater economic growth but it is not one of its main causes. Other factors affecting economic growth could include the application of new technology and the creation of a more efficient infrastructure and utilities sector.No, that's not right. The correct answer is C as this might result from greater economic growth but it is not one of its main causes. The others are causes of economic growth. Other factors affecting economic growth could include the application of new technology and the creation of a more efficient infrastructure and utilities sector.Your answer has been saved.

9

Aggregate supply Which of the following is a major influence on AS? a) Consumption b) Government spending c) The quality of the factors available d) The advice of government Yes, that's correct. Well done. The quality of the factors of production is a key determinant of the level of aggregate supply.No, that's not right. The correct answer is C. Both A and B refer to aggregate demand, whilst D is unlikely to have any real influence on AS.Your answer has been saved.

10

Shifts in aggregate supply Choose appropriate phrases from the drop down boxes below to complete the explanation of an aggregate supply curve. The short run AS curve slopes Choose... left long run right short run upwards. In the Choose... left long run right short run upwards, firms respond to price increases by supplying more goods but in the Choose... left long run right short run upwards supply may not always respond to an increase in price levels. In the short run changes like a reduction in profits tax will shift the aggregate supply curve to the Choose... left long run right short run upwards whereas a reduction in wage costs would shift the aggregate supply curve to the Choose... left long run right short run upwards. Your answer has been saved.

11

Shifts in aggregate supply and demand An increase in aggregate demand (given no change in aggregate supply) will cause higher inflation. a) True b) False Yes, that's correct. The statement is true. Higher aggregate demand will shift the aggregate demand to the right and cause the equilibrium price level to rise (inflation).No, that's not right. The statement is true. Higher aggregate demand will shift the aggregate demand to the right and cause the equilibrium price level to rise (inflation).Your answer has been saved.

12

Shifts in aggregate supply and demand An increase in costs will make the aggregate supply curve more inelastic. a) True b) False Yes, that's correct. The statement is false. An increase in costs will shift the supply curve to the left, but will not change the elasticity.No, that's not right. The statement is false. An increase in costs will shift the supply curve to the left, but will not change the elasticity.Your answer has been saved.

13

Shifts in aggregate supply and demand The less responsive is AS to a rise in AD, the more prices will rise for a given increase in AD. a) True b) False Yes, that's correct. The statement is true. Try rotating the AS curve and then drag the AD curve and see the impact on the equilibrium price level.No, that's not right. The statement is true. Try rotating the AS curve and then drag the AD curve and see the impact on the equilibrium price level.Your answer has been saved.

14

Shifts in aggregate supply and demand An increase in expenditure tax will shift both the aggregate demand and supply curves to the left. a) True b) False Yes, that's correct. The statement is true. An increase in expenditure tax will reduce consumption (shifting aggregate demand to the left) and will also represent an increase in costs (shifting aggregate supply to the left as well).No, that's not right. The statement is true. An increase in expenditure tax will reduce consumption (shifting aggregate demand to the left) and will also represent an increase in costs (shifting aggregate supply to the left as well).Your answer has been saved.

15

Shifts in aggregate supply and demand An improvement in productivity will shift both the aggregate demand and supply curves to the right. a) True b) False Yes, that's correct. The statement is false. An improvement in productivity will mean that firms are more efficient (shifting aggregate supply to the right), but it will not shift aggregate demand. There will simply be a 'move along' the aggregate demand curve, not a shift.No, that's not right. The statement is false. An improvement in productivity will mean that firms are more efficient (shifting aggregate supply to the right), but it will not shift aggregate demand. There will simply be a 'move along' the aggregate demand curve, not a shift.Your answer has been saved.

16

Increase in AD Which of the following is likely to result from a rapid rise in aggregate demand? a) Increased unemployment b) Static living standards c) Rising prices d) Surplus on the balance of payments Please select an answerNo, it is more likely to fall as the extra demand will lead to an increase in the demand for labour.No, they are more likely to rise.Yes, this is likely. A rapid rise in AD is likely to cause demand-pull inflation.No, the balance of payments is more likely to move into deficit. A rapid rise in AD is likely to lead to inflation. This may cause a depreciation, which may lead to a deficit on the balance of payments.