Question 1

What are the main targets of Bank of England interest rate changes?

Accepted Answer

A)  The exchange rate 
B)  Aggregate demand 
C)  A and B 
D)  Neither A nor B 
A)  The exchange rate 
B)  Aggregate demand 
C)  A and B 
D)  Neither A nor B D

Question 2

The Medium Term Financial Strategy describes the monetary policy followed by the

Accepted Answer

A)  UK Conservative government in the 1990s. 
B)  UK Conservative government in the 1980s. 
C)  European Central Bank from 1998. 
D)  UK Labour government from 1997. 
A)  UK Conservative government in the 1990s. 
B)  UK Conservative government in the 1980s. 
C)  European Central Bank from 1998. 
D)  UK Labour government from 1997. B

Question 3

In response to the credit crunch in 2007/2008, central banks in several countries extended their willingness to lend to banks.

Accepted Answer

A) True 
 B)False  TRUE

Question 4

The banking system has £200 million in deposits. The bank liquidity ratio is 20%. The Bank of England wants to increase deposits in the banking system to £400 million. There are no leakages from the banking system. Deposits would increase to £400 million if the liquidity ratio were

Accepted Answer

A)  increased to 25%. 
B)  reduced to 10%. 
C)  increased to 40%. 
D)  reduced to 5%. 
A)  increased to 25%. 
B)  reduced to 10%. 
C)  increased to 40%. 
D)  reduced to 5%.

Question 5

The money supply has increased from £100 trillion to £101 trillion. Which of the following could have caused this increase?

Accepted Answer

A)  The Bank of England sold government securities to the public. 
B)  Banks began to hold excess reserves. 
C)  The Bank of England increased the bank rate. 
D)  Consumers who were holding money outside the banking system deposited this money to buy government securities. 
A)  The Bank of England sold government securities to the public. 
B)  Banks began to hold excess reserves. 
C)  The Bank of England increased the bank rate. 
D)  Consumers who were holding money outside the banking system deposited this money to buy government securities.

Question 6

Which of the following is not an automatic fiscal stabiliser?

Accepted Answer

A)  Income support 
B)  VAT 
C)  Unemployment benefit 
D)  Government expenditure on road- building programmes 
A)  Income support 
B)  VAT 
C)  Unemployment benefit 
D)  Government expenditure on road- building programmes

Question 7

A deliberate injection of narrow money into the banking system is known as

Accepted Answer

A)  crowding out. 
B)  quantitative easing. 
C)  Ricardian equivalence. 
D)  credit creation. 
A)  crowding out. 
B)  quantitative easing. 
C)  Ricardian equivalence. 
D)  credit creation.

Question 8

The MPCd = 0.75. If the Chancellor of the Exchequer decides to cut taxes by £35 million, what would be the effect on national income?

Accepted Answer

A)  National income would rise by £105 million. 
B)  National income would rise by £140 million. 
C)  National income would rise by £262.5 million. 
D)  National income would fall by £140 million. 
A)  National income would rise by £105 million. 
B)  National income would rise by £140 million. 
C)  National income would rise by £262.5 million. 
D)  National income would fall by £140 million.

Question 9

The policy mix of an expansionary monetary policy and a contractionary fiscal policy will lead to a decrease in the interest rate.

Accepted Answer

A) True 
 B)False

Question 10

Controlling the money supply is likely to be difficult because

Accepted Answer

A)  money supply is endogenous. 
B)  money supply is affected by the demand for money. 
C)  of Goodhart's Law. 
D)  all the above 
A)  money supply is endogenous. 
B)  money supply is affected by the demand for money. 
C)  of Goodhart's Law. 
D)  all the above

Question 11

The less taxes rise as national income rises, the smaller will be the stabilising effect of the automatic stabiliser.

Accepted Answer

A) True 
 B)False

Question 12

The UK Labour government's Golden Rule and Sustainable Investment Rule were suspended in light of the 2008 financial crisis.

Accepted Answer

A) True 
 B)False

Question 13

What is disintermediation?

Accepted Answer

Strictly, this is where financial interm

Question 14

Explain why the higher the Marginal Propensity to Tax (MPT), the bigger will be the stabilising effect of the automatic stabiliser.

Accepted Answer

The higher the MPT, the higher will be t

Question 15

Say that in 2013, the government collected £250 billion in taxes and spent £400 billion. This means it would have had a

Accepted Answer

A)  budget deficit of £150 billion. 
B)  budget surplus of £150 billion. 
C)  budget deficit of £650 billion. 
D)  budget surplus of 83%. 
A)  budget deficit of £150 billion. 
B)  budget surplus of £150 billion. 
C)  budget deficit of £650 billion. 
D)  budget surplus of 83%.

Question 16

The more government expenditure rises as national income falls, the greater will be the stabilising effect of the automatic stabiliser.

Accepted Answer

A) True 
 B)False

Question 17

The use of demand management policy (fiscal or monetary) to smooth out business cycles is called fine tuning.

Accepted Answer

A) True 
 B)False

Question 18

What are the two targets of interest rate changes?

Accepted Answer

Changes of interest rates by the central

Question 19

If government spending is increased by £500 and taxes are reduced by £500, equilibrium output will change by

Accepted Answer

A)  £0. 
B)  £500. 
C)  - £500. 
D)  an amount that cannot be determined from this information. 
A)  £0. 
B)  £500. 
C)  - £500. 
D)  an amount that cannot be determined from this information.

Question 20

Taxes are reduced by £200 million and income increases by £800 million. The value of the tax multiplier is

Accepted Answer

A)  4 
B)  0.25 
C)  - 4 
D)  - 0.25 
A)  4 
B)  0.25 
C)  - 4 
D)  - 0.25

Exam 30: Demand-Side Policy

What are the main targets of Bank of England interest rate changes?

The Medium Term Financial Strategy describes the monetary policy followed by the

In response to the credit crunch in 2007/2008, central banks in several countries extended their willingness to lend to banks.

The banking system has £200 million in deposits. The bank liquidity ratio is 20%. The Bank of England wants to increase deposits in the banking system to £400 million. There are no leakages from the banking system. Deposits would increase to £400 million if the liquidity ratio were

The money supply has increased from £100 trillion to £101 trillion. Which of the following could have caused this increase?

Which of the following is not an automatic fiscal stabiliser?

A deliberate injection of narrow money into the banking system is known as

The MPCd = 0.75. If the Chancellor of the Exchequer decides to cut taxes by £35 million, what would be the effect on national income?

The policy mix of an expansionary monetary policy and a contractionary fiscal policy will lead to a decrease in the interest rate.

Controlling the money supply is likely to be difficult because

The less taxes rise as national income rises, the smaller will be the stabilising effect of the automatic stabiliser.

The UK Labour government's Golden Rule and Sustainable Investment Rule were suspended in light of the 2008 financial crisis.

What is disintermediation?

Explain why the higher the Marginal Propensity to Tax (MPT), the bigger will be the stabilising effect of the automatic stabiliser.

Say that in 2013, the government collected £250 billion in taxes and spent £400 billion. This means it would have had a

The more government expenditure rises as national income falls, the greater will be the stabilising effect of the automatic stabiliser.

The use of demand management policy (fiscal or monetary) to smooth out business cycles is called fine tuning.

What are the two targets of interest rate changes?

If government spending is increased by £500 and taxes are reduced by £500, equilibrium output will change by

Taxes are reduced by £200 million and income increases by £800 million. The value of the tax multiplier is

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The MPC_d= 0.75. If the Chancellor of the Exchequer decides to cut taxes by £35 million, what would be the effect on national income?