Question 1

Withdrawals are endogenous.

Accepted Answer

A) True 
 B)False  True

Question 2

According to the accelerationist theory, unemployment can only be kept below the natural rate if

Accepted Answer

A)  interest rates continually fall. 
B)  inflation is allowed to rise. 
C)  there is scope for considerable export expansion. 
D)  growth is allowed to accelerate. 
A)  interest rates continually fall. 
B)  inflation is allowed to rise. 
C)  there is scope for considerable export expansion. 
D)  growth is allowed to accelerate. B

Question 3

Business cycles are highly irregular in practice since

Accepted Answer

A)  growth is very rapid in a recovery but declines slowly in the downturn, so recoveries last a short time whereas downturns occur very slowly. 
B)  the length of each stage can vary. 
C)  the magnitude of each stage can vary. 
D)  booms are short- lived, while recessions last a long time. 
E)  B and C F) A and D 
A)  growth is very rapid in a recovery but declines slowly in the downturn, so recoveries last a short time whereas downturns occur very slowly. 
B)  the length of each stage can vary. 
C)  the magnitude of each stage can vary. 
D)  booms are short- lived, while recessions last a long time. 
E)  B and C F) A and D E

Question 4

Given the following data in £ billions, if injections are constant at £12 billion and full employment occurs at a national income of £100 billion, what is the size of the recessionary (or 'deflationary') gap?

Accepted Answer

A)  £5 billion 
B)  £40 billion 
C)  £80 billion 
D)  £4 billion 
E)  £20 billion 
A)  £5 billion 
B)  £40 billion 
C)  £80 billion 
D)  £4 billion 
E)  £20 billion

Question 5

When government spending or investment increases in an open economy

Accepted Answer

A)  some of the extra consumption spending that results is on foreign products and not on domestically produced goods and services. 
B)  none of the extra consumption spending that results is on foreign products; all of it is on domestically produced goods and services. 
C)  consumption rises but income does not. 
D)  all of the extra consumption spending that results is on foreign products and none of it on domestically produced goods and services. 
A)  some of the extra consumption spending that results is on foreign products and not on domestically produced goods and services. 
B)  none of the extra consumption spending that results is on foreign products; all of it is on domestically produced goods and services. 
C)  consumption rises but income does not. 
D)  all of the extra consumption spending that results is on foreign products and none of it on domestically produced goods and services.

Question 6

Monetarists argue that M and V vary inversely.

Accepted Answer

A) True 
 B)False

Question 7

According to New Classical economists, what happens to the Phillips curve if inflation is (a) underpredicted and (b) overpredicted?

Accepted Answer

(a) Underprediction will shift the short

Question 8

Hysteresis is a term applied to processes that are not easily reversible.

Accepted Answer

A) True 
 B)False

Question 9

The marginal propensity to consume is the ratio of consumption to income.

Accepted Answer

A) True 
 B)False

Question 10

The Monetarist analysis is based on the theory of portfolio balance. This states that

Accepted Answer

A)  in times of recession individuals will use up their savings rather than cutting down on excess spending. 
B)  individuals will keep an equal balance between financial assets and money in their portfolios, irrespective of the rate of interest. 
C)  people hold their wealth in a number of different forms, the balance depending on their relative profitability and liquidity. 
D)  individuals with stocks and shares spread their risks by having a broadly balanced portfolio of equities. 
A)  in times of recession individuals will use up their savings rather than cutting down on excess spending. 
B)  individuals will keep an equal balance between financial assets and money in their portfolios, irrespective of the rate of interest. 
C)  people hold their wealth in a number of different forms, the balance depending on their relative profitability and liquidity. 
D)  individuals with stocks and shares spread their risks by having a broadly balanced portfolio of equities.

Question 11

Why is the adaptive expectations theory of the Phillips curve sometimes referred to as the accelerationist theory?

Accepted Answer

It is sometimes called the accelerationi

Question 12

According to real business cycle theory, booms and recession will come to an end because aggregate supply will eventually stop shifting once the shock has worked its way through the economy.

Accepted Answer

A) True 
 B)False

Question 13

If there is a general rise in demand in the economy, but firms assume that their cost curves are given, then the aggregate supply curve will be upward- sloping.

Accepted Answer

A) True 
 B)False

Question 14

According to the equation of exchange, if the money supply rises by 10% and the velocity of circulation and price level are constant, then real national income will rise by

Accepted Answer

A)  10%. 
C)  10%. 
D)  It is impossible to say without knowing the original values of M and Y. 
A)  10%. 
C)  10%. 
D)  It is impossible to say without knowing the original values of M and Y.

Question 15

If the MPC is 0.8, and savings is the only withdrawal, the MPS is

Accepted Answer

A)  1.8 
B)  1.25 
C)  0.8 
D)  0.2 
A)  1.8 
B)  1.25 
C)  0.8 
D)  0.2

Question 16

Outline two changes in an economy that could reduce an inflationary gap (using the Keynesian 45° diagram framework).

Accepted Answer

To reduce an inflationary gap, the aggre

Question 17

As the interest rate increases

Accepted Answer

A)  planned investment increases and aggregate expenditure increases. 
B)  planned investment decreases and aggregate expenditure decreases. 
C)  planned investment decreases, but aggregate expenditure remains constant. 
D)  planned investment increases, but aggregate expenditure remains constant. 
A)  planned investment increases and aggregate expenditure increases. 
B)  planned investment decreases and aggregate expenditure decreases. 
C)  planned investment decreases, but aggregate expenditure remains constant. 
D)  planned investment increases, but aggregate expenditure remains constant.

Question 18

Explain the accelerator effect.

Accepted Answer

According to the accelerator effect, the

Question 19

The Phillips curve demonstrates a robust and long- term relationship between inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 20

In the UK, the Bank of England sets the inflation target.

Accepted Answer

A) True 
 B)False

Exam 29: Business Activity, Employment and Inflation

Withdrawals are endogenous.

According to the accelerationist theory, unemployment can only be kept below the natural rate if

Business cycles are highly irregular in practice since

Given the following data in £ billions, if injections are constant at £12 billion and full employment occurs at a national income of £100 billion, what is the size of the recessionary (or 'deflationary') gap?

When government spending or investment increases in an open economy

Monetarists argue that M and V vary inversely.

According to New Classical economists, what happens to the Phillips curve if inflation is (a) underpredicted and (b) overpredicted?

Hysteresis is a term applied to processes that are not easily reversible.

The marginal propensity to consume is the ratio of consumption to income.

The Monetarist analysis is based on the theory of portfolio balance. This states that

Why is the adaptive expectations theory of the Phillips curve sometimes referred to as the accelerationist theory?

According to real business cycle theory, booms and recession will come to an end because aggregate supply will eventually stop shifting once the shock has worked its way through the economy.

If there is a general rise in demand in the economy, but firms assume that their cost curves are given, then the aggregate supply curve will be upward- sloping.

According to the equation of exchange, if the money supply rises by 10% and the velocity of circulation and price level are constant, then real national income will rise by

If the MPC is 0.8, and savings is the only withdrawal, the MPS is

Outline two changes in an economy that could reduce an inflationary gap (using the Keynesian 45° diagram framework).

As the interest rate increases

Explain the accelerator effect.

The Phillips curve demonstrates a robust and long- term relationship between inflation and unemployment.

In the UK, the Bank of England sets the inflation target.

The Business Environment and Business Economics

Economics and the World of Business

Business Organisations

The Working of Competitive Markets

Business in a Market Environment

Demand and the Consumer

Demand and the Firm

Products, Marketing and Advertising

Costs of Production

Revenue and Profit

Profit Maximisation Under Perfect Competition and Monopoly

Profit Maximisation Under Imperfect Competition

An Introduction to Business Strategy

Alternative Theories of the Firm

Growth Strategy

The Small-Firm Sector

Pricing Strategy

Labour Markets, Wages and Industrial Relations

Investment and the Employment of Capital

Reasons for Government Intervention in the Market

Government and the Firm

Government and the Market

Globalisation and Multinational Business

International Trade

Trading Blocs

The Macroeconomic Environment of Business

The Balance of Payments and Exchange Rates

Banking, Money and Interest Rates

Demand-Side Policy

Supply-Side Policy

International Economic Policy

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