Deck 9: Introduction to the Macroeconomy

Question 1

In the simple circular ?ow of income where there are no leakages and injections, _____.

A) households spend all their income on consumption
B) government policies play a vital role in determining the level of economic activity of a
C) the foreign trade sector is of prime importance
D) households undertake both consumption and investment activities

Answer 1

households spend all their income on consumption

Question 2

An injection into the circular ?ow is additional spending on goods and services that does not come from _____.

A) spending by consumers on exports
B) income earned by households
C) the investments made by ?rms
D) government spending

Answer 2

income earned by households

Question 3

The outer loop of the simple circular ?ow of income, comprising only households and ?rms, captures the ?ow of _____.

A) taxes and government spending
B) wages and spending on goods and services
C) savings and investments
D) exports and imports

Answer 3

wages and spending on goods and services

Question 4

Which of the following statements is true?

A) Businesses work in an isolated environment.
B) The business cycle affects the microeconomic decisions of a ?rm.
C) Only spending and export growth matter; business con?dence will not help an economy.
D) A fall in unemployment will decrease domestic demand in an economy.

Question 5

When the factors of production are hired to produce output, _____.

A) the costliest resources available in the market are usually employed
B) the level of spending on goods and services will fall
C) income is generated for households to spend on goods
D) ?rms will use the income they earn to buy goods and services

Question 6

The simple circular ?ow model shows that _____.

A) ?rms supply inputs to households and households supply output to ?rms
B) households supply goods and services to the economy
C) ?rms supply output to households and households supply inputs to ?rms
D) households supply both output and inputs to the economy

Question 7

The key policy inputs controlled directly by the central bank are _____.

A) the government de?cit
B) interest rates
C) the level of government borrowings
D) income tax rates

Question 8

Which of the following would suggest that economic growth may be resuming in an economy that is recovering from a recession?

A) The country's exports fell by 8% since the last quarter.
B) Domestic demand has reduced by 5.5.% over the last year.
C) The business climate index rose from 102 to 105.
D) Unemployment rose from 9% to 12%.

Question 9

Which of the following entities cause an injection in the circular ?ow of income in the form of capital assets?

A) The foreign sector.
B) The government.
C) Households.
D) Firms.

Question 10

In the early 2000s the UK economy experienced _____.

A) a fall in government spending and a decline in the budget de?cit
B) high in?ation which led to high unemployment
C) a current account surplus
D) low interest rates and rising GDP

Question 11

In the circular ?ow model, the factors of production are owned by _____.

A) ?rms
B) the government
C) a few rich industrialists
D) households

Question 12

In the early 2010s the UK economy was characterized by _____.

A) low in?ation and unemployment levels
B) high interest rates since growth was strong
C) rising unemployment and tax increases
D) low budget and current account de?cits

Question 13

Leakages from the circular ?ow constitute:

A) savings, taxes and imports.
B) savings, government spending and exports.
C) investment, taxes and imports.
D) investment, government spending and exports.

Question 14

What is meant by a trade de?cit?

A) Trade de?cit is the difference between producer surplus and consumer surplus.
B) Trade de?cit is the difference between the price paid for a good and the cost of making it.
C) Trade de?cit is the difference between exported and imported goods and services.
D) Trade de?cit is the difference between the government's revenues and expenditures.

Question 15

GDP (gross domestic product) measures the _____.

A) total output produced by an economy in a given year
B) total output, including net exports, produced in an economy in a given year
C) total payment made to factors of production in a given year
D) the amount of taxes collected by the government in a given year

Question 16

Which of the following represents a leakage from the circular ?ow of income by the government?

A) Taxes.
B) Investments.
C) Exports.
D) Government spending.

Question 17

The level of unemployment in an economy is measured as:

A) the total number of individuals in the economy who are not working.
B) the number of individuals seeking work that do not currently have a job.
C) the number of individuals in the economy who are not eligible to work.
D) Unemployment is the total number of individuals who are gainfully employed but are

Question 18

Which of the following correctly de?nes in?ation?

A) In?ation is the aggregated level of prices of essential goods in an economy.
B) In?ation is an absolute measure of the prices of all the goods produced in an economy.
C) In?ation is the average level of prices in an economy.
D) In?ation is the rate of change in the average price level in an economy.

Question 19

Government de?cit can be de?ned as the _____.

A) difference between tax receipts and depreciation
B) difference between government spending and tax receipts
C) difference between exports and imports
D) amount spent by the government on subsidies and grants

Question 20

Injections into the circular ?ow of income consist of:

A) investment, taxes and imports.
B) government spending, taxes and exports.
C) investment, government spending and exports.
D) savings, investment and imports.

Question 21

The aggregate supply curve is upward sloping _____.

A) in the long run
B) in the short run
C) when the marginal cost of production is high
D) when wages rise faster than in?ation

Question 22

Which of the following will occur when net exports in an economy increase?

A) The aggregate demand curve will shift to the left.
B) The aggregate supply curve will shift to the right.
C) The aggregate supply curve will shift to the left.
D) The aggregate demand curve will shift to the right.

Question 23

When the rate of in?ation in an economy is low, _____ in order to avoid de?ation.

A) the government has to reduce spending
B) the central bank has to raise interest rates
C) the central bank has to cut interest rates
D) the government has to increase taxes

Question 24

The total expenditure in an economy is the aggregate of spending on _____.

A) consumption, investment, government purchases and net exports
B) consumption, savings, taxes and net exports
C) savings, investments, government purchases and imports
D) consumption, savings, government purchases and imports

Question 25

A downward movement along the aggregate demand curve is attributed to _____.

A) an increase in income
B) a fall in the price of complementary goods
C) a fall in the level of in?ation
D) a change in consumers' preferences

Question 26

The changes in the average price level re?ects the sum of changes in the prices of _____.

A) agricultural and residential land across the country
B) a basket of commonly purchased goods and services
C) bonds issued by the government
D) stocks of companies with the largest market capitalization

Question 27

Assume that wages in an economy do not fully adjust to in?ation. Other things constant, with an increase in in?ation, _____.

A) ?rms' marginal cost of production increases
B) aggregate supply remains unchanged
C) aggregate supply decreases
D) ?rms' marginal cost of production falls

Question 28

When the aggregate demand curve shifts to the right, _____.

A) the level of national output decreases in real terms
B) national output in the economy remains unchanged
C) the willingness to demand national output increases
D) the level of in?ation in the economy falls

Question 29

Nominal prices and nominal wages are _____.

A) inversely related to in?ation
B) constant at all levels of output
C) adjusted for the effect of prices
D) not adjusted for in?ation

Question 30

A positive relationship between in?ation and aggregate supply can exist. This is because _____.

A) ?rms will be willing to decrease supply when real wages fall
B) ?rms will be willing to increase supply when nominal wages rise
C) ?rms will be willing to increase supply when real wages fall
D) ?rms will be willing to decrease supply when nominal wages fall

Question 31

When the central bank of an economy raises interest rates, _____.

A) aggregate demand will rise
B) aggregate supply will increase
C) both aggregate demand and aggregate supply will remain constant
D) aggregate demand will decrease

Question 32

Which of the following could cause the aggregate demand curve to shift to the left?

A) A decrease in supply.
B) A decrease in consumption.
C) An increase in net exports.
D) An increase in government expenditure.

Question 33

The level of aggregate demand in an economy is the same as the level of _____.

A) total expenditure
B) net investment
C) government spending
D) total consumption

Question 34

Which of the following is an injection into the circular ?ow of income by the international sector?

A) Taxes.
B) Imports.
C) Exports.
D) Savings.

Question 35

In the circular ?ow of income, the purchase of a hospital by the government represents _____.

A) a payment made to a factor of production
B) an injection into the circular ?ow
C) an investment by a ?rm
D) a leakage from the circular ?ow

Question 36

When the level of wages in an economy fully adjust to changes in in?ation, _____.

A) aggregate supply will increase
B) aggregate supply will remain constant
C) aggregate supply will decrease
D) ?rms' costs and revenues will vary frequently

Question 37

When households decrease consumption spending, which of the following is likely to occur?

A) The overall level of economic activity in the circular ?ow of income will remain unchanged.
B) Firms will increase the level of investment in capital equipment and assets.
C) Firms will employ more factors of production in an attempt to stimulate household spending.
D) Firms will decrease their demand for the factors of production from households.

Question 38

Which of the following could cause the aggregate demand curve to shift to the right?

A) An increase in investment.
B) An increase in aggregate supply.
C) A decrease in consumption.
D) A decrease in government spending.

Question 39

Net exports is equal to _____.

A) exports minus the in?ation rate
B) exports plus imports
C) imports plus the in?ation rate
D) exports minus imports

Question 40

Other things remaining constant, an increase in the average price level _____.

A) causes a decrease in aggregate supply
B) affects only aggregate demand and not aggregate supply
C) causes an increase in aggregate demand
D) causes a decrease in aggregate demand

Question 41

_____ will cause both in?ation and national output to fall.

A) A decrease in consumption
B) A decrease in aggregate supply
C) An increase in aggregate supply
D) An increase in government spending

Question 42

The Organisation for Economic Co-operation and Development (OECD) summary forecast for Greece reads 'The economy is suffering a serious recession in the context of the sizeable, but vital, ?scal retrenchment.' This means that:

A) the Greek government needs to reduce its spending or increase its taxes for the economy to recover.
B) the Greek economy is recovering through increases in the demand for exports.
C) the level of household consumption as a percentage of total expenditure in Greece is likely to be high.
D) new job formation and employment in Greece is likely to be high.

Question 43

When national output increases and the in?ation level falls, the economy is said to be in a(n) _____.

A) in?ationary boom
B) de?ationary boom
C) in?ationary recession
D) de?ationary recession

Question 44

The following ?gure shows the business cycle for an economy over time. Refer to the ?gure to answer the question. It is pro?table for a ?rm to make investments in new products, production facilities, distribution or retail outlets when the economy is at ____.
A. Then investments can be put in place to exploit the economic boom in a more timely fashion.

A) point A
B) point B
C) point C
D) point D

Question 45

Which of the following will occur if there is an increase in investment in the economy?

A) Both in?ation and national output will fall.
B) Both in?ation and national output will rise.
C) In?ation will rise, but national output will fall.
D) In?ation will fall, but national output will rise.

Question 46

The Organisation for Economic Co-operation and Development (OECD) summary forecast for the UK states that above-target in?ation will hold back private consumption and public spending. Given this information, which of the following is likely to be true for the UK economy?

A) The government is likely to buy more hospitals and schools and employ nurses and teachers in the near future.
B) Interest rates in the UK need to be reduced in order to increase private consumption.
C) The aggregate supply curve in the economy is likely to be vertical.
D) The UK economy is likely to move to an in?ationary recession.

Question 47

A situation where both national output and in?ation rise is called a(n) _____.

A) de?ationary recession
B) de?ationary boom
C) in?ationary boom
D) in?ationary recession

Question 48

The long-run aggregate supply curve is _____.

A) downward sloping
B) upward sloping
C) a vertical line
D) a horizontal line

Question 49

If there is a fall in national output and a rise in in?ation, this implies that the _____.

A) aggregate demand curve has shifted to the right
B) aggregate demand curve has shifted to the left
C) aggregate supply curve has shifted to the right
D) aggregate supply curve has shifted to the left

Question 50

In an in?ationary recession, _____.

A) national output falls but in?ation rises
B) both national output and in?ation rise
C) national output rises but in?ation falls
D) both national output and in?ation fall

Question 51

An economy is in a de?ationary recession when _____.

A) consumption increases
B) aggregate demand falls
C) aggregate supply decreases
D) investment increases

Question 52

Firms that _____ are likely to be pro?table even during a recession.

A) provide goods at a premium price
B) have income inferior product lines
C) ?nance their activities through borrowings rather than through retained earnings
D) stick to one product line

Question 53

The following ?gure shows the business cycle for an economy over time. Refer to the ?gure to answer the question. When the economy is in a recession, it is at _____.

A) point A
B) point B
C) point C
D) point D

Question 54

During a recession, which of the following ?rms are likely to be pro?table?

A) A manufacturer of expensive automobiles.
B) A luxury hotel.
C) A boutique offering high-end designer products.
D) A manufacturer of value lines for supermarkets.

Question 55

The following ?gure shows the business cycle for an economy over time. Refer to the ?gure to answer the question. An economic boom in the country is represented by _____.

A) point A
B) point B
C) point C
D) point D

Question 56

Firms' manufacturing costs increase substantially due to higher electricity tariffs. How will this affect the economy?

A) Aggregate supply will rise causing a boom in the economy.
B) Aggregate supply will fall and the economy will move into recession.
C) Aggregate demand will fall and the economy will move into recession.
D) Aggregate demand will rise causing a boom in the economy.

Question 57

When prices start falling in the economy and margins shrink, this implies that:

A) demand is growing at a slower rate than supply.
B) supply in the economy is falling.
C) the economy is at the peak of a boom.
D) the economy is expanding.

Question 58

Which of the following would cause in?ation to fall but national output to rise?

A) An increase in aggregate demand.
B) A decrease in consumption.
C) A relatively higher increase in wages than the rate of in?ation.
D) An increase in aggregate supply.

Question 59

Which of the following is likely to cause a recession?

A) A fall in unemployment.
B) A rise in investment.
C) A rise in consumption.
D) A fall in total expenditure.

Question 60

During a recession, a ?rm that faces an elastic demand curve should _____ to increase revenues.

A) engage in price wars
B) offer niche, high-quality goods
C) offer price discounts
D) increase the ?xed costs of production

Question 61

In equilibrium, savings equal investments.

Question 62

There is a negative relationship between aggregate demand and inflation.

Question 63

In the circular flow model, households offer the services of factors of production to firms in return for income.

Question 64

Both in the early 2000s and in the early 2010s, the current account in the UK was in surplus.

Question 65

An Indian buying a British car is an example of an injection into the circular flow of income in the UK.

Question 66

The level of total expenditure in an economy is the same as its aggregate supply.

Question 67

Total expenditure in an economy is equal to consumption, plus savings, plus government purchases, plus imports.

Question 68

Inflation is the average level of prices in an economy.

Question 69

A decrease in investment by firms will lead to a downward movement along the aggregate demand curve.

Question 70

Household savings is an example of a leakage in the circular flow of income.

Question 71

Leakages in the circular flow of income represent additional spending on goods and services that does not come from the income earned by households.

Question 72

In the early 2000s in the UK, since taxation was increased and government spending reduced, the budget deficit grew.

Question 73

If wages fully adjust to inflation, aggregate supply will remain constant.

Question 74

Higher interest rates will lead to an increase in aggregate demand.

Question 75

In the circular flow model, goods and services flow from households to firms.

Question 76

An increase in aggregate demand will shift the aggregate demand curve to the left.

Question 77

In the early 2010s, the UK economy was characterized by weak growth in GDP and high inflation and unemployment levels.

Question 78

Other things constant, an increase in imports will shift the aggregate demand curve to the right.

Question 79

Real wages are adjusted for inflation.

Question 80

Low interest rates in the economy lead to increased borrowing, faster spending growth and rising GDP.