Deck 30: Demand-Side Policy

Question 1

If central government's spending exceeds its tax receipts in the current year by £x, the country is said to have a______of £x.

A) budget deficit
B) national debt
C) public sector net cash requirement
D) monetary deficit

Answer 1

budget deficit

Question 2

If the budget deficit is lower than it was last year, we could say that

A) ceteris paribus, the level of aggregate demand will be higher than it was last year.
B) the government's fiscal stance must be contractionary.
C) the government must have an expansionary fiscal stance.
D) ceteris paribus, the level of aggregate demand will be lower than it was last year.

Answer 2

ceteris paribus, the level of aggregate demand will be lower than it was last year.

Question 3

The difference between what central and local government and public corporations spend and what they collect in taxes and earn in revenues in a year is

A) net revenue.
B) the national debt.
C) the budget deficit.
D) net taxes.
E) the public sector net cash requirement.

Answer 3

the public sector net cash requirement.

Question 4

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

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

Question 5

Which of the following statements is false?

A) Most countries saw an increase in their average deficit between 2008 and 2013.
B) Average general government debt levels were higher between 1995 and 2007 than they were between 2008 and 2013.
C) Between 1995 and 2007, Ireland and Sweden did not average a general government deficit.
D) The countries with the largest deficits will see their debt levels increase the fastest.

Question 6

The excess of the central government's tax receipts over its spending is called the

A) budget surplus.
B) net revenue.
C) PSNCR.
D) budget deficit.

Question 7

When a country has a positive public sector net cash requirement, it means that

A) the government has accumulated debt over a number of years.
B) central government's spending exceeds its tax receipts.
C) the total expenditure of central government, local government and public corporations exceeds the tax revenues and sales revenues collected by those bodies.
D) nationalised industries are being subsidised.

Question 8

The accumulated budget deficit (less any surpluses) over the years is called the

A) PSBR.
B) PSDR.
C) net revenue.
D) national debt.

Question 9

When a country has a public sector borrowing requirement, it means that

A) nationalised industries are being subsidised.
B) the total expenditure of central government, local government and public corporations exceeds the tax revenues and sales revenues collected by those bodies.
C) the government has accumulated debt over a number of years.
D) central government's spending exceeds its tax receipts.

Question 10

If a government had a PSDR for three years, we could say that over that period

A) the national debt would have fallen.
B) the total expenditure of the public sector exceeded the total receipt of the public sector.
C) the government could have had either a reflationary or a deflationary stance.
D) the government had a reflationary fiscal stance.

Question 11

If the total expenditure of the UK public sector is £650 billion and revenues to the UK public sector are £325 billion in a given year, then

A) the UK government will have a budget deficit of £325 billion.
B) the UK general government debt will rise by £325 billion.
C) the UK will have a PSNCR of £325 billion.
D) the UK will have a PSNCR of - £325 billion.

Question 12

When a deficit, surplus or debt is referred to as 'general government', this means it concerns

A) central and local government only.
B) the whole public sector.
C) current and capital spending by all central government departments.
D) central government only.

Question 13

Fiscal policy which does not involve any changes in money supply is called

A) discretionary fiscal policy.
B) neutral fiscal policy.
C) fiscal drag.
D) pure fiscal policy.

Question 14

Automatic fiscal stabilisers are______that rise and______that fall as national income rises.

A) tax revenues; government expenditures
B) transfer payments; withdrawals
C) withdrawals; transfer payments
D) government expenditures; tax revenues

Question 15

Which of the following is not an automatic fiscal stabiliser?

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

Question 16

Which of the following is an automatic stabiliser?

A) VAT
B) Inheritance tax
C) Disaster relief
D) Military spending

Question 17

Whether a government is pursuing an expansionary or contractionary fiscal policy is referred to as its

A) fiscal policy.
B) fiscal stance.
C) PSBR.
D) budget deficit.

Question 18

The Chancellor of the Exchequer is concerned that the level of aggregate demand is too high and that this will cause inflation. He feels that it is necessary to reduce demand by £5 billion. The MPC is 8. Which of the following would be the best thing to do?

A) Increase taxes by £5 billion.
B) Reduce government spending by £1 billion.
C) Increase taxes by £1 billion.
D) Reduce government spending by £5 billion.

Question 19

If the economy were booming, we would expect

A) government expenditure to be high and tax revenues to be low causing a large budget deficit.
B) government expenditure to be low and tax revenues to be low so that the government could pay off the national debt.
C) government expenditure to be low and tax revenues to be high to that the public sector might be running a surplus.
D) none of the above

Question 20

If a government were using fiscal policy for stabilisation in a it would .

A) recession; increase spending
B) boom; decrease taxes
C) recession; raise taxes
D) boom; increase spending

Question 21

Under which of the following conditions is discretionary fiscal policy most likely to be effective?

A) Economic forecasts are inaccurate.
B) Income tax increases reduce the incentive for effort.
C) Substantial time lags occur before tax cuts affect spending.
D) Crowding out does not occur.
E) Public sector expenditure increases and replaces private sector investment.

Question 22

What is fiscal drag?

A) When inflation reduces real income
B) When inflation increases tax rates
C) When inflation puts nominal income into a higher tax bracket
D) When inflation reduces real interest rates
E) When inflation puts real income into a higher tax bracket

Question 23

If the MPS is 0.4, the tax multiplier is

A) - 2.5
B) - 0.67
C) - 1.67
D) - 1.5

Question 24

The MPC_d = 0.8. Suppose that, in the next Budget, the Chancellor decides to cut taxes by £50 million. What would be the effect on national income?

A) National income would rise by £200 million.
B) National income would rise by £40 million.
C) National income would fall by £200 million.
D) National income would rise by £250 million.

Question 25

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?

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 26

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

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

Question 27

If the tax multiplier is - 5 and taxes are reduced by £200 million, output

A) increases by £40 million.
B) falls by £1 billion.
C) increases by £1 billion.
D) falls by £40 million.

Question 28

If the government spending multiplier is 5, then the tax multiplier is

A) - 4
B) 1
C) - 5
D) cannot be determined because the MPS is not given

Question 29

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

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

Question 30

A rise in government spending of £x will lead to a rise in injections that is smaller than £x if

A) parents decide to send their children to state schools rather than to private schools when the Department of Education's budget increases.
B) the government's funding of a major tourist attraction attracts an equivalent level of funding from the European community.
C) the Department of Education states that there will now be sufficient funds to finance the education of all 4- year- olds.
D) the Department of Transport is given an increase in its funds for the road- building programme.

Question 31

Which of the following is not a lag that affects the working of fiscal policy? A lag between

A) action being taken and expectations being formed.
B) action being taken and effects happening.
C) it being noticed and action being taken.
D) a problem happening and it being noticed.

Question 32

Discretionary fiscal policy may have undesirable effects. Which of the following is not likely to be one such effect?

A) Tax changes could have disincentive effects.
B) Raising taxes may raise prices.
C) Cuts in spending may harm the poor.
D) Tax changes may affect aggregate demand.

Question 33

A fiscal rule which involves a ceiling to government borrowing as a percentage of GDP

A) prohibits the use of contractionary fiscal policy when the economy is already at the ceiling.
B) prohibits the use of expansionary fiscal policy when the economy is already at the ceiling.
C) prevents the use of discretionary fiscal policy at any time as long as the government abides by the rule.
D) B and C

Question 34

Carrying out fiscal policy is a political matter. In a______ the ______ would ______.

A) slump; left; increase spending
B) boom; right; increase spending
C) boom; right; increase taxes
D) slump; left; lower taxes

Question 35

The economy is experiencing both low output and high inflation. Which of the following is true?

A) If the Chancellor of the Exchequer dislikes high inflation more than low output, he would like the Bank of England to contract the money supply.
B) If the Chancellor of the Exchequer dislikes high inflation more than low output, he would like the Bank of England to expand the money supply.
C) If the Chancellor of the Exchequer dislikes low output more than high inflation, he would like the Bank of England to contract the money supply.
D) In any situation the Chancellor of the Exchequer will always like the Bank of England to contract the money supply.

Question 36

Which of the following statements is a true reflection of what happened in the aftermath of the financial crisis in 2008?
(i) Barack Obama signed a fiscal package aimed at stimulating the economy.
(ii) Monetary policies were implemented in countries across the world to increase the flow of credit.
(iii) The UK economy entered recession after the US in 2008.
(iv) The UK government has the aim of a balanced current budget by 2015/2016.
(v) Within the EU, a new Fiscal Compact Agreement requires that from January 2013 national governments not only abide by the Stability and Growth Pact, but also keep structural deficits below 0.5% of GDP.
(vi) The UK government has operated a much looser fiscal policy to stimulate the economy.
(vii) The US government has, through a tight fiscal policy, managed to reduce its budget deficit to within 0.5% of GDP.

A) (i), (ii), (iv) and (v)
B) (i), (iv) and (vii)
C) (i), (iv) and (v)
D) (ii), (iii), (vi) and (vii)
E) (iii), (iv), (v) and (vi)

Question 37

The belief that the money supply should change to 'accommodate' changes in aggregate demand is held by

A) Keynesians.
B) Monetarists.
C) A and B
D) neither A nor B

Question 38

The belief that inflation is caused by too much money and that the aim should be to have 'sound money' is held by

A) Keynesians.
B) Monetarists.
C) A and B
D) neither A nor B

Question 39

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

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

Question 40

A government wishing to operate a tighter monetary policy might

A) raise interest rates and manipulate the money supply.
B) lower interest rates to encourage spending and discourage savings.
C) promote investment in other countries by British firms.
D) work to lower the exchange rate.

Question 41

When economists refer to 'easy' monetary policy, they mean that the Bank of England is taking actions that will

A) contract the money supply.
B) expand the money supply.
C) increase the demand for money.
D) decrease the demand for money.

Question 42

An example of a tight monetary policy is

A) a decrease in the tax rate.
B) a decrease in the bank rate.
C) the Bank of England buying government securities in the open market.
D) an increase in the liquidity ratio.

Question 43

Assume that all commercial banks are making their maximum amount of loans possible. Total deposits in the banking system are £200 million. The liquidity ratio is increased from 20% to 25%. The money supply will

A) not change because there was no change in deposits.
B) decrease by £5 million.
C) decrease by £40 million.
D) decrease by £10 million.

Question 44

Monetarists have tended not to use changes in the liquidity ratio as a means of controlling the money supply because

A) they feel that banks should be free from government restrictions.
B) a change in the liquidity ratio has only a very small impact on the money supply.
C) it takes a long time for the Bank of England to approve a change in the liquidity ratio.
D) only banks that are members of the Bank of England are subject to reserve requirements, and most banks do not belong to the Bank of England.

Question 45

Some argue that the demand curve for money is unstable and its position is difficult to predict. The main reason for this is

A) the banks' ability to create credit fluctuates depending on their liquidity ratio.
B) speculation over inflation, interest rates, exchange rates and the rate of growth of the economy.
C) that individuals do not behave in rational ways.
D) that consumer tastes change.

Question 46

The Bank of England is likely to be asked by the Chancellor of the Exchequer to increase the money supply during times of

A) low output and low inflation.
B) low output and high inflation.
C) high output and low inflation.
D) high output and high inflation.

Question 47

Which of the following actions by the Bank of England will result in a decrease in the money supply?

A) Imposing a higher liquidity rate on banks
B) Buying government securities in the open market
C) A decrease in government spending
D) A decrease in the bank rate

Question 48

The economy's unemployment rate is 10% and the inflation rate is 1%. The most appropriate policy for the Bank of England to pursue would be to

A) increase the money supply to try to reduce the unemployment rate.
B) raise interest rates to try to stimulate saving.
C) reduce the money supply to try to bring the inflation rate to zero.
D) do nothing because the inflation rate is so low.

Question 49

Owing to the liquidity trap

A) increases in the money supply will have little or no effect on spending.
B) raising interest rates may not curb spending.
C) it may be difficult to control the money supply.
D) too much money is held in active balances.

Question 50

The bank rate cannot be used to control the money supply with great precision because

A) a change in the bank rate will not affect a bank until two weeks after the change is implemented.
B) its effects on the banks' demand for reserves are uncertain.
C) there is a maximum amount of money that the discount houses can borrow from the Bank of England in any one year.
D) only banks that are members of the Bank of England can borrow from the Bank of England, and most banks are not members of the Bank of England.

Question 51

The best instrument for controlling day- to- day changes in the money supply given day- to- day changes in the demand for money

A) is funding.
B) is the repo rate.
C) are open market operations.
D) is co- operation with the banks.

Question 52

Assume that there is no leakage from the banking system and that all banks are lending their maximum amount. The liquidity ratio is 20%. If the Bank of England sells £10 million worth of government securities to the public, the change in the money supply will be

A) £50 million.
B) - £20 million.
C) - £50 million.
D) £20 million.

Question 53

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

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 54

If the Bank of England raises interest rates it will

A) lower aggregate demand and raise the exchange rate.
B) lower aggregate demand and lower the exchange rate.
C) raise aggregate demand and lower the exchange rate.
D) raise aggregate demand and raise the exchange rate.

Question 55

What is the effect of raising banks' minimum reserve asset ratios?

A) The amount of credit available to borrowers will be increased.
B) The Central Bank will sell bills in the money markets.
C) Commercial banks will place special deposits with the central bank.
D) The amount of credit available to borrowers will be reduced.

Question 56

Assume that banks are holding excess reserves because firms and consumers are not willing to borrow money. A decrease in the bank rate is likely to

A) decrease the money supply because it is now cheaper for discount houses to borrow from the Bank of England instead of buying government securities.
B) decrease the money supply because it will now be more expensive for firms and consumers to borrow money.
C) not change the money supply because banks already have excess reserves they cannot lend.
D) increase the money supply because it is now cheaper for discount houses to borrow from the Bank of England.

Question 57

The Bank of England sometimes sells Treasury Bills to recognised banks at very attractive prices. Its aim is to

A) keep interest rates up.
B) keep interest rates down.
C) help the banks that have a liquidity problem.
D) A and B

Question 58

Which of the following is not an argument for an independent central bank?

A) It removes monetary policy from political control.
B) It can have longer run aims than politicians appear to have.
C) It may be more credible and thus have more influence on expectations.
D) It has a clear legal status and objectives.

Question 59

Which of the following is a good argument against an independent central bank?

A) It will be concerned to maintain its independence.
B) It will keep monetary policy separate from other economic policies.
C) It will gradually become more dependent on government.
D) It will have more influence on expectations than a government institution.

Question 60

Which of the following does not cause problems in controlling the money supply?

A) PSDR
B) Increasing use of credit cards
C) Budget deficits
D) Competition between banks

Question 61

Monetary base control is a policy that focuses on

A) cash.
B) consumer credit.
C) broad liquidity.
D) cash and deposits at the Bank of England

Question 62

The Bank of England has not used 'special deposits' to control the recognised banks since

A) 1981.
B) 1985.
C) 1979.
D) 1992.

Question 63

Controlling the money supply is likely to be difficult because

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 64

A Taylor rule states by how much______will change.

A) council tax
B) income tax rates
C) interest rates
D) exchange rates

Question 65

If the Bank of England were to adopt a Taylor rule, national income would be likely to fluctuate______And inflation would be likely to fluctuate ______than at present.

A) more; more
B) less; less
C) less; more
D) more; less

Question 66

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

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.

Question 67

The Bank of England experienced difficulties in controlling the 1980s credit boom. One of the reasons was that the Conservative government would not allow the Bank of England to suggest to banks that they should be more prudent in their lending to private individuals. This practice of asking the commercial banks to do things which might reduce their profits was known as

A) monetary control.
B) moral suasion.
C) open market operations.
D) exchange control.

Question 68

Disintermediation occurs when

A) building societies become banks.
B) consumers obtain credit from institutions that are not subject to Bank of England control.
C) banks take over building societies.
D) the Bank of England is made independent of the Treasury.

Question 69

In 2007/2008, the government was faced with the possible return of stagflation. This occurs when

A) unemployment and inflation rise simultaneously.
B) unemployment and inflation fall simultaneously.
C) unemployment rises rapidly and inflation falls rapidly.
D) there are rapidly declining inflation rates.

Question 70

Which of the following defines quantitative easing?

A) A method for setting the rate of interest, whereby interest rates will rise if (a) inflation is above target or (b) real national income is above the sustainable level (or unemployment is below the equilibrium rate)
B) A deliberate attempt by the central bank to increase the money supply by buying large quantities of securities through open market operations
C) A set of principles or rules within which economic policy operates
D) The idea that controlling a symptom of a problem, or only part of the problem, will not cure the problem; it will simply mean that the part that is being controlled now becomes a poor indicator of the problem

Question 71

In 2007/2008, why was the Bank of England and the government faced with a dilemma?

A) They were under pressure to raise interest rates to meet the inflation target.
B) They were facing the possibility of breaching the golden rule.
C) They were under pressure to cut interest rates to avert a recession.
D) They were under pressure to give a fiscal stimulus to boost the economy.
E) All of the above

Question 72

What is the main priority of the Coalition government formed in 2010?

A) To reduce unemployment
B) To keep inflation under control
C) To reduce borrowing
D) To give a fiscal stimulus to boost the economy
E) To reduce the trade deficit

Question 73

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

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

Question 74

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

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

Question 75

Which of the following statements is false?

A) The Coalition cut the rate of VAT to stimulate consumer spending.
B) The Coalition has an aim to achieve a cyclically adjusted current balance by 2015/16.
C) The Coalition chose to boost economic growth through an expansionary fiscal package rather than cutting the deficit.
D) The Coalition has a target for public sector debt as a percentage of GDP to be falling by 2015/16.

Question 76

The difference between government revenue and government spending is called the national debt.

Question 77

Pure fiscal policy describes the use of fiscal policy without any change in money supply.

Question 78

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

Question 79

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

Question 80

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