Unit 5: Government macroeconomic intervention · AS Level Economics

Some countries experienced a recent decline in investment spending.

What might be done to stop such a decline?

• Aincrease quotas on imports
• Blower interest rates
• Craise income tax
• Dset up training courses

What is a reason for a government policy that aims at achieving a low and stable rate of inflation?

• AConsumers are encouraged to increase spending on imports.
• BFirms are encouraged to increase the level of production.
• CThe central bank is encouraged to increase the interest rate.
• DThe government is encouraged to increase the rate of income tax.

What is an objective of supply-side policy?

• Ato shift the short-run aggregate supply (SRAS) curve to the left
• Bto shift the short-run aggregate supply (SRAS) curve to the right
• Cto shift the long-run aggregate supply (LRAS) curve to the left
• Dto shift the long-run aggregate supply (LRAS) curve to the right

What is most likely to improve the effectiveness of an expansionary fiscal policy in an economy?

• Aa fall in consumer confidence
• Ba fall in the size of the labour force
• Can increase in interest rates
• Dan increase in the money supply

What is a transfer payment?

• Aadvertising expenses incurred by a charity organisation
• Bfood vouchers to help low-income households pay for food
• Cinterest-free study loans given to deserving students by the government
• Dsalary paid to a nurse working in a hospital that provides free treatment

What is the main objective of supply-side policies?

• Ato bring a country’s potential output up to the level of its actual output
• Bto ensure a budget surplus
• Cto ensure that the composition of output matches the pattern of demand
• Dto increase potential output

A government reduced direct taxes on consumers and businesses.

What are likely to be the effects of these changes on consumption, investment and national output?

consumption investment national output

• Adecrease decrease decrease
• Bdecrease increase increase
• Cincrease decrease decrease
• Dincrease increase increase

An economy has a GDP of $500 billion.The budget surplus is 2% of GDP.

What is the government spending when the tax revenue is $80 billion?

• A$60 billion
• B$70 billion
• C$80 billion
• D$90 billion

Which action might be part of an expansionary economic policy?

• Areducing the budget deficit
• Breducing the level of government spending
• Creducing the money supply
• Dreducing the rate of interest

What is not included in government spending (G) while calculating aggregate demand (AD)?

• Aeducation
• Bhealthcare
• Croads
• Dtransfer payments

The income tax structure of a country has two elements.

1 The first $20000 of earned income is not taxed.

2 Any income earned above $20000 is taxed at 20%.

What would be a correct description of this tax structure?

• AIt is a progressive tax structure.
• BIt is a proportional tax structure.
• CIt is a regressive tax structure.
• DThe average rate of taxation decreases as incomes increase.

What is not a tool of monetary policy?

• Acapital investment
• Bcredit regulations
• Cinterest rates
• Dmoney supply

In which situation is expansionary fiscal policy through increased government expenditure likely to be most effective in increasing employment in an economy?

• AWhen the AD curve cuts the horizontal part of the AS curve.
• BWhen the AD curve cuts the vertical part of the AS curve.
• CWhen the government also raises tax to fund its increased expenditure.
• DWhen the government injects a large amount of spending into the economy.

Increases to which measures are most likely to stabilise the price level and reduce income inequalities at the same time?

• Aimport tariffs on non-essential items and transfer payments
• Binterest rates and restrictions on bank lending
• Cminimum wages and tax allowances
• Dtax rates on high income earners and subsidies for essential food items

An economy is at a point within its production possibility curve (PPC).

Which monetary policy will help the government to achieve a macroeconomic objective of lower unemployment?

• Aan increase in credit regulations
• Ban increase in the exchange rate
• Can increase in the interest rate
• Dan increase in the money supply

The central bank of a country has increased interest rates to a high level.

What will increase as a result of this?

• Acost of borrowing
• Beconomic growth
• Cemployment
• Dprice level

A newly-built public sector engineering training college received poor inspection reports. The government ceased to pay the college the money that it had usually received as its annual grant.

Which types of government policy does this statement imply?

• Afiscal and monetary policies only
• Bfiscal and supply-side policies only
• Cfiscal, monetary and supply-side policies
• Dmonetary and supply-side policies only

Governments are trying to reduce the burden of transfer payments in economies with an ageing population.

Which policy would help to achieve this aim?

• Aintroducing financial support for university students
• Blinking pension increases to the consumer price index during inflation
• Craising the retirement age
• Dreducing state pensions to finance an equal rise in unemployment benefit

Which policy mainly deals with managing public finances?

• Aenvironmental policy
• Bfiscal policy
• Cmonetary policy
• Dsupply-side policy

What is not a supply-side policy measure?

• Aderegulating industry to encourage more competitive markets
• Blinking unemployment benefits to the obligation to look for work
• Ctackling cyclical slump by lowering interest rates
• Dtackling structural unemployment by giving grants for labour mobility

Monetary policy can be used to increase the level of business activity.

Which action illustrates this?

• Acurbing consumption through controls on credit
• Beasing credit regulations for banks to increase lending
• Creducing government spending to achieve a budget surplus
• Dstimulating company investments by increasing interest rates

There is an increase in the income of individuals.

Which of the following shows a regressive tax system?

• AThe amount of income tax paid remains unchanged.
• BThe marginal income tax rate exceeds the average tax rate.
• CThe income tax rate remains unchanged.
• DThe income tax rate rises.

Which combination correctly classifies an expansionary fiscal policy measure and its impact on a budget deficit?

fiscal policy measure budget deficit

• Aincreased money supply unchanged
• Bincreased welfare spending increased
• Chigher income tax reduced
• Dlower interest rates unchanged

A government spends money to provide an education for students.

Which type of spending is capital expenditure?

• Acomputers for classrooms
• Bgrants for university students
• Crent for school buildings
• Dwages for teachers

What is an example of fiscal policy aimed at increasing aggregate demand in an economy?

• Aincreasing expenditure by firms on skills training programmes for unskilled workers
• Bincreasing the commercial banks’ lending ability
• Creducing the rate of income tax for all income earners
• Dreducing the rate of interest on loans to manufacturing companies

What is not a government macroeconomic policy objective?

• Aeconomic growth
• Bincome equality
• Clow unemployment
• Dprice stability

A central bank increases interest rates to reduce inflation.

When will this policy be most likely to succeed?

• AWhen household spending is inelastic in response to interest rate changes.
• BWhen the country has a floating exchange rate that appreciates.
• CWhen the government has an increasing budget deficit.
• DWhen trade unions demand higher wages to protect the living standards of their members.

A government reduces its expenditure on workplace training, increases the level of indirect taxes and reduces the rate of interest it pays on government debt.

How would these government macroeconomic policies be categorised?

supply-side fiscal monetary

• Acon con exp key
• Bexp con con con = contractionary
• Ccon exp exp exp = expansionary
• Dexp exp con

The government of a country reduces its budget deficit by cutting government spending. At the same time, the central bank raises the interest rates.

When might this combination of policies be used?

inflation rate unemployment rate

• Ahigh high
• Bhigh low
• Clow high
• Dlow low

A country has a current account deficit on its balance of payments. The government also has a budget deficit.

Which measure to reduce the current account deficit will increase the budget deficit?

• Adepreciating the exchange rate
• Bintroducing quotas on imports
• Craising tariffs on imports
• Dsubsidising exports

A government reduces the benefits that it pays to unemployed workers to increase the incentive to work.

Which types of macroeconomic policies are being used?

fiscal monetary supply-side policy policy policy

• A✓ ✗ ✗
• B✓ ✓ ✗
• C✓ ✗ ✓
• D✗ ✗ ✓

A central bank is asked by the government to help achieve price stability.

If inflation rises steeply, which policy will not be directly within the control of the central bank?

• Aincreasing the rate of interest to reduce consumer spending
• Bmanaging a reduction of the money supply
• Cusing credit restrictions to regulate lending by commercial banks to households
• Drestricting wage increases in the private and public sectors

What is not a likely reason for a government having the objective of economic growth?

• Ato improve living standards
• Bto improve business confidence
• Cto increase inflationary pressures
• Dto increase consumer choice

What is an example of expansionary monetary policy?

• Athe central bank increasing the money supply
• Bthe central bank causing an appreciation of the country’s foreign exchange rate
• Cthe central bank increasing controls on credit lending
• Dthe central bank increasing the minimum lending rate of interest

A country has a target rate of inflation of 2.5% and has recently experienced the actual rate rising to 6%, with unemployment falling to very low levels.

Which policy option is most likely to be implemented?

• Aan increase in government expenditure on training
• Ban increase in indirect taxes on demerit goods
• Can increase in import tariffs
• Dan increase in interest rates

What is the most likely reason for a government to introduce a progressive tax?

• Ato discourage the consumption of a particular good
• Bto distribute disposable income more evenly
• Cto increase the disposable income of households
• Dto reduce demand for healthcare services

What is the effect of a cut in a country‘s income tax rates on its exports and imports?

exports imports

• Afall fall
• Bfall unchanged
• Cunchanged fall
• Dunchanged rise

Which area of government spending is a transfer payment?

• Aspending on new road building
• Bspending on pensions to the elderly
• Cspending on buying new police cars
• Dspending on wages of teachers

A government increases the basic rate of income tax to finance additional spending on apprenticeships and training.

Which types of macroeconomic policy are being used?

monetary supply side fiscal policy policy policy

• A✓ ✓ ✓ key
• B✓ ✓ ✗ ✓= used
• C✓ ✗ ✓ ✗= not used
• D✗ ✓ ✓

A government reduced the tax on company profits from 28% to 20%.

Which statement best describes this policy?

• AIt is both a contractionary fiscal policy and a supply-side policy.
• BIt is both an expansionary fiscal policy and a supply-side policy.
• CIt is both an expansionary fiscal policy and an expansionary monetary policy.
• DIt is both an expansionary monetary policy and a supply-side policy.

Which policy is most likely to have a contractionary effect on national income?

• Aa reduction in income tax rates
• Ba reduction in interest rates
• Can appreciation in the exchange rate
• Dan increase in government spending on transport infrastructure

What is an example of expansionary fiscal policy?

• Aan increase in income tax
• Ban increase in private sector investment
• Can increase in spending on public goods
• Dan increase in the money supply

What is an example of a supply-side policy?

• Aan import quota to restrict the supply of goods
• Ba rise in interest rates to encourage the supply of savings
• Ca specific tax on the supply of goods to raise revenue
• Da subsidy to businesses to promote the supply of training courses

A worker earns $10000 and pays $1000 in income tax.

Another worker earns $30000 and pays $4500 in income tax.

A third worker earns $150000 and pays $50000 in income tax.

Which type of tax is this?

• Aindirect
• Bprogressive
• Cproportional
• Dregressive

An increase in interest rates is an example of which type of policy?

• Acontractionary fiscal policy
• Bcontractionary monetary policy
• Cexpansionary monetary policy
• Drestrictive supply-side policy

What is not an example of monetary policy?

• Aa rise in import tariffs on manufactured goods
• Ba rise in interest rates by the central bank
• Ca rise in credit regulations
• Da rise in the money supply

A government decides to raise most of its revenues from indirect taxes.

What would increase the effectiveness of this policy?

• Aan increasing trend towards bartering of goods
• Bincreasing interest rates on household savings
• Cincreasing occurrence of informal markets in the economy
• Dplacing taxes on goods and services which have a price-inelastic demand

What is not an example of an expansionary supply-side policy?

• Aa reduction in government spending on training
• Ban increase in support for technological improvement
• Ca reduction in payments to the unemployed
• Dan increase in privatisation of industry

A country increases its spending on education and training. It pays for this by reducing unemployment benefit payments and increasing taxes on imports of machinery.

What is the likely effect of these changes?

human capital physical capital

• Adecreases decreases
• Bdecreases increases
• Cincreases decreases
• Dincreases increases

Price stability can be said to occur if the measured value of the consumer prices index (CPI) is unchanged during the year.

Which statement is correct?

• AFor price stability to occur, there must be no changes in prices of any products.
• BFor price stability to occur, the number of products whose prices rise must exactly match the number whose prices fall.
• CIf some prices rise and others fall, there cannot be price stability.
• DDifferent weightings of items used in the calculation of CPI mean that price stability can occur in many ways.

What is likely to be an expansionary monetary policy?

• Aa decrease in the availability of credit
• Ba decrease in the exchange rate
• Can increase in government spending
• Dan increase in subsidies for training

An income tax has a tax-free allowance of $10 000 and a single rate of 25%.

What type of tax is this?

• Aindirect
• Bprogressive
• Cproportional
• Dregressive

Which supply-side policy will encourage new entrepreneurs?

• Aan increase in government subsidy to small firms
• Ban increase in the national minimum wage
• Can increase in the power of trade unions
• Dan increase in the tax on business profits

A government wants to operate a tighter monetary policy.

What would it increase?

• Abudget surplus
• Binterest rate
• Cmoney supply
• Drates of taxation

Which action is classified as a fiscal policy measure?

• Afixing a currency to another country’s currency
• Btightening credit regulations on banks
• Cproviding guidance to industry and the public
• Dmanaging changes in the level of government debt

Which statement about supply-side policies is correct?

• AThey solve the problem of demand deficient unemployment.
• BThey do not involve an opportunity cost.
• CThey reduce unemployment but do not affect the price level.
• DThey may reduce regional unemployment.

A government has a target to reduce the rate of inflation.

Why might it not want to raise interest rates to achieve this target?

• Aaggregate demand may fall
• Baggregate supply may fall
• Csaving may fall
• Dthe exchange rate may fall

A government decides to increase indirect taxes, abolish the agricultural subsidy and lower the income level at which tax becomes payable.

What would be the most likely consequence of these changes?

• Aa decrease in cost-push inflation
• Ban increase in income inequality
• Can increase in the balance of payments deficit
• Dan increase in the budget deficit

If a country is suffering from deflation, what would be the best policy to reflate the economy?

• Aincrease corporation tax
• Bincrease income tax
• Creduce interest rates
• Dreduce spending on education

What would be a positive effect on the growth of an economy in the short run, if the government reduced a direct tax on individual earnings?

• AFood prices would increase because of shortages.
• BImports of luxury cars would increase to satisfy a change in demand.
• CSavings would increase because of additional disposable income.
• DThe consumption of domestically produced goods would increase.

, , 22 What is not a monetary policy measure?

• Acredit regulations for banks
• Binterest rate changes
• Cincreased government subsidies
• Dmoney supply changes

The government has a macroeconomic objective of low unemployment. It has recently decreased interest rates.

What may limit the effectiveness of this tool in achieving the objective of low unemployment?

• Aa lack of productive capacity
• Bexcess demand in the economy
• Cincreased government spending on infrastructure
• Dlow levels of welfare benefits

Governments may have price stability as a macroeconomic objective.

What is meant by price stability?

• AAll equilibrium prices are maintained in the long run.
• BDemand-pull inflation cancels out any cost-push inflation.
• COnly disinflation is present in the economy in the long run.
• DProlonged periods of inflation and deflation are avoided.

A government cuts income tax.

Why might this be seen as an example of a supply-side policy?

• AReal incomes are increased.
• BThe costs of businesses are reduced.
• CThe opportunity cost of unemployment has increased.
• DThe standard of living has improved.

A country’s central bank decides to reduce the level of credit regulation.

What is this an example of?

• Acontractionary fiscal policy
• Bcontractionary monetary policy
• Cexpansionary fiscal policy
• Dexpansionary monetary policy

A government decides to use supply-side policy to increase long-run aggregate supply (LRAS).

What is the most likely reason why this policy tool will not lead to a fall in the price level?

• AAggregate demand will also increase.
• BLabour productivity levels will increase.
• CWorkers will save any extra wages they earn.
• DWorkers will spend any extra wages on imports.

What defines a progressive tax?

• AAll taxpayers pay the same proportion of income in taxes.
• BLow-income earners pay a lower proportion of income in taxes than high-income earners.
• CLow-income earners pay less in taxes than high-income earners.
• DLow-income earners pay more in taxes than high-income earners.

Apart from interest rates, state two other tools of monetary policy that could be used in Japan to control inflation. [2]

With the help of a diagram, explain how a decrease in the interest rate in Japan could lead to the depreciation in the value of the yen and consider whether only Japan’s interest rate determines the value of the yen. [4]

Assess whether low interest rates alone are likely to lead to an increase in aggregate demand in Japan. [6]

Assess whether fiscal policy or supply‑side policy is likely to be more effective in reducing unemployment in an economy. [12]

‘The Australian government plans a large increase in its spending.’

Assess the possible effects of a large increase in government spending by the government on the Australian economy. [6]

Assess the extent to which a government can use fiscal policy to influence leakages from and injections into the circular flow of income to achieve any two of its macroeconomic objectives. [12]

Assess whether ‘improvements to the supply side of the economy’ of Argentina would benefit everybody in Argentina. [6]

Assess the extent to which the shape of the long-run aggregate supply (LRAS) curve affects the ability of a government to use fiscal policy to achieve price stability. [12]

Assess whether expansionary monetary policy is the best method to correct deflation and restore price stability. [12]

Assess the extent to which the use of supply-side policy would be the best way to reduce a deficit on the current account of the balance of payments. [12]

Assess whether supply-side policy or demand-side policy is the better way of reducing this inflation. [12]

Assess the extent to which maintaining interest rates at a high level will be the best policy for the US to control inflation. [6]

Low unemployment is a macroeconomic policy objective for a government.

Assess the extent to which this is most likely to be achieved by supply-side policy. [12]

Using the data in Table 1.1, compare changes in the inflation rate and changes in the interest rate in the US. [2]

‘In an attempt to bring about disinflation, the Federal Reserve used a contractionary monetary policy.’ Consider whether disinflation is more harmful than deflation. [4]

Assess whether increases in the interest rate make a recession in the US inevitable. [6]

Assess whether the Federal Reserve setting an inflation target as part of its monetary policy is likely to be helpful for the US economy. [6]

Explain the difference between a budget surplus and a budget deficit and consider the extent to which a budget surplus is better than a budget deficit. [8]

Assess whether expansionary fiscal policy always benefits an economy. [12]

Assess the extent to which the policies suggested to improve infrastructure and to reduce the high rates of unemployment in South Africa are likely to reduce income inequality. [6]

Assess the extent to which using fiscal policy would be the best way to reduce a high rate of inflation. [12]

Explain why expenditure on education and training is a supply-side policy and consider why its impact on the general price level may differ between the short run and the long run. [8]

With the help of an AD/AS diagram, explain what is meant by an expansionary fiscal policy and consider the extent to which an expansionary fiscal policy will always increase the level of aggregate demand. [8]

Assess the extent to which supply-side policy is the best method to reduce the rate of inflation. [12]