1 What is least likely to rise as a result of the use of expansionary fiscal policy?

A aggregate demand

B budget surplus

C nominal income

D inflation

2 Under which current conditions will supply-side policy measures be most likely to achieve a country’s key
macroeconomic goals?

3 What would be classified as a supply-side policy measure?

A a law to reduce the power of trade unions

B a reduction in the government’s fiscal deficit

C an open market sale of securities

D the imposition of a tariff on imported goods

4 Supply-side policies can be used to correct cost-push inflation.

Which policy would best achieve this aim in the long run?

A allowing trade unions to maintain work practices irrespective of productivity

B encouraging workers to work extra hours for extra pay

C increasing total labour supply by employing more unskilled workers

D supporting the replacement of labour-manned machines by the use of robots

5 The diagram shows production possibility curves for two countries, India and Japan.

Which combination of outputs would be achieved if each country specialised in the product in
which it has a comparative advantage?

6 The diagram shows the current equilibrium of an economy.

The government introduces a contractionary monetary policy

What is the most likely outcome?

A a fall in investment and a fall in inflation

B a fall in investment and a rise in inflation
C a rise in investment and a fall in inflation
D a rise in investment and a rise in inflation
7 Which government action is least likely to prevent a fall in economic growth?
A additional controls on commercial banks’ lending
B relaxation of rules for immigration of adult population
C removal of trade barriers on import of raw materials
D training and education of workforce

8 Country X and country Y each allocate half of their resources towards the manufacturing of shoes, and the
other half towards the manufacturing of t-shirts. Resources can be used equally effectively in the production
of both products in both countries.

The table shows the output of shoes and t-shirts produced by both countries using half their resources in each case,
before specialisation.

What can be concluded from the data?

A The opportunity cost of country Y producing two shoes is four t-shirts.
B The opportunity cost of country X producing one t-shirt is four shoes.
C The total output of shoes and t-shirts after specialisation would be 24 000.
D The total output of shoes and t-shirts after specialisation would be 28 000.

9 An increase in which variable is a contractionary monetary policy?

A the budget deficit
B the budget surplus
C the interest rate
D the money supply

10 What are government monetary policies that would be the most effective in a global recession?
A allowing the rate of interest to fluctuate and increasing business taxation
B increasing the budget surplus and raising tariffs on imports
C keeping the rate of interest very low and increasing the money supply
D raising the rate of interest and restricting the money supply
11 Two countries, X and Y, produce food and drink. The table shows how many hours it takes them
to produce one unit of each.

What will be the result if country Y doubles its productivity in the output of drink and both countries produce only
one good according to comparative advantage?
A X will continue to produce drink.
B Y will produce drink instead of food.
C World drink production will rise.
D World food production will fall.

12 Why will a contractionary monetary policy reduce inflation?

A Banks will lend more.
B Consumers will have higher disposable income.
C Consumers will pay more tax.
D Consumers will save more.

13 What could be described as an expansionary fiscal policy?

A a decrease in the budget deficit
B a decrease in the budget surplus
C a decrease in the exchange rate
D a decrease in the money supply

14 The central bank of an economy decides to raise interest rates in order to attract capital inflows and improve
the financial account of the balance of payments.
When is the central bank’s decision least likely to be effective?
A when the currency of the economy is expected to lose its value
B when the economy is politically and economically stable
C when the interest rate of the economy is higher than that of other countries
D when the reserves of foreign currencies held by the central bank are high and rising

15 What would be the best policy to increase the value of a currency?

A Impose tariffs on imported goods with price-inelastic demand.
B Increase interest rates.
C Reduce income tax.
D Sell the currency on the foreign exchange markets.
16 What is an example of contractionary fiscal policy?
A an increase in the budget deficit
B an increase in the budget surplus
C an increase in the interest rate
D an increase in the money supply

17 A government decides to borrow from the general public in order to finance its extra spending on
apprenticeship training schemes.
Which types of macroeconomic policy are being used?

18 What would be increased by an expansionary fiscal policy?

A budget deficit
B exchange rate
C money supply
D rate of direct taxation

19 Which combination of changes is most likely to result in a fall in a country’s inflation rate?

B
20 To encourage people to work, a government increases the minimum income level at which people start to
pay income tax.
Which types of macroeconomic policy are being followed?

21 The diagram shows four possible aggregate supply curves and an equilibrium point X. A government employs
deflationary fiscal policy in order to reduce the rate of inflation in its economy. This shifts aggregate demand
to AD2.

With which AS curve would this policy be most effective?

22 Which type of economic policy is likely to be considered the most effective by a government that has greater
income equality as its primary aim?

A fiscal policy
B international trade policy
C monetary policy
D supply side policy
23 From the same quantity of factors of production, country X and country Y each produce the following units of
output.

Which statement is correct?

A Country X has absolute advantage in the production of both goods.

B Country X has comparative advantage in the production of sugar.
C Country Y has absolute advantage in the production of textiles.
D Country Y has comparative advantage in the production of sugar.

24 A country is currently experiencing deflation. It has a large national debt that is greater than its annual real
income.
Which combination of policies is most likely to increase the general price level without adding to the national debt?

25 A government spends money building more schools. How might this be classified?

A
26 The diagrams show the production possibility curves of four countries W, X, Y and Z. They all produce rice and
cotton using the same resources.

27 When comparing these four countries, what can be concluded from the diagrams?

A Country W has a comparative advantage in producing cotton.

B Country X has a comparative advantage in producing rice.

C Country Y has a comparative advantage in producing rice.

D Country Z has an absolute advantage in producing cotton.

28 Why are higher interest rates together with increased taxation on expenditure likely to cause domestic
deflation?

A because the contractionary monetary policy will over-ride the expansionary fiscal policy

B because the monetary and fiscal policies involved will reinforce each other

C because the expansionary monetary policy will over-ride the contractionary fiscal policy

D because the monetary and fiscal policies involved will cancel each other out
29 Two statements are shown.
1 A country can produce a good at a lower opportunity cost than another country.
2 A country can produce a greater quantity of a good for the same quantity of inputs than another country.
What do these two statements describe?

30 Which combination identifies a main aim of supply-side policy and a measure used to achieve this target?

31 The government wishes to increase aggregate demand. Which actions would be most likely to succeed?
A a reduction in income tax and an increase in interest rates
B a reduction in income tax and an increase in production subsidies
C an increase in corporate tax and an increase in government spending
D an increase in value added tax (sales tax) and a reduction in government spending

32 A government reduces the rate of direct income tax and devalues its currency.
Which row describes the policy effects of these decisions?

D
33 Country X and country Y both produce rice and tables. Half of their resources are used to produce rice and the
other half to produce tables. The resulting output of each product is given in the table shown.

What can be concluded from the table?

A Country X has a comparative advantage in the production of both goods.

B Country X has a comparative advantage in the production of rice.
C Country Y has a comparative advantage in the production of both goods.
D Country Y has a comparative advantage in the production of rice.

34 The table shows the number of biscuits and cakes that can be produced by four workers in an hour.

35 Who has the greatest comparative advantage in producing biscuits?

A Laura
B Mo
C Nathan
D Omar

36 What is an example of the use of monetary policy?

A a cut in the rate of corporation tax
B a reduction in interest rates
C a switch from direct to indirect taxation
D the introduction of maximum price controls to reduce inflation

37 According to the theory of comparative advantage, what makes trade beneficial between two countries?
A Each country has different goods to sell and different tastes.
B Each country has different opportunity costs of production.
C One country has the absolute advantage in producing both goods.
D The prices of goods are different between each country.
38 What is an example of fiscal policy aimed at increasing aggregate demand in an economy?
A increasing expenditure by firms on skills training programmes for unskilled workers
B increasing the commercial banks’ lending ability
C reducing the rate of income tax for all income earners
D reducing the rate of interest on loans to manufacturing companies

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

40 Which combination of fiscal and monetary policies is most likely to be effective in the short run for tackling
deflation in a closed economy?