Question 1

Why is it important to control inflation?

Accepted Answer

$\bullet$Consider the definition of inflation.
$\bullet$Adverse effects of an increase in inflation on output and employment, i.e. price system may become less efficient as a coordinating mechanism; increased uncertainty may cause a fall in consumption and investment; potential adverse effect on international competitiveness.
$\bullet$Low and stable inflation conducive to increased business activity.
$\bullet$Distributive effects, i.e. arbitrary and unplanned changes in the distribution of income and wealth.

Question 2

What are the main costs associated with unemployment?

Accepted Answer

$\bullet$Consider the definition of unemployment.
$\bullet$Financial impact on the unemployed and their families, i.e. potential source of hardship and poverty.
$\bullet$Wider psychological and social consequences, e.g. boredom; loss of self-respect, skill, personal motivation, etc.
$\bullet$Loss of tax revenue which would be generated if the unemployed were in work, plus the cost of various benefits paid to the unemployed and their families by the state.
$\bullet$Wide range of potential social and political consequences, e.g. higher unemployment associated with increased crime, drug abuse, etc.

Question 3

In the view of Keynesian economists, when an economy settles below full employment, expansionary fiscal policy will result in:
A) An increase in output and employment
B) A fall in both inflation and employment
C) An increase in inflation and a fall in employment
D) None of the above

Accepted Answer

Keynesian economists argue that when an economy is operating below its full employment level, implementing expansionary fiscal policy (such as increasing government spending or cutting taxes) can stimulate demand. This increased demand leads to higher output and employment as businesses ramp up production to meet the demand, hence option A is correct.

Question 4

Which one of the following is not a measure intended to reduce the natural rate of unemployment?
A) Currency depreciation or devaluation
B) Reducing the power of trade unions
C) Reducing the minimum wage
D) Making unemployment-related benefits conditional on active job-search

Accepted Answer

Currency depreciation or devaluation is primarily a monetary policy tool used to influence a country's export competitiveness and balance of payments, rather than a direct measure to reduce the natural rate of unemployment. The other options (B, C, D) are direct measures aimed at influencing the labor market dynamics and reducing structural or frictional unemployment.

Question 5

Which one of the following policy measures is not available to countries that are members of the euro area?
A) An improvement of their international price competitiveness through currency depreciation
B) Reducing taxes on individuals and firms
C) Labour market reform
D) Reductions in interest rates

Accepted Answer

Countries in the euro area do not have control over their individual monetary policies, including setting interest rates, as this is managed by the European Central Bank (ECB) for the entire eurozone.

Question 6

The conventional objective for economic growth is best described by which one of the following?
A) Economic growth should be stable and satisfactory
B) Economic growth should be as fast as possible
C) Economic growth should be at an average rate that is close to long-term potential
D) Economic growth should be stable at 2.5 per cent

Accepted Answer

Economic growth should be stable and satisfactory to ensure that it is sustainable and benefits the majority of the population without leading to excessive inflation or other economic imbalances.

Question 7

Which two of the following are economically active individuals?
A) People of working age, not seeking work
B) Unemployed people, not actively seeking work
C) People who are employed
D) Unemployed people, actively seeking work

Accepted Answer

Economically active individuals are those who are employed or unemployed but actively seeking work.

Question 8

Which three of the following are inflows to the unemployment pool?
A) Redundancies
B) Quits
C) New entrants
D) Withdrawals

Accepted Answer

The answer of Which three of the following are inflows...

Question 9

Suppose the economy is initially operating at its potential GDP. In the Keynesian view, which two of the following will occur after the economy is hit by an adverse aggregate demand shock?
A) Output and employment will increase, as will inflationary pressures
B) The economy will take a long time to revert to its former state
C) Both output and employment will fall
D) The economy will not be affected and will remain at its potential GDP

Accepted Answer

In the Keynesian view, an adverse aggregate demand shock leads to a decrease in output and employment (C) as businesses respond to decreased demand for their products by reducing production and laying off workers. Additionally, the Keynesian perspective suggests that without intervention, the economy will take a long time to revert to its former state (B), as it relies on mechanisms like price and wage adjustments which can be slow to respond.

Question 10

Which two of the following are examples of expansionary fiscal policy?
A) Lower interest rates
B) An increase in VAT
C) An increase in government expenditure
D) A cut in the basic rate of income tax

Accepted Answer

Expansionary fiscal policy involves increasing government spending (C) and reducing taxes (D) to stimulate economic growth. Lowering interest rates (A) is a monetary policy tool, and increasing VAT (B) is a contractionary fiscal measure.

Question 11

Which two of the following are factors affecting a country's capacity to efficiently produce goods and services in the long term?
A) Its willingness to run budget deficits
B) The flexibility of its monetary policy
C) Its investment in human capital
D) Its level of institutional sophistication and institutional reliability

Accepted Answer

Investment in human capital (C) enhances a workforce's productivity, innovation, and efficiency, directly impacting long-term production capabilities. The level of institutional sophistication and reliability (D) ensures a stable and predictable environment for economic activities, fostering efficient production and innovation.

Question 12

Macroeconomics is concerned with the study of the behaviour of individual households and firms within the economy.

Accepted Answer

Macroeconomics focuses on the behavior of the economy as a whole, including issues like inflation, unemployment, and economic growth, rather than individual households and firms, which are the focus of microeconomics.

Question 13

Economic growth refers to an increase in money GDP.

Accepted Answer

Economic growth refers to an increase in the real output of goods and services in an economy over time, not just an increase in money GDP, which could be influenced by changes in price levels (inflation).

Question 14

Low and stable inflation is an important pre-condition for achieving a sustainable growth of output and employment.

Accepted Answer

Low and stable inflation helps in maintaining the purchasing power of money, reduces uncertainty, encourages savings and investment, and contributes to economic stability, which are all crucial for sustainable growth in output and employment.

Question 15

The famous British economist John Maynard Keynes argued that the Great Depression was a result of a sharp fall in the level of investment and that unemployment reflected a state of deficient aggregate demand.

Accepted Answer

John Maynard Keynes indeed argued that the Great Depression was primarily due to a significant drop in investment, leading to insufficient aggregate demand, which in turn resulted in high unemployment. This perspective formed the basis of Keynesian economics, emphasizing the role of government intervention to manage economic cycles.

Question 16

Keynes introduced the concept of there being a natural rate of unemployment in his 1936 book, The General Theory of Employment, Interest and Money.

Accepted Answer

The concept of the natural rate of unemployment was introduced by Milton Friedman in his 1968 presidential address to the American Economic Association, not by Keynes. Keynes focused on the relationship between unemployment and economic demand.

Question 17

The late American economist Milton Friedman's contribution to the debate over stabilization policy may be summarized as follows: governments do not need to stabilize the economy, they cannot do so, and they should not try.

Accepted Answer

Milton Friedman argued that government intervention in the economy through stabilization policies (like adjusting interest rates or government spending to manage economic cycles) is often ineffective, can lead to unintended consequences, and that the economy is better off self-regulating through the natural dynamics of the free market.

Question 18

According to Friedman, governments need to, can, and therefore should seek to stabilize their economies through aggregate demand management.

Accepted Answer

Milton Friedman argued against the government's ability to control economic fluctuations through aggregate demand management, emphasizing the limitations and unintended consequences of such policies. He was a proponent of a more laissez-faire approach to economic policy.

Question 19

Inflation has always been a major and active concern of the world's macroeconomic policymakers.

Accepted Answer

The answer of Inflation has always been a major and...

Question 20

Which two of the following are characteristics of the European single market?
A) Free movement of goods and services
B) The euro as a common currency
C) A unified macroeconomic policy
D) Free movement of labour

Accepted Answer

The European single market is characterized by the free movement of goods, services, capital, and labor. The euro as a common currency and a unified macroeconomic policy are not characteristics of the single market itself, as not all EU countries use the euro and macroeconomic policies are largely determined at the national level.

Quiz 9: How Has Macroeconomic Policy Changed in an Era of Uncertainty

Why is it important to control inflation?

What are the main costs associated with unemployment?

In the view of Keynesian economists, when an economy settles below full employment, expansionary fiscal policy will result in:

Which one of the following is not a measure intended to reduce the natural rate of unemployment?

Which one of the following policy measures is not available to countries that are members of the euro area?

The conventional objective for economic growth is best described by which one of the following?

Which two of the following are economically active individuals?

Which three of the following are inflows to the unemployment pool?

Suppose the economy is initially operating at its potential GDP. In the Keynesian view, which two of the following will occur after the economy is hit by an adverse aggregate demand shock?

Which two of the following are examples of expansionary fiscal policy?

Which two of the following are factors affecting a country's capacity to efficiently produce goods and services in the long term?