King: Economics Chapter 26 Instructions Answer the following questions and then press 'Submit' to get your score. Question 1 Suppose that aggregate demand has recently increased. This has taken output above the potential level and it has also increased the price level. The government is keen to avoid any further increases in the price level. Which of the following options should it avoid? a) Simply wait for the labour market to return output to the potential level. b) Apply a contractionary fiscal policy. c) Announce a credible zero target for inflation. d) Apply a supply-side policy to shift LAS to the right? Question 2 Which of the following is not a problem with discretionary policies? a) Governments might use them in a way which leads to political business cycles. b) Discretionary fiscal policies may act too late. c) Discretionary monetary policies lose any power that a rules policy has to hold inflationary expectations down. d) They need to be announced in advance. Question 3 Suppose that growth and unemployment were at satisfactory levels. What target would be the focus of the Bank of England's monetary policy? a) The interest rate. b) The rate of growth of the money stock. c) The current inflation rate. d) The expected inflation rate in two years' time. Question 4 Suppose a central bank is concerned about inflation and wishes to raise interest rates. Which of the following instruments would it be inappropriate to use? a) Interest rate control. b) Open market operations. c) Quantitative easing. d) Reserve ratio controls. Question 5 Suppose the Bank of England wishes to restrain inflation, so it increases Bank Rate. Which of the following events will not be part of the monetary policy transmission process? a) The increased Bank Rate will increase the value of sterling. b) The increased Bank Rate will increase people's wealth. c) The increased Bank Rate will lead to increases in other nominal interest rates. d) The increased Bank Rate will reduce the incomes people expect to have in future. Question 6 To secure equity over time, which principle of government finance is generally recommended? a) To finance all government spending by loans. b) To finance all government spending by taxes. c) To finance government capital spending by loans and government current spending by taxes. d) To finance government capital spending by taxes and government current spending by loans. Question 7 Which of the following statements is false? a) An increase in government spending financed by loans can crowd out other spending in the economy. b) A structural deficit is the government would have if it adopted its current policies and output was at the potential level. c) The last and current UK governments have favoured trying to ensure that, each year, total government borrowing equals total net government investment. d) A cyclically adjusted deficit is the same as a structural deficit. Question 8 Suppose the government of a country has a high level of debt. Which of the following statements about this debt is false? a) If all the debt was in the form of bonds owned by the country's own citizens, then the debt would not be a burden to the country's taxpayers. b) If all the debt was in the form of bonds owned by the country's own citizens, then the debt would not be a burden to the country's citizens. c) A high debt might make lenders worry if the government could repay its loans and so raise the interest rate people wanted when they lent to it. d) A high debt would make it difficult for the government to respond to any future downturns in its economy with expansionary fiscal policy. Question 9 Which of the following policies would not be used by a government which wished to increase the quantity of labour that will be hired? a) A reduction in income tax rates. b) An increase in firms' non-labour costs. c) A reduction in the benefits paid to unemployed people. d) An increase in help for unemployed people to retrain. Question 10 Which of the following policies would not be used by a government which wished to increase the output per labour hour? a) Increase the school leaving age. b) Discouraging firms from investing in new capital. c) Make government departments more efficient. d) Promoting competition.