[Nilsdejongh]

Did a multi choice and these are the ones i got wrong

1. The economy is currently operating at its normal capacity level of output. It is estimated that the long-run trend rate of growth of the economy is around 2.5% per annum. In the coming year, it is expected that inflation will be 4% per annum and money national income will grow by 5%. Which one of the following is most likely?
A Unemployment will fall and the economy will grow below its trend rate
B Employment will be stable and the economy will grow at its trend rate
C Employment will rise and the economy will grow above its trend rate
D Unemployment will increase and the growth of the economy will be below its trend rate

i put C the correct answer was D.. Why is this? i understand that 4% inflat and 5% income rises will mean that its actually only a 1% real income increase.. i dont understand how you'd relate with to the long-run trend rate of growth though?
-------------------------
2.Inflation in an economy is currently at 10%. Which of the following changes in monetary and fiscal policy, A, B, C or D, is most likely to bring down the rate of inflation in the economy?
Interest rates --- Government expenditure ---Taxation revenue
A Increase Increase Decrease
B Decrease Decrease Increase
C Increase Decrease Increase
D Decrease Increase Increase

i put B, it was actually C... why?

-------------------------------------
3. The underlying trend rate of growth in an economy is declining and the economy is also experiencing an increase in its rate of unemployment. Which one of the following is likely to be most effective in dealing with these problems?
A An expansionary fiscal policy and a restrictive monetary policy
B A restrictive monetary and fiscal policy
C An expansionary monetary policy and supply-side policies
D A restrictive fiscal policy and supply-side policies
i put A - It was C - Why?
------------------------
4.An economy is experiencing a balance of payments deficit and inflation. All ther things being equal, which policy is most likely to reduce both the balance of payments deficit on current account and the rate of inflation?
A A fall in government spending
B A cut in interest rates
C A decrease in the rate of income tax
D A reduction in the exchange rate

i put D - it was A.. i thought a fall in Gov spending would reduce Agg Demand therefore Inflation would rise??

[sweetascandy]

(Original post by Nilsdejongh)
Did a multi choice and these are the ones i got wrong
-------------------------------------
3. The underlying trend rate of growth in an economy is declining and the economy is also experiencing an increase in its rate of unemployment. Which one of the following is likely to be most effective in dealing with these problems?
A An expansionary fiscal policy and a restrictive monetary policy
B A restrictive monetary and fiscal policy
C An expansionary monetary policy and supply-side policies
D A restrictive fiscal policy and supply-side policies
i put A - It was C - Why?
------------------------
4.An economy is experiencing a balance of payments deficit and inflation. All ther things being equal, which policy is most likely to reduce both the balance of payments deficit on current account and the rate of inflation?
A A fall in government spending
B A cut in interest rates
C A decrease in the rate of income tax
D A reduction in the exchange rate

i put D - it was A.. i thought a fall in Gov spending would reduce Agg Demand therefore Inflation would rise??

I only know the answers to the last two so here goes:

For number 3, A is incorrect because although expansionary fiscal policy will cause AD to rise and thus unemployment to fall, a restrictive monetary policy will decrease the level of AD in the economy. so no overall affect.
On the other hand, an expansionary monetary poicy will cause AD to shift out, and expansionary supply side policy will cause SRAS/LRAS to increase, causing a rightward shift in the curve. Both these factors will cause unemployment levels to fall; hence, C is correct for number 3.

4: A fall in AD will actually cause Price levels to fall (think about the diagram). and this may be a bit BS, but it can be argued that a fall in G will mean that the government spends less on imports, causing an improvement in the balance of payments deficit.

Hope this helps, quote me if you need any more help

[ollyhal]

For number 2 you want to reduce aggregate demand thereby reducing interest rates and government expenditure and increasing taxation.