Which of the following is not an element of fiscal policy?
D Rationale: Exchange rates are a target of monetary policy: government policy on the money
supply, the monetary system interest rates, exchange rates and the availability of credit. Fiscal
policy is government policy on the three other options.
Pitfalls: This whole syllabus area is full of fine distinctions in terminology, which lend themselves
to testing in a Multiple Choice and Objective Testing format.
Ways in: If you knew that there was a distinction between fiscal and monetary policy, you might
have identified exchange rates as the only monetary issue.
Which of the following is associated with a negative Public Sector Net Cash Requirement?
C Rationale: A budget surplus occurs when a government’s income exceeds its expenditure: there is
a negative PSNCR or PSDR. When a government’s expenditure exceeds its income, so that it
must borrow to make up the difference, there is a positive PSNCR and we say that the
government is running a budget deficit.
Ways in: If you recognised that a negative PSNC means no borrowing, you might have been able
to start eliminating some options…
........................................ taxes are collected by the Revenue authority from a business, which
attempts to pass on the tax to consumers in the price of goods.
Which word correctly completes this statement?
C Rationale: The definition clearly distinguishes an indirect tax (eg sales tax) from a direct tax,
which is paid direct by a person to the Revenue authority (eg income tax, corporation tax, capital
gains tax and inheritance tax). Option A refers to the proportion of income taken by a tax.
If a government has a macro-economic policy objective of expanding the overall level of economic
activity, which of the following measures would not be consistent with such an objective?
C Rationale: Increasing taxation lowers demand in the economy because people have less of their
own money after tax for consumption or saving/investment. Increasing public expenditure should
increase the level of consumer demand. Decreasing taxation has the opposite effect. Lowering
interest rates should stimulate investment (by companies) and consumer expenditure, even if only
after a time lag.
The currency in country X is the Krone while country Y uses the Euro. Country Y has recently
experienced an increase in its exchange rate with Country X. Which of the following effects is likely to
result in Country Y?
D Rationale: An increase in the exchange rate makes a country’s exports more expensive to
overseas buyers, and imports cheaper: it therefore has the opposite of the first three effects. The
lower cost of imports, however, is likely to reduce the rate of domestic inflation.
Pitfalls: The permutations of increases/decreases in interest rate can be confusing: ensure that
the logic makes sense to you!
Ways in: You could group options B and C together (increased cost = reduce demand): since
both cannot be the answer, and there is only one answer, neither of these options can be correct.
This gets you quite a long way towards the solution… So if you don’t know an answer, don’t
panic: logic can often help!
The following, with one exception, are ‘protectionist measures’ in international trade. Which is the
B Rationale: Subsidies for exporters will encourage domestic exports, but will not help to protect
domestic producers against overseas producers. The other options are tariff (taxes and duties on
goods entering the country) and non-tariff barriers to trade.
Are the following statements true or false?
1 Frictional unemployment will be short term
2 Governments can encourage labour mobility if they want to reduce unemployment
A Rationale: Frictional unemployment occurs when there is difficulty in matching workers quickly
with jobs. This means that frictional unemployment is temporary and short term and so
statement 1 is true. A government can encourage labour mobility by offering individuals financial
assistance with relocation expenses and by improving the flow of information on vacancies. This
means that statement 2 is true.
Monetary policy is a government economic policy relating to:
1 Interest rates
3 Public borrowing and spending
4 Exchange rates
Which of the above are correct?
A Rationale: Government policy on taxation, public spending and public borrowing relates to fiscal
policy. Government policy on interest rates and exchange rates are part of the monetary policy.
Which of the following organisations might benefit from a period of high price inflation?
A Rationale: Debts lose ‘real’ value with inflation: a company that owes a lot of money would
effectively pay less (in real terms) over time. The other organisations would suffer because:
inflation would make exports relatively expensive and imports relatively cheap; business might be
lost due to price rises; and the cost of implementing price changes would be high.
Which of the following are the goals of macroeconomic policy?
1 Encouraging economic growth
2 Low unemployment
3 Achievement of a balance between exports and imports
4 Achieving zero inflation
D Rationale: The four main objectives of macroeconomic policy relate to economic growth, stable
(not zero) inflation, unemployment and the balance of payments (balance between exports and