Economic Growth & Fluctuations
Country X’s real GDP rose from $500 billion to $525 billion in one year. What is the growth rate?
5%
Define “expansionary fiscal policy.”
Government action to increase spending or cut taxes to boost aggregate demand.
Name one primary tool a central bank uses in open market operations.
Buying or selling government bonds.
What does the Consumer Price Index (CPI) measure?
The weighted average change in prices of a fixed basket of consumer goods and services.
Define a supply-side policy.
Government measures aimed at increasing productive capacity and efficiency in the economy.
Which term describes a period of falling real GDP and rising unemployment?
A) Boom
B) Stagflation
C) Recession
D) Expansion
C) Recession
Give one example of a regressive tax and one of a progressive tax.
Regressive: sales tax; Progressive: personal income tax.
What happens to bank reserves when the central bank raises the reserve requirement?
A) Reserves increase
B) Reserves decrease
C) No change
D) Reserves become unlimited
A) Reserves increase
If CPI rises from 102 to 106 over one year, what is the inflation rate?
3.92% [(106 − 102)/102 × 100].
Which is NOT a supply-side measure?
A) Deregulation
B) Subsidies for R&D
C) Higher income taxes
D) Trade liberalisation
C) Higher income taxes
List two indicators that economists use to confirm a recession.
Two consecutive quarters of negative real GDP growth; a rising unemployment rate.
Explain briefly why government borrowing might “crowd out” private investment.
Higher borrowing raises interest rates, making private loans more expensive and reducing business investment.
List two goals of contractionary monetary policy.
Reduce inflation; slow down an overheating economy.
Explain what a high labour-force participation rate combined with rising unemployment might indicate.
Many discouraged workers are re-entering the labour force but are unable to find jobs, suggesting hidden unemployment pressures.
List two potential social costs of aggressive deregulation.
Reduced worker protections; environmental degradation.
Give the formula for Real GDP
If the multiplier effect is 1.5 and the government increases spending by $100 million, by how much will GDP rise?
A) $50 million
B) $100 million
C) $200 million
D) $150 million
D) $150 million
Explain how expansionary monetary policy lower interest rates
Expansionary monetary policy pushes the supply of money right on the short term interest rate market, increasing quantity demanded and supplied, and lowering overall interest rates.
Name three components of GDP by expenditure.
Consumption (C); Investment (I); Government spending (G); Net exports (X − M).
Explain how improved infrastructure can shift the long-run aggregate supply curve.
Better infrastructure lowers firms’ production costs and increases capacity, shifting LRAS rightward.
Explain how persistent under-utilization of resources during a recession can shift the long-run production possibility curve (PPC).
Under-utilization leads to depreciation of capital and skill erosion, which lowers an economy’s potential output and shifts the PPC inward.
Evaluate one short-term advantage and one long-term disadvantage of a large fiscal deficit.
Advantage: boosts demand and reduces unemployment quickly; Disadvantage: increases debt servicing costs and may raise future taxes.
Analyze one potential risk or side-effect of an extended expansionary monetary policy program.
It can inflate asset bubbles by driving investors into riskier assets seeking yield.
Given a widening current account deficit, discuss two likely impacts on the currency’s exchange rate in a floating system.
Depreciation pressure due to higher import demand; increased foreign borrowing to finance the deficit.
Evaluate whether tax incentives or direct grants are more effective for long-term R&D investment.
Tax incentives encourage broader innovation by many firms, but grants can target strategic sectors more directly.