Exam code: 7136
1 markAll other things being equal, which one of the following is most likely to increase the national debt?
Foreign companies increasing their direct investment into the economy
The central bank using its reserves of foreign currency to fund a trade deficit
The government reducing its budget surplus by increasing its expenditure on infrastructure
The government running a budget deficit, financed by selling bonds to foreign investors
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1 markWhich one of the following is correct for a proportional tax on income?
The amount of tax paid increases as income increases.
The marginal rate of tax is lower than the average rate
The average rate of tax falls as income increases
The average rate of tax is lower than the marginal rate
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1 markThe diagram below shows the aggregate demand (AD) curve, the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve for an economy. The economy’s initial equilibrium is at E1.
The government wants to achieve economic growth without conflicting with its long-run objective of price stability. All other things being equal, which one of the following policy combinations is most likely to enable the economy to achieve a new long-run equilibrium at E2?
A reduction in interest rates and increased government borrowing.
A reduction in the budget deficit and the rate of growth of the money supply.
Increased government expenditure on apprenticeships and transport infrastructure funded through borrowing.
Increased government expenditure on welfare funded through higher indirect taxes.
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1 markThe table below shows different combinations of changes in the rate of interest and the government’s budget position. The economy has a negative output gap. All other things being equal, which one of the combinations of policies, A, B, C or D, is most likely to reduce the economy’s negative output gap?
| Rate of interest | Government’s budget position |
A | Increase | Decrease in surplus |
B | Decrease | Increase in surplus |
C | Increase | Decrease in deficit |
D | Decrease | Increase in deficit |
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1 markThe marginal propensity to consume (MPC) in an economy is 0.5. If the MPC increases by 20% the new value of its multiplier will be
2.0
2.5
5.0
10.0
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1 markAt the start of the financial year, an economy’s national debt stands at £1000 billion. Over the course of the year, the government plans to spend an extra £100 billion and borrow an extra £40 billion.
If the government achieves its spending and borrowing targets, by the end of the financial year the national debt will have increased by
4%
10%
14%
40%
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1 markAll other things being equal, an increase in the ratio of capital to labour resulting from an increase in investment is most likely to lead to a
decline in labour productivity
fall in the size of the labour force
negative demand-side shock to the economy
supply-side improvement
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1 markWhich one of the following is most likely to cause an increase in the structural budget deficit?
A fall in income tax receipts in the downturn of the economic cycle
A rise in government spending on unemployment-related benefits during a recession
A rise in healthcare expenditure and state pension provision due to an ageing population
A rise in spending on imports during an economic recovery
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1 markThe table below shows the marginal income tax rates in an economy for 2016.
Table: Marginal income tax rates for every $1 of income
Taxable Income | Income tax rates 2016 |
From $0 to $10 000 | 0% |
From $10 001 to $30 000 | 10% |
From $30 001 to $50 000 | 30% |
$50 001 and above | 45% |
How much income tax would be payable by someone earning $40 000 in 2016?
$5 000
$5 500
$10 000
$12 000
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1 markThe national debt is the
annual budget deficit plus the external trade deficit
amount by which the budget deficit increases each year
annual difference between government spending and tax receipts
the cumulative stock of outstanding central government borrowing
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Which one of the following statements regarding supply-side policies is correct?
Supply-side policies
can have microeconomic as well as macroeconomic effects on the economy.
can increase the potential output of an economy but not its trend rate of growth.
cannot be used to correct market failures and improve the operation of markets.
do not affect competitiveness or the current account of the balance of payments.
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At the end of the previous financial year, a country had a national debt of £20 000 billion. The government’s planned expenditure for the current year exceeds its projected income by £100 billion.
All other things being equal, which one of the following is most likely to enable the government to complete its planned expenditure and reduce the national debt?
Increasing its
planned borrowing by more than £100 billion.
projected income and borrowing by £100 billion
projected income by £100 billion and reducing new borrowing by £100 billion.
projected tax revenue by more than £100 billion.
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All other things being equal, which one of the following is the most likely consequence of technological innovation in the production process by the firms within an industry?
A decrease in the number of firms in the industry
A reduction in firms’ unit costs of production
The elimination of entry barriers into the industry
The invention of a product that did not previously exist
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Which one of the following is a role of the UK’s Office for Budget Responsibility?
Deciding how much public funding is given to each government department
Enabling the government to run a budget deficit by issuing government bonds
Evaluating the government’s performance against its own fiscal targets
Making recommendations to the government on how to reduce its budget deficit
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Figure 8 shows the aggregate demand curve (AD) and the long-run aggregate supply curves (LRAS) for an economy.
A redistribution of government spending from spending on welfare towards the funding of research and development shifts the long-run aggregate supply curve from LRAS1 to LRAS2
Which one of the following is the most likely effect of this policy?
A decrease in the number of people who are economically active
An improvement in the balance of payments on current account
An increase in the size of the government’s budget deficit
The creation of a positive output gap
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Figure 9 shows the government budget balance for an economy from 2019 to 2023.
All other things being equal, between 2019 and 2023, the national debt of this economy increased by
$50bn
$200bn
$275bn
$325bn
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Figure 2 shows two aggregate demand (AD1 and AD2) curves and the short-run aggregate supply (SRAS) curve for an economy.
Which one of the following is the government most likely to increase if it wishes to use fiscal policy to reduce national output from Y1 to Y2?
Infrastructure expenditure
Interest rates
Rates of income tax
The budget deficit
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Which one of the following is a supply-side policy aimed at reducing the natural rate of unemployment?
Government retraining schemes for structurally unemployed workers
Increasing legal protection against unfair dismissal for employees
Increasing the real value of the national minimum wage
New government subsidies for developers of artificial intelligence
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Table 2 shows the amount paid in tax by individuals at different levels of income.
Table 2
Income (£) | Tax paid (£) |
|---|---|
20000 | 4 000 |
30000 | 5400 |
40000 | 6400 |
50000 | 7000 |
This tax is an example of a
lump sum tax.
progressive tax.
proportional tax.
regressive tax.
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A government introduces a number of supply box -side policies that increase the size of the country's working population and labour productivity. All other things being equal, which one of the following statements identifies the most likely effects of the policies on the country's economy?
An increase in real national income and a reduction in the balance of payments deficit
An increase in short-run economic growth and inflation
An increase in the trend rate of economic growth and a growing balance of payments deficit
A reduction in unemployment and an increase in inflation
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Table 5 shows a household's income and the amount the household has to pay in tax for three taxes
Table 5
Income (£) | Tax F (£) | Tax G (£) | Tax H (£) |
|---|---|---|---|
10 000 | 1000 | 500 | 500 |
30000 | 2500 | 1500 | 1800 |
60000 | 4000 | 3000 | 4000 |
Which one of the following statements is correct?
Tax F is a progressive tax and Tax H is a progressive tax
Tax F is a regressive tax and Tax G is a progressive tax
Tax F is a regressive tax and Tax G is a proportional tax
Tax F is a regressive tax and Tax H is a regressive tax
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Table 6 shows the national debt and gross domestic product (GDP) for the UK in the second quarters of 2020 and 2022.
Year | National debt (£bn) | GDP (£bn) |
|---|---|---|
2020 | 2069 | 2190 |
2022 | 2437 | 2391 |
All other things being equal, which one of the following is most likely to help the government manage the impact of the changes shown in Table 6?
Contractionary monetary policy by the Bank of England
Falling demand for government bonds from foreign investors
Rising interest rates in global financial markets
Sustained rises in nominal national income in future years
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