Lesson 4.2.1.1

4.2.1.1 The objectives of government economic policy Quiz: AQA Economics, Unit 2

20 questions

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Lesson 4.2.1.1, The objectives of government economic policy: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Which set lists the four main macroeconomic objectives of government policy in the specification?

    • Price stability, maximising imports, full employment and a rising share of wealth held by the richest households.
    • Rising inflation, falling unemployment, a surplus on the capital account and higher interest rates for savers.
    • Economic growth, price stability, minimising unemployment and a stable balance of payments on current account.
    • Economic growth, a fixed exchange rate, zero inflation and a balanced government budget in every single year.

  2. Why might the objectives of low inflation and low unemployment conflict in the short run?

    • Expansionary policy that reduces unemployment can raise demand and push up prices, so pursuing one objective may worsen the other.
    • Inflation and unemployment are measured in the same units, so policy can influence both of them equally without any conflict.
    • Lower unemployment always lowers prices, because more workers produce more goods and so reduce unit costs across the economy.
    • Low inflation and low unemployment are both caused by the same supply shock, so policy cannot affect either of them in practice.

  3. A current account deficit means that:

    • The stock of foreign currency reserves held by the central bank has fallen to zero in the same period of the year.
    • Government spending exceeds tax revenue in the same year, as measured by the public sector net borrowing figure for the period.
    • The value of goods and services imported, plus net payments abroad, exceeds the value of exports and net income received from abroad.
    • Household savings exceed household investment spending in the domestic economy over the course of the year under the conditions described.

  4. Which measure best represents the objective of economic growth?

    • A decrease in the balance of trade in goods, which shows that the economy is importing more than it exports in the year.
    • A rise in the number of people claiming benefits, which indicates that more households are in need of government support.
    • A sustained rise in real GDP over time, which indicates that the economy is producing more goods and services.
    • A fall in the price level measured by the consumer prices index over one year, which indicates falling living costs.

  5. Why is price stability regarded as a macroeconomic objective?

    • Rising prices always increase the real income of all households, so price stability reduces their welfare over time.
    • Price stability removes the need for any monetary policy, since prices never change in any economy at any time in history.
    • High and unpredictable inflation erodes the real value of savings and makes planning difficult for firms and households.
    • Stable prices always lower the exchange rate, so the balance of payments is always in surplus as a result of the policy.

  6. An economy has nominal GDP of £2,100 billion and a GDP deflator of 105. What is real GDP?

    • £1,995 billion, since 2,100 minus 5 per cent gives the real output of the economy after the change in prices.
    • £2,205 billion, since 2,100 multiplied by 1.05 gives the real output of the economy in the year concerned.
    • £2,000 billion, since 2,100 divided by 105 and multiplied by 100 gives 2,000.
    • £2,100 billion, since nominal and real GDP are always equal in any year of the period being measured.

  7. A government targets inflation of 2 per cent, but inflation is 4 per cent. Which objective is not being met?

    • Minimising unemployment, because higher inflation always leads to lower unemployment by definition in every economy.
    • Balance of payments stability, because inflation has no effect on the current account balance in any economy at any time.
    • Economic growth, because inflation above target always means that real output has risen above its trend level in the economy.
    • Price stability, as inflation of 4 per cent is above the 2 per cent target set for the economy.

  8. A government pursues faster growth by expanding aggregate demand. Which trade-off is most likely?

    • Lower unemployment and lower inflation at the same time, because higher demand always reduces prices in the economy.
    • Higher inflation or a worsening current account, as stronger demand raises prices and increases the demand for imports.
    • Lower growth in the short run, because expansion always reduces the level of real output produced in the economy in the case described.
    • A surplus on the current account, because stronger demand always increases exports by more than the rise in imports.

  9. Which evaluation best reflects the difficulty of achieving all macroeconomic objectives at once?

    • Objectives are never achieved in practice, because the government has no tools to influence any macroeconomic variable at all.
    • Objectives conflict only in the long run, so in the short run every government can meet every target without any cost.
    • Objectives may conflict, so the government must prioritise and accept trade-offs depending on economic conditions and political judgement.
    • All objectives can always be achieved at the same time, since each objective is independent of the others in the economy.

  10. Why does a persistent current account deficit matter for policy?

    • A current account deficit always shows that a country is becoming richer, since it imports more goods than it sells abroad.
    • The current account has no effect on the wider economy, so the objective is included only for historical reasons in policy.
    • A current account surplus always causes inflation, so governments prefer deficits to maintain price stability in every case.
    • It may need to be financed by borrowing from abroad or selling assets, which may not be sustainable over a long period of time.

  11. Why is economic growth not the same as an increase in living standards?

    • Growth always raises living standards equally for all households, because total output is shared equally across the population.
    • Growth reduces living standards in every case, because output rises only when households work longer hours for lower pay.
    • Growth measures total output, which may be unevenly distributed and may not account for environmental costs or the value of leisure time.
    • Growth is measured in nominal terms only, so it never reflects any change in the real goods that households can buy in the case described.

  12. Which policy is most likely to conflict with the price stability objective?

    • A rise in the minimum wage paid to low-paid workers, which reduces the demand for labour in some sectors of the economy.
    • A fall in interest rates when inflation is below target and output is well below its potential level in the economy.
    • A large increase in government spending financed by money creation when the economy is already operating at full capacity.
    • A rise in interest rates to reduce demand when inflation is above target and output is above its sustainable level in the case described.

  13. Which of the following would improve the current account balance, all else being equal?

    • A rise in the competitiveness of exports, so that exports increase relative to imports over the period.
    • A rise in the value of the currency, which makes exports cheaper and imports more expensive for foreign buyers in the market.
    • A rise in the rate of inflation relative to trading partners, which raises the competitiveness of domestic exports abroad.
    • A rise in domestic income, which increases the demand for imports and so worsens the current account balance in the economy.

  14. Which indicator is most directly associated with the objective of minimising unemployment?

    • The unemployment rate, measured as the proportion of the labour force who are without work but are seeking and available for work.
    • The public sector net borrowing figure, measured as the difference between government spending and government revenue each year.
    • The money supply measure M4, which counts the deposits held by households and firms in the banking sector at a given date.
    • The balance of trade in goods, measured as the value of exports minus the value of imports over the course of the year.

  15. A government targets real GDP growth of 2.5 per cent, but real GDP grows by 1 per cent. What follows?

    • The growth objective has been exceeded, because any positive growth figure automatically counts as meeting a target in every year.
    • The growth objective is irrelevant, since real GDP growth is not a macroeconomic objective of government in any period.
    • The growth objective has not been fully met, so output is below the target set for the economy in that year.
    • The growth objective has been met, because growth below the target in real terms is equal to the target in nominal terms.

  16. What is an argument for pursuing several macroeconomic objectives rather than one?

    • Only one objective matters, so governments should ignore all the others that are listed in the specification for macroeconomics.
    • The economy faces several problems at once, so policy aims to address growth, prices, employment and the external balance together.
    • Policy is easier with many objectives, because they never interact with each other in the economy at any time in history.
    • Objectives are always achieved at the same level, so there is no need to choose between them in policy design at all.

  17. Why might an economy with high growth still face a balance of payments problem?

    • High growth is measured only in nominal terms, so it has no effect on trade flows in the economy at any time.
    • Rising incomes may increase demand for imports faster than exports grow, which can worsen the current account balance.
    • High growth always increases exports by more than imports, because foreign buyers prefer rapidly growing economies in every case.
    • High growth reduces the price of imports to zero, so the current account automatically improves in every case of expansion.

  18. Which statement best describes a short-run trade-off between growth and inflation?

    • Higher growth always lowers inflation, because more output reduces the cost of each good in the economy in every case.
    • Pushing output above its sustainable level may generate rising inflation, so higher growth can come at the cost of price stability.
    • Growth and inflation are unrelated, since the price level is fixed by government regardless of the level of output in the economy.
    • Higher inflation always raises growth, because consumers spend more money at higher prices in every market in the economy.

  19. Which measure is typically used to assess the price stability objective?

    • The value of the current account balance, measured as the net flow of exports and imports in the year concerned at the time in question.
    • A price index such as the consumer prices index, which tracks the change in prices of a basket of goods and services over time.
    • The number of jobs created in the economy during each year, measured as the net change in employment numbers across sectors.
    • The stock of savings held by households, measured as the total value of deposits in banks at a given date in the year.

  20. Supply-side policy raises productivity and so the potential output of the economy. Which objective is most likely to benefit with little conflict?

    • The current account, because higher productivity always reduces exports by making domestic goods more expensive abroad.
    • Income equality, because higher productivity always raises the incomes of the poorest households by the same amount as others.
    • Price stability, because higher productivity always raises prices as firms pass on their higher costs to consumers in the market.
    • Economic growth, because higher productivity raises the potential output of the economy without necessarily raising inflation.

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