Lesson 2.6.1

2.6.1 Possible macroeconomic objectives Quiz: Pearson Edexcel Economics A, Unit 2

20 questions

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Lesson 2.6.1, Possible macroeconomic objectives: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 2: Theme 2: The UK economy – performance and policies, written with Revision Ninja.

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The 20 questions

  1. Which of the following is one of the main macroeconomic objectives of government?

    • a fixed exchange rate against the dollar at all times
    • low and stable inflation
    • the maximisation of imports to lower consumer prices
    • a permanent budget surplus in every year

  2. A conflict between macroeconomic objectives is best illustrated by:

    • a policy to protect the environment that always increases growth, because cleaner production methods raise output and cut firms' costs
    • a policy to reduce income inequality that has no effect on government budgets, because redistribution is funded by spending cuts alone
    • a policy to reduce unemployment through higher demand that may raise inflation and widen the current account deficit
    • a policy to cut inflation that has no effect on any other objective, because lower prices always raise growth and employment together

  3. Which objective refers to a current account of the balance of payments close to zero or in balance?

    • balance of payments equilibrium on the current account
    • low and stable rate of inflation
    • a balanced government budget over the business cycle
    • greater income equality among households

  4. A balanced government budget means that:

    • government borrowing is always zero in every year regardless of the economy
    • government spending equals tax revenue, so there is no fiscal deficit or surplus
    • the central bank holds the same amount of gold as the government's debt
    • the government spends more than it receives in tax each year

  5. Which is an example of a potential conflict between economic growth and protecting the environment?

    • growth cannot be affected by any environmental regulation
    • environmental protection always reduces the cost of production
    • growth from services can never raise emissions in any economy
    • growth from heavy industry can raise emissions and pollution

  6. Which objective is most closely linked to a fall in the unemployment rate?

    • low unemployment, which can raise output, incomes and tax revenues
    • a fall in growth, which reduces the need for workers
    • a rise in the unemployment rate, which lowers the claimant count
    • a rise in inflation, which reduces the real cost of wages

  7. Why is greater income equality considered a macroeconomic objective by some governments?

    • Equality is irrelevant to macroeconomic policy because it affects only individuals, so it has no bearing on aggregate demand or stability
    • Greater equality may support social cohesion, economic stability and sustainable demand from lower and middle income households
    • Equality reduces the government's tax revenue in every case, because redistribution always lowers the tax that households pay to the state
    • Greater equality always reduces growth, so governments avoid it

  8. A government has inflation of 6% against a target of 2%. Which objective is most directly at risk?

    • greater income equality
    • a balanced government budget
    • protection of the environment
    • low and stable rate of inflation

  9. Which of the following is a likely trade-off between a balanced government budget and economic growth?

    • balancing the budget has no effect on any macroeconomic variable, because budget decisions are separate from the rest of the economy
    • raising taxes always increases growth because incomes rise, since higher taxes allow the government to spend more on productive projects
    • cutting government spending to balance the budget may reduce aggregate demand and slow growth
    • cutting government spending always increases growth in the short run

  10. Which of the following best describes an objective of 'low unemployment' that is compatible with stable inflation?

    • an economy in a deep recession with falling prices
    • an economy operating close to potential output with stable price growth
    • an economy with a large positive output gap and rapidly rising prices
    • an economy with high unemployment and a large balance of payments deficit

  11. Why might a country face a trade-off between the current account and economic growth?

    • growth has no effect on imports because consumers spend only on domestic goods
    • faster growth raises imports, which can widen a current account deficit
    • the current account is unaffected by any change in growth
    • faster growth always reduces imports, which improves the current account

  12. The UK inflation target is set by:

    • the Chancellor of the Exchequer, with the Bank of England operating monetary policy to meet it
    • the Bank of England alone, without any government involvement
    • the Office for Budget Responsibility, which sets the target each year as part of its forecasts for public finances and the economy
    • the European Central Bank, which determines UK monetary policy and sets the inflation target on behalf of the British government

  13. Which statement best evaluates the view that all macroeconomic objectives can be achieved at the same time?

    • All objectives are always compatible, so no trade-offs arise in any economy
    • Objectives cannot be pursued at all without a fixed exchange rate
    • Objectives often conflict, so policy-makers must prioritise and accept trade-offs between them
    • Objectives are irrelevant because the economy adjusts automatically to all shocks

  14. Which of these would most directly worsen a government's budget balance?

    • a rise in income tax revenues as employment grows, because more people in work pay more tax and so government receipts increase
    • a fall in welfare spending as more people find work, which lowers government spending and so reduces the deficit in the year
    • a fall in tax revenues during a recession alongside rising unemployment benefit payments
    • a rise in indirect taxes on goods without any change in spending, which reduces the deficit by raising extra revenue from consumers

  15. The 'low and stable rate of inflation' objective is usually interpreted as:

    • keeping price growth low and predictable so that households and firms can plan with confidence
    • increasing inflation as much as possible to boost growth, since higher prices always lead to higher output and more jobs
    • keeping prices fixed at their current level permanently, so that the price level never changes in any year and households never face rises
    • allowing prices to fall in every year to maximise real incomes, because falling prices always raise the real value of wages for workers

  16. Which of the following is an example of a macroeconomic objective linked to sustainability?

    • a fixed budget deficit in every year regardless of the economy, which keeps public borrowing constant and protects long-run stability
    • an unlimited expansion of imports to boost consumer choice
    • a rise in unemployment to reduce public spending, because fewer people in work lowers demand for public services and protects the budget
    • protection of the environment through policies that limit emissions and resource depletion

  17. Which statement best explains why governments aim for a balance of payments equilibrium on the current account?

    • Current account surpluses always lead to a fall in the exchange rate, so governments prefer surpluses only if they want cheaper imports
    • A current account deficit has no link to borrowing from abroad
    • Persistent deficits can require large foreign borrowing and affect the exchange rate and confidence
    • Persistent deficits always raise growth and so are preferred by governments

  18. Which of these would most help a government to meet the objective of greater income equality?

    • a flat tax on all income combined with cuts to welfare payments, because the same rate for everyone and lower benefits reduce the gap
    • a reduction in public spending on education and training, because spending less on skills lets households keep more of their own income
    • progressive taxation combined with transfer payments to lower-income households
    • a cut in the minimum wage to raise employment regardless of pay, since lower pay for the lowest earners increases the number of jobs

  19. Why might a government be unable to pursue all of its macroeconomic objectives at the same time?

    • Objectives are never in conflict because all policies affect every objective equally, so pursuing one goal always helps all the others
    • Governments can only pursue one objective if they have a fixed exchange rate
    • Objectives are fixed by law and cannot be changed by any policy, so governments have no choice about which goals they pursue each year
    • Some objectives conflict, such as low unemployment with low inflation during a boom, so trade-offs are unavoidable

  20. A government sets a goal of 'low unemployment' while the economy is operating above its potential output. What is the most likely risk?

    • a permanent fall in potential output because of excess demand
    • rising inflation as excess demand pushes up wages and prices
    • a rise in the budget surplus as tax receipts grow
    • a fall in inflation as demand is excessive

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