2.6.4 Conflicts and trade-offs between objectives Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Which pair of macroeconomic objectives is most commonly in conflict in the short run?

   • Economic growth and low inflation, which are always complementary
   • Low unemployment and low inflation, as the short-run Phillips curve suggests
   • Sustainable growth and an equal distribution of income in every case
   • Balance of payments equilibrium and a government budget surplus

2. The short-run Phillips curve shows an inverse relationship between which two variables?

   • Inflation and economic growth
   • Interest rates and business investment
   • Inflation and unemployment
   • Exports and imports of goods and services

3. Which best describes a potential conflict between economic growth and the environment?

   • Environmental protection always lowers the rate of economic growth permanently
   • Faster growth can increase pollution and resource depletion, so growth may conflict with sustainability
   • Growth always improves the environment through higher incomes alone
   • Growth has no effect on natural resources in any economy

4. A current account deficit is best defined as:

   • Government spending exceeding total tax revenue in a year
   • Money supply growing faster than real output over a period
   • Imports of goods and services, together with other current flows, exceeding exports of goods and services
   • Exports of goods and services exceeding imports of goods and services

5. Which objective is measured by the Gini coefficient?

   • Income inequality
   • The rate of inflation
   • The rate of unemployment
   • The current account balance

6. Inflation is 5 per cent and unemployment is 3 per cent. The government expands demand to reduce unemployment to 2 per cent. What conflict is most likely?

   • The balance of payments would automatically improve without any other effects
   • Inflation is likely to rise further, reflecting the short-run trade-off between unemployment and inflation
   • Unemployment would rise above 3 per cent after the expansion
   • Inflation must fall to zero because unemployment has fallen

7. Raising interest rates to reduce inflation is most likely to conflict with which objective?

   • Economic growth, since higher borrowing costs reduce spending and investment
   • A lower Gini coefficient, because rates change the distribution of income
   • Low inflation, which is the direct aim of the higher rates themselves
   • A stable budget balance, since higher rates lower tax revenue directly

8. Expansionary fiscal policy raises aggregate demand. Which trade-off is most likely shown?

   • No trade-off, because aggregate demand does not affect the price level at all
   • Lower growth together with higher inflation and no change in borrowing
   • Lower unemployment together with a current account surplus in every case
   • Higher growth and lower unemployment, against higher inflation and a larger budget deficit

9. Which best describes the long-run Phillips curve?

   • Downward sloping like the short-run curve with a stable trade-off
   • Upward sloping, showing that higher unemployment goes with higher inflation
   • Vertical at the natural rate of unemployment, so there is no long-run trade-off
   • Horizontal at a 2 per cent inflation rate for all unemployment levels

10. Using a supply-side policy to cut unemployment without raising inflation is best explained by:

    • Raising the price of imports so that domestic prices fall
    • Moving along the short-run Phillips curve to a higher inflation rate
    • Shifting aggregate demand to the left through higher taxes
    • Shifting the short-run Phillips curve left, so a given unemployment rate comes with lower inflation

11. A government reduces the budget deficit by raising VAT. Which conflict is most likely?

    • Faster growth and lower inflation are guaranteed at the same time
    • The budget deficit rises because VAT revenue falls automatically
    • Lower consumer spending may slow growth even as the public finances improve
    • Aggregate demand is unaffected because consumers ignore prices

12. A policy depreciates the currency to reduce the current account deficit. What is the most likely conflict?

    • Imports become more expensive, which may push up domestic inflation
    • The current account deficit rises because the currency is weaker
    • Inflation falls automatically because prices of all goods drop
    • Exports become more expensive and fall sharply, raising unemployment

13. Progressive taxation is used to reduce income inequality. Which objective may it conflict with?

    • Economic growth, if high marginal tax rates reduce incentives to work, save or invest
    • Reducing income inequality, which the policy is designed to achieve
    • Low inflation, since tax rates directly control the price level
    • Balance of payments equilibrium, because taxes only affect exports

14. Which statement correctly describes a trade-off between economic growth and the balance of payments?

    • Faster growth always improves the current account by reducing imports
    • Faster growth raises demand for imports, which can worsen the current account
    • Economic growth has no effect on the demand for imports
    • Growth and the balance of payments are unrelated in every economy

15. Can a government meet all four macroeconomic objectives at the same time with one policy?

    • Not necessarily, because the objectives can conflict and a policy that helps one may hinder another
    • No, because the objectives cannot be measured with any accuracy
    • Only if the exchange rate is fixed at zero in all periods
    • Yes, always, using a single policy tool in every circumstance

16. Which factor can shift the short-run Phillips curve?

    • The curve never shifts because it is fixed by the natural rate
    • Changes in inflation expectations or supply-side factors such as productivity
    • Only changes in the official interest rate set by the central bank
    • Only changes in the tax on imports paid by the government

17. After a demand expansion pushes unemployment below the natural rate, what happens as expectations adjust?

    • Unemployment rises above the natural rate while inflation falls
    • Inflation falls permanently while unemployment stays below the natural rate
    • Inflation rises and the short-run curve shifts up, so unemployment returns to the natural rate at higher inflation
    • Nothing changes in the long run because the economy is always at equilibrium

18. Inflation is above target while growth is weak (stagflation). Which describes the policy dilemma?

    • Stagflation never occurs because inflation and growth are always linked
    • Both inflation and growth can be fixed instantly by raising interest rates
    • Raising rates to cut inflation worsens growth and jobs, while cutting rates to help growth risks higher inflation
    • The dilemma only arises under a fixed exchange rate regime with capital controls

19. Evaluate the claim: 'Low unemployment always comes at the cost of higher inflation.'

    • Correct, because the trade-off holds in every time period
    • Overstated, because the trade-off is mainly short run and supply-side improvements can lower the natural rate
    • Incorrect, because unemployment and inflation are statistically unrelated
    • Correct, because supply-side policies always raise inflation in practice

20. Which is the strongest evaluation of using interest rates to meet an inflation target when there is a current account deficit?

    • Higher rates may attract hot money and strengthen the currency, worsening export competitiveness and the external balance
    • Interest rates cannot affect exchange rates in any economy at all
    • Higher rates always reduce the current account deficit immediately and fully
    • Higher rates always increase exports by making goods cheaper abroad

Related quizzes

• Economic growth Quiz · 2.1.1 · 20 questions
• Inflation Quiz · 2.1.2 · 20 questions
• Employment and unemployment Quiz · 2.1.3 · 20 questions
• Balance of payments Quiz · 2.1.4 · 20 questions
• The characteristics of AD Quiz · 2.2.1 · 20 questions
• Consumption (C) Quiz · 2.2.2 · 20 questions
• Investment (I) Quiz · 2.2.3 · 20 questions
• Government expenditure (G) Quiz · 2.2.4 · 20 questions
• Net trade (X-M) Quiz · 2.2.5 · 20 questions
• The characteristics of AS Quiz · 2.3.1 · 20 questions