Lesson 4.5.4

4.5.4 Macroeconomic policies in a global context Quiz: Pearson Edexcel Economics A, Unit 4

20 questions

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Lesson 4.5.4, Macroeconomic policies in a global context: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 4: Theme 4: A global perspective, written with Revision Ninja.

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The 20 questions

  1. Which measure would a government use to reduce a fiscal deficit and national debt?

    • Increasing public spending on all departments, which raises demand and so reduces the size of the deficit
    • Raising tax revenue or cutting public spending, so that the budget balance improves over time
    • Cutting interest rates to zero, which automatically reduces the fiscal deficit in every economy each year
    • Reducing the exchange rate to zero, which removes the need to borrow from foreign creditors in the market

  2. A government introduces a policy to tackle poverty and inequality through a higher minimum wage and targeted benefits. Which type of policy is this?

    • Fiscal policy, through tax and transfer changes that redistribute income towards lower-income households
    • Monetary policy, through changes in the official interest rate that directly alter the incomes of poor households
    • Direct controls, through a quota on imports that raises the price of basic goods bought by households
    • Exchange rate policy, through management of the currency that directly changes the incomes of the poorest

  3. Which policy is most likely to raise investment and reduce the cost of finance for businesses?

    • A rise in income tax rates, which reduces the cost of borrowing for every business in the economy
    • A cut in the official interest rate, which lowers borrowing costs and tends to encourage investment
    • A rise in the official interest rate, which lowers the cost of borrowing and so encourages investment
    • A rise in the government's spending on transfers, which lowers the cost of finance by reducing the demand for loans

  4. A country wants to improve its international competitiveness through supply-side measures. Which policy is most suitable?

    • Investment in education, skills and infrastructure, which raises productivity and lowers relative unit labour costs
    • A rise in import tariffs, which by itself improves the productivity of domestic firms and their export prices
    • A cut in spending on training and research, which lowers the cost of production and so raises competitiveness
    • A rise in the exchange rate, which by itself improves productivity and the quality of goods produced domestically

  5. A sudden fall in world demand for a country's exports slows its economy sharply. Which response is most consistent with supporting demand?

    • A rise in the official interest rate, which raises the cost of borrowing and so supports the export sector
    • Expansionary fiscal policy, such as higher public spending or tax cuts, to support aggregate demand
    • A ban on all imports, which raises the cost of living and so forces households to increase spending on exports
    • Contractionary fiscal policy, such as tax rises and spending cuts, to reduce aggregate demand further

  6. What is transfer pricing?

    • Prices set on transactions between subsidiaries of the same multinational, which can shift profits between countries
    • The price paid by a foreign customer when a domestic firm sells goods at a fixed price in a foreign market
    • The price charged by a central bank when it lends money to commercial banks in the financial system
    • The price at which a government sells public assets to private investors in a privatisation programme

  7. Why is regulating transfer pricing important for national tax authorities?

    • It limits the ability of multinationals to shift profits to low-tax jurisdictions, protecting domestic tax revenue
    • It has no effect on tax revenue, since transfer prices are always set at the market price in every transaction
    • It ensures that multinationals always pay the highest possible tax rate in every country where they operate
    • It removes the need for any corporate tax, since transfer pricing rules ensure that all profits are taxed abroad

  8. A UK subsidiary sells components to its overseas parent at £50 per unit, when the market price for the same components is £80. What is the likely effect?

    • No effect on tax, because internal sales between subsidiaries of the same firm are always exempt from tax in every country
    • UK profit rises, because the subsidiary sells at a price below the market, which increases its taxable profit in the UK
    • The overseas parent pays higher UK tax, because it buys components below the market price in every case
    • Profit is shifted to the overseas parent, lowering the UK subsidiary's taxable profit and UK tax revenue

  9. What limits a government's ability to control global companies' operations?

    • Governments have complete control over every global company, since all firms must register with national authorities
    • Companies can move capital and production across borders, and information asymmetry makes their true activities hard to monitor
    • Global companies are always fully transparent and always follow every instruction given by national governments in full
    • Global companies are not subject to any tax or regulation, which means governments can do nothing to influence them

  10. Which problem is most likely to make it hard for policymakers to apply policies effectively?

    • The absence of any time lags, since all policy effects are felt immediately and fully in the economy in every case
    • Inaccurate or delayed information about the state of the economy, which can lead to poorly timed decisions
    • Complete control over external shocks, which allows policymakers to offset any change in the world economy at will
    • Perfect information about every future event, which means policymakers always know the exact effect of every policy

  11. Why can external shocks make macroeconomic policy harder to manage?

    • They have no effect on the domestic economy, because open economies are insulated from world events by trade
    • They always raise inflation without any effect on output, so policy simply needs to lower prices each time
    • They are largely outside a country's control and can move output, prices and the exchange rate in unpredictable ways
    • They are fully predictable and can be eliminated by domestic policy, so they never cause difficulty for policymakers

  12. Which statement best reflects the risks and uncertainties facing policymakers?

    • Forecasts can be wrong and the effects of policies are uncertain, so policymakers must act with incomplete knowledge
    • Uncertainty arises only in developing countries, so policymakers in advanced economies face no risks in their decisions
    • Policymakers always know exactly what will happen, so forecasting errors never affect their policy decisions at all
    • Uncertainty is not a problem, because the economy always returns automatically to equilibrium with no need for policy

  13. A government wants to reduce a current account deficit using exchange rate policy. Which is the most likely trade-off?

    • A weaker currency helps exports but raises import prices, which can feed into inflation and reduce household real incomes
    • A stronger currency always helps exports and reduces the trade deficit without any side effects for the economy
    • A weaker currency always reduces the trade deficit within a single month, with no effect on prices or incomes
    • A weaker currency lowers import prices and inflation, and it has no effect on export competitiveness at all

  14. Which combination of policies would be most consistent with reducing poverty in a global context while improving competitiveness?

    • Targeted transfers to the poorest together with education and infrastructure investment that raises productivity
    • A permanent fixed exchange rate and no spending on any services, which removes all economic risks from the economy
    • A rise in import tariffs and a fall in investment, which protects domestic firms and so reduces poverty directly
    • A cut in all benefits and a fall in education spending, which lowers the tax burden and raises the incomes of the poor

  15. Which is a key limitation of using capital controls to manage capital flows?

    • Controls can deter investment and may be evaded, so they carry costs and their effectiveness is limited
    • Controls always raise investment and remove all risk from the financial system without any side effects
    • Controls have no effect on capital flows, because capital always moves freely regardless of any government rules
    • Controls always improve the current account by a fixed amount each year, regardless of other economic conditions

  16. Which is an example of a direct control that governments can use over international capital flows?

    • Capital controls that limit the movement of money into or out of the country
    • Lower interest rates that encourage households to save more and so reduce the need for foreign borrowing
    • A rise in public spending on education that raises the skills of workers and so attracts foreign firms
    • A rise in income tax that reduces the disposable income of households and so their demand for imported goods

  17. Which policy would most directly reduce poverty through supply-side measures?

    • Training programmes that raise the employability and skills of low-skilled workers
    • A rise in indirect taxes on basic goods, which raises revenue that can then be used to fund wider spending
    • A cut in the minimum wage, which lowers firms' costs and so increases the number of low-paid jobs available
    • A rise in import tariffs, which protects domestic firms and so raises the incomes of workers in those firms

  18. Why is an oil price shock particularly difficult for policymakers to respond to?

    • It affects only exports, so policymakers can ignore it because it has no effect on domestic prices or incomes
    • It affects only the government budget and never prices or output, so it needs no policy response at all
    • It can raise inflation and reduce output at the same time, creating conflicting goals for policy
    • It always lowers inflation and raises output, so policymakers need take no action in response to the shock

  19. Which is an effect of tighter regulation of transfer pricing?

    • Multinationals are exempt from tax, since regulation of transfer pricing removes any tax obligation on profits
    • Multinationals report more profit where value is created, which can raise local tax revenue
    • Multinationals stop trading between subsidiaries, which removes all tax revenue from cross-border activity
    • Multinationals report less profit in every country, which reduces the tax revenue collected by all governments

  20. Which statement about fiscal policy in a global context is most accurate?

    • Fiscal policy always raises the trade balance, since government spending always reduces imports in the economy
    • Fiscal stimulus has the full effect on domestic output because open economies never import goods from abroad
    • Part of any fiscal stimulus can leak abroad through imports, which reduces its impact on domestic output
    • Fiscal policy has no effect on domestic output in open economies, because exchange rates always offset it fully

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