An economy has a high rate of inflation. In response to this, its government increases income tax.

What is the most likely reason for this increase?

• to discourage the consumption of harmful goods

• to raise money for government spending

• to redistribute income

• to reduce total demand

Interest rates are sometimes raised to control inflation.

Why might this policy be effective?

• Consumers may save more.

• Government spending may increase.

• Investment may be encouraged.

• The exchange rate may fall.

A government’s revenue grew 8% to $3.25 trillion. Its expenditure was reduced to $3.69 trillion.

What can be concluded from this?

• A

• B

• C

• D

A country’s inflation rate, measured by the Consumer Prices Index (CPI), was 3% in year 1. Three years later it was 0.8%. What can be concluded from this information?

• Prices are falling

• The rate of price increases is falling

• The real rate of interest is negative

• There is increased purchasing power for those on fixed incomes

What will deflation most likely lead to?

• a fall in the real value of debts

• an increase in the exchange rate

• an increase in the rate of interest

• an increase in the real purchasing power of money

Economic growth can be defined as

• a reduction in a country’s rate of inflation

• an increase in a country’s exports

• an increase in a country’s population.

• an increase in a country’s productive capacity.

In a year, two changes occurred in a company. Company directors’ salaries increased by 15%. Office workers’ wages increased by 5%. The rate of inflation was 3.4%.

What happened to real income?

• A

• B

• C

• D

Gross Domestic Product (GDP) is a better measure of comparative living standards when it is adjusted for the effects of

• exports and inflation

• imports and exports.

• population change and exports.

• population change and inflation.

What is a fiscal policy measure?

• direct tax

• exchange rates

• interest rates

• regulation

A government uses expansionary monetary policy.

What does the government decrease?

• bank lending

• interest rates

• the budget deficit

• the money supply