Unit 29-31 MCQs Practice

What does a consumer price index show?

• How the price of domestically produced products has changed over time

• How the price of a representative basket of goods and services has changed over time

• How the wages of consumers have changed relative to the change in the price level

• How the wages of consumers have changed relative to the costs of production

Answer explanation

A consumer prices index measures the price change of a sample of products that people spend

most on.

A country is experiencing a high rate of inflation. Which item would be the least desirable store of wealth?

• Money

• Property

• Land

• Shares

Answer explanation

Money loses its value with inflation. Each US $ will buy less. Property, land and shares are likely to lose less of their value with inflation and may even gain value.

In which circumstance would an increase in total (aggregate) demand be most likely to cause inflation?

• It is caused by an increase in investment undertaken by expanding industries

• It is the result of higher government spending on training which raises labour productivity

• It occurs when there is a low level of spare capacity in the economy

• It takes place when there is net immigration occurring

Answer explanation

When there is a low level of spare capacity in the economy, an increase in AD will be likely to push

up the price level as firms will be competing for scarce resources.

What is a cause of cost-pull inflation?

• A reduction in direct taxes

• A reduction in the rate of interest

• An increase in bank lending

• An increase in the price of raw materials

Answer explanation

Cost-push inflation is caused by an increase in the costs of production. A, B and C may cause demand-pull inflation.

What is a cause of demand-pull inflation?

• A fall in labour productivity

• A fall in investment

• A rise in the budget deficit

• A rise in a current account deficit

Answer explanation

A rise in the budget deficit would mean that the gap between government spending and taxation is increasing. It could be the result of a rise in government spending and/or a fall in taxation. In either case, aggregate demand would increase. B and D would reduce aggregate demand and A would increase costs of production.

In which circumstance would a rise in a country's inflation rate increase the international competitiveness of the products it produces?

• The quality of the products produced by other countries improves at a more rapid rate

• The price level of other countries increases at a more rapid rate

• The country's exchange rate increases

• The productivity of the country's labour force decreases

Answer explanation

If other countries’ price levels rise at a more rapid rate, this country’s products will become more internationally price competitive. A, C and D would all reduce the country’s price competitiveness.

Which group is economically active?

• Full-time students

• Those who are too sick to work

• Those who are officially classified as unemployed

• Those who have retired early

Answer explanation

People are said to be economically active if they are in the labour force; that is, working or

seeking to work. A, B and D are economically inactive.

What is the cause of frictional unemployment?

• A lack of total demand

• The introduction of new technology

• A lack of information about job vacancies

• Domestic consumers buying more imports

Answer explanation

Frictional unemployment occurs when people are in-between jobs sometimes because of a lack of information about job vacancies. A is a cause of cyclical unemployment and B and D are a cause of structural unemployment.

Which factor may cause official unemployment figures to understate the actual level of unemployment?

• People being ashamed to admit they are unemployed

• People being prepared to cheat the system

• People who have found employment since the measure was taken

• People working in the informal economy

Answer explanation

If people are ashamed to admit they are unemployed, they will not register as unemployed and this will mean the official figures will give a lower than accurate figure for unemployment. B, C and D would all give an artificially high figure for unemployment.

What type of unemployment is caused by workers changing jobs?

• Cyclical

• Frictional

• Regional

• Structural

Answer explanation

As noted before frictional unemployment arises when people have left one job but have not yet taken up another job. A occurs because of a lack of aggregate demand and C and D because of changes in the structure of the economy.