Chapter 7 - External Economic Influences

What is meant by 'inflation' in an economy?

• An increase in unemployment
• A fall in consumer demand
• A general increase in prices
• A decrease in wages

Answer explanation

Inflation means a general rise in prices, reducing purchasing power.

Which policy involves government spending and taxation?

• Monetary policy
• Fiscal policy
• Supply-side policy
• Exchange rate policy

Answer explanation

Fiscal policy focuses on taxation and government spending.

What happens during the 'boom' phase of the business cycle?

• Rising unemployment and low demand
• Falling prices and increased investment
• High demand, rising prices, and low unemployment
• Stable GDP and low inflation

Answer explanation

A boom is characterised by strong growth, low unemployment, and rising prices.

How does a rise in interest rates typically affect consumers?

• Encourages more borrowing
• Makes saving less attractive
• Discourages borrowing and reduces spending
• Leads to lower inflation immediately

Answer explanation

Higher interest rates discourage borrowing, reducing consumer demand.

Which of these is an example of a supply-side policy?

• Increasing VAT
• Cutting interest rates
• Subsidising worker training
• Printing more money

Answer explanation

Subsidising training improves labour skills – a supply-side strategy.

What is the main goal of monetary policy?

• Managing exports
• Controlling inflation through interest rates
• Providing government subsidies
• Changing tax brackets

Answer explanation

Monetary policy uses interest rates to target inflation and economic stability.

Which policy tool is directly controlled by the central bank?

• Corporate tax levels
• Welfare payments
• Interest rates
• Minimum wage laws

Answer explanation

Central banks set base interest rates to influence borrowing and inflation.

Currency appreciation helps which type of businesses?

• Exporters
• Domestic tourism providers
• Importers
• Firms with high local labour costs

Answer explanation

Appreciation lowers import costs, helping businesses that rely on imports.

What is a common effect of deflation?

• Consumers rush to buy before prices rise
• Higher sales and confidence
• Delays in spending as people expect lower prices
• Increased investment and profits

Answer explanation

Deflation discourages spending, as consumers wait for further price drops.

Which of these is most likely during a slump?

• Rising wages
• Increased consumer demand
• Falling GDP and high unemployment
• Rapid growth in output

Answer explanation

Slumps are periods of falling output and rising unemployment.