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practice questions.

The document consists of three parts: True/False questions assessing economic concepts, short answer questions requiring explanations of economic scenarios using the AD-AS model, and calculation questions involving the determination of equilibrium output based on given consumption, investment, government spending, taxes, and net exports. Each section tests understanding of economic principles and their application in different contexts. The overall focus is on the impact of fiscal and monetary policies on aggregate demand and economic output.

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7 views

practice questions.

The document consists of three parts: True/False questions assessing economic concepts, short answer questions requiring explanations of economic scenarios using the AD-AS model, and calculation questions involving the determination of equilibrium output based on given consumption, investment, government spending, taxes, and net exports. Each section tests understanding of economic principles and their application in different contexts. The overall focus is on the impact of fiscal and monetary policies on aggregate demand and economic output.

Uploaded by

sandrahu2806
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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PART I: TRUE/FALSE QUESTIONS (5 Marks)

State whether the following statements are True or False. Justify your answer briefly.

1. An increase in interest rates tends to reduce consumption and investment, leading to


lower aggregate demand.
2. In the long run, economic growth depends primarily on capital accumulation and labor
force growth.
3. A trade deficit indicates that a country is exporting more goods and services than it
imports.
4. Contractionary fiscal policy is used to reduce inflation and may lead to slower economic
growth.
5. Lowering the reserve requirement increases the potential for banks to create more money
through lending.
6. Even at full employment, the unemployment rate may be above zero due to frictional and
structural factors.
7. An appreciation of a country’s currency typically leads to a decrease in net exports.
8. In an open economy, saving must always equal investment.
9. A low marginal propensity to consume (MPC) results in a smaller effect of increase in
income to aggregate demand.
10. Buying government securities in the open market is an expansionary monetary policy that
increases the money supply.

PART II: SHORT ANSWER QUESTIONS (2 Marks)

Answer the following questions briefly using diagrams where applicable. Assume the economy
is operate at the long run equilibrium.

Question 1

1. Consumer confidence falls sharply. The economy is initially at potential output.


o Explain the short-run effects on output and price level using the AD-AS model.
2. If actual output is below potential output and unemployment is rising, describe how
monetary policy could be used to return the economy to full employment. Use the AD-
AS diagram to support your explanation.

Question 2.

1. If the cost of production raises due to raise in natural resource price. Explain the short-run
effect on output and price level using the AD-AS model.
2. How government can use monetary policy to control the price level from the above event.
Use the AD-AS diagram to support your explanation.
PART III: CALCULATION QUESTIONS (3 Marks)

Use the following data:

 Consumption (C) = 180 + 0.6(Y – T)


 Investment (I) = 160
 Government Spending (G) = 240
 Taxes (T) = 0.2Y
 Net Exports (NX) = 50
 Aggregate Demand (AD): Y = C + I + G + NX

Questions:

1. Calculate the equilibrium level of output Y.


2. If taxes are increased such that T=0.25Y, what is the new equilibrium output?
3. How might this tax increase affect aggregate demand and consumer spending? Briefly
explain.

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