Self Assessment Topic 5

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Self-assessment for topic 5:

1. Which of the following fiscal policy measures would have an expansionary and which a contractionary impact upon the level of economic activity?

(a) A cut in direct taxation. ....................................................expansionary

(b) A rise in personal allowances. .....................................................expansionary

(c) An increase in government borrowing. ................ contractionary

(d) A reduction in social security benefits. ................... contractionary

(e) A move from a budget deficit to a budget surplus. .....................expansionary

2. One problem with fiscal policy is that it can lead to ‘crowding out’. Crowding out is defined as:

A. increased public expenditure replacing private-sector expenditure.

3. On most days, there is a shortage of liquidity in the banking system. Which ONE of the following open market operations can a central bank conduct to maintain interest rates at the level chosen by the Monetary Policy Committee?

C. It buys bonds from the commercial banks at its chosen interest rate on condition that the banks must buy them back again later from the central bank.

4. Assume that there is a substantial rise in oil and other commodity prices and inflation is forecast to rise considerably above the 2 per cent target. As a result the central bank raises interest rates. Which of the following might be a consequence of such a policy?

(a) Reduced investment.....................................Yes

(b) A deteriorating competitive position overseas..................................Yes

(c) Increased costs of production ..................................... No

(d) Slower growth in potential output .............................................................Yes

e) Increased cost to the government in servicing the national debt ...............................No

(f) Increased cost-push...
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