CIMA BA1 · Chapter 1

National income and the macroeconomy MCQs with Answers

10 multiple-choice questions on National income and the macroeconomy for CIMA BA1 Fundamentals of Business Economics. Try each one before revealing the answer and explanation.

1. Question 1

   In the circular flow of income model, which of the following is an injection into the flow of income?

   • A) Household saving
   • B) Government spending on goods and services
   • C) Taxation of incomes
   • D) Spending on imports
   Show answer & explanation

   Answer: B) Government spending on goods and services

   Injections add spending to the circular flow that does not originate from domestic households' consumption: investment, government spending and exports. Saving, taxation and imports are withdrawals (leakages) because they take income out of the flow.

2. Question 2

   Which of the following is a withdrawal (leakage) from the circular flow of income?

   • A) Spending on imported goods
   • B) Exports of goods to foreign buyers
   • C) Investment by firms in new machinery
   • D) Government spending on infrastructure
   Show answer & explanation

   Answer: A) Spending on imported goods

   Imports are a withdrawal because the spending flows to foreign producers rather than domestic firms. Exports, investment and government spending are injections into the circular flow.

3. Question 3

   Gross national product (GNP) is best defined as:

   • A) Gross domestic product plus capital consumption (depreciation)
   • B) Gross domestic product minus indirect taxes plus subsidies
   • C) Gross domestic product minus net exports
   • D) Gross domestic product plus net property income from abroad
   Show answer & explanation

   Answer: D) Gross domestic product plus net property income from abroad

   GDP measures output produced within the country's borders. GNP (gross national income) adds net income earned by residents from assets owned abroad, i.e. property income received from abroad less property income paid abroad.

4. Question 4

   An economy has the following data for a year ($bn): Consumer expenditure 420 Investment 110 Government spending 150 Exports 95 Imports 120 What is gross domestic product at market prices using the expenditure approach?

   • A) $895bn
   • B) $775bn
   • C) $655bn
   • D) $680bn
   Show answer & explanation

   Answer: C) $655bn

   Expenditure GDP = C + I + G + (X - M) = 420 + 110 + 150 + (95 - 120) = $655bn. Imports must be deducted because they are spending on output produced abroad.

5. Question 5

   GDP at market prices is $900bn. Indirect taxes are $120bn and subsidies are $30bn. What is GDP at basic prices (factor cost)?

   • A) $990bn
   • B) $810bn
   • C) $750bn
   • D) $870bn
   Show answer & explanation

   Answer: B) $810bn

   Market prices include indirect taxes and are reduced by subsidies. To convert to factor cost, remove taxes and add back subsidies: 900 - 120 + 30 = $810bn.

6. Question 6

   In a closed economy with no government sector, the marginal propensity to consume is 0.8. Investment increases by $40m. By how much will equilibrium national income increase?

   • A) $200m
   • B) $32m
   • C) $50m
   • D) $160m
   Show answer & explanation

   Answer: A) $200m

   The multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5. The increase in national income = 5 x $40m = $200m.

7. Question 7

   In an open economy with a government sector, the marginal propensity to save is 0.1, the marginal rate of taxation is 0.25 and the marginal propensity to import is 0.15, each expressed as a proportion of national income. Government spending rises by $60bn. What is the resulting increase in national income?

   • A) $600bn
   • B) $240bn
   • C) $30bn
   • D) $120bn
   Show answer & explanation

   Answer: D) $120bn

   Total marginal propensity to withdraw = 0.1 + 0.25 + 0.15 = 0.5. Multiplier = 1 / 0.5 = 2. Increase in national income = 2 x $60bn = $120bn.

8. Question 8

   Nominal GDP grows by 7% in a year while the GDP deflator rises by 3%. Using the exact method (dividing by the change in the deflator, not the approximation of subtracting the inflation rate from nominal growth), what is the growth in real GDP (to one decimal place)?

   • A) 4.0%
   • B) 10.2%
   • C) 3.9%
   • D) 10.0%
   Show answer & explanation

   Answer: C) 3.9%

   Real growth = (1 + nominal growth) / (1 + inflation) - 1 = 1.07 / 1.03 - 1 = 0.0388, i.e. 3.9%. Simply subtracting inflation (7% - 3% = 4.0%) is only an approximation.

9. Question 9

   Which of the following would be included in the calculation of gross domestic product?

   • A) State retirement pensions paid to retired people
   • B) Salaries paid to nurses employed in a state-funded hospital
   • C) The sale of a second-hand car between two private individuals
   • D) The purchase of existing shares on the stock exchange
   Show answer & explanation

   Answer: B) Salaries paid to nurses employed in a state-funded hospital

   GDP measures the value of current production. Nurses' salaries are payment for current services and are included. Pensions are transfer payments with no corresponding output, second-hand sales were counted when first produced, and share purchases are transfers of ownership of financial assets.

10. Question 10

    In a closed economy, the consumption function is C = 40 + 0.75Y, investment is $60bn and government spending is $100bn. Ignoring taxation, what is equilibrium national income?

    • A) $800bn
    • B) $266.7bn
    • C) $200bn
    • D) $150bn
    Show answer & explanation

    Answer: A) $800bn

    In equilibrium Y = C + I + G, so Y = 40 + 0.75Y + 60 + 100. Therefore Y - 0.75Y = 200, so 0.25Y = 200 and Y = 200 / 0.25 = $800bn.