CIMA BA1 · Chapter 2
Macroeconomic policy and the business cycle MCQs with Answers
10 multiple-choice questions on Macroeconomic policy and the business cycle for CIMA BA1 Fundamentals of Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT normally regarded as one of the main objectives of government macroeconomic policy?
- A) Achieving a low and stable rate of inflation
- B) Achieving sustainable economic growth
- C) Achieving a high level of employment
- D) Maximising the profits earned by state-owned enterprises
Show answer & explanation
Answer: D) Maximising the profits earned by state-owned enterprises
The usual macroeconomic objectives are sustainable growth, low unemployment, stable prices and a satisfactory balance of payments position. The profitability of individual state enterprises is a microeconomic or organisational matter, not a macroeconomic objective.
Question 2
Which of the following combinations represents an expansionary fiscal policy?
- A) Raising the central bank's policy interest rate
- B) Selling government bonds to the banking system
- C) Reducing income tax rates and increasing government spending
- D) Increasing the rate of sales tax and cutting public investment
Show answer & explanation
Answer: C) Reducing income tax rates and increasing government spending
Fiscal policy uses taxation and government spending. Cutting taxes and raising spending increase aggregate demand, so the stance is expansionary. Interest rate changes and bond sales are monetary policy tools, and higher taxes with lower spending is contractionary.
Question 3
A sharp rise in the world price of imported oil causes the general price level in an economy to increase. This is best described as:
- A) Demand-pull inflation
- B) Cost-push inflation
- C) Deflation
- D) Disinflation
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Answer: B) Cost-push inflation
Cost-push inflation arises when increases in costs of production (here imported energy) are passed on to customers as higher prices. Demand-pull inflation results from aggregate demand exceeding the economy's productive capacity. Deflation is a falling price level and disinflation is a falling rate of inflation.
Question 4
Workers in a region lose their jobs because the local manufacturing industry has been replaced by automated production elsewhere, and their skills are not suited to the new jobs available. This is an example of:
- A) Structural unemployment
- B) Frictional unemployment
- C) Cyclical (demand-deficient) unemployment
- D) Seasonal unemployment
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Answer: A) Structural unemployment
Structural unemployment arises from long-term changes in the pattern of demand or technology, leaving a mismatch between workers' skills or location and the available jobs. Frictional unemployment is short-term between jobs, cyclical unemployment is caused by a general lack of demand in a downturn and seasonal unemployment follows regular seasonal patterns.
Question 5
The original Phillips curve suggested that:
- A) Higher inflation is always associated with higher unemployment
- B) Unemployment is determined only by the size of the budget deficit
- C) Inflation is caused only by growth in the money supply
- D) There is a short-run trade-off between the rate of inflation and the rate of unemployment
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Answer: D) There is a short-run trade-off between the rate of inflation and the rate of unemployment
The Phillips curve showed an inverse relationship: lower unemployment tended to be associated with higher wage and price inflation, and vice versa. The monetarist view that inflation results from money supply growth is a separate theory.
Question 6
Which of the following is most likely to be observed during the recession phase of the business (trade) cycle?
- A) Strong inflationary pressure and labour shortages
- B) Rapidly rising tax receipts for the government
- C) Business investment falls and unemployment rises
- D) A sharp increase in spending on imports
Show answer & explanation
Answer: C) Business investment falls and unemployment rises
In a recession, output and incomes fall, so firms cut investment and employment. Tax receipts tend to fall, import spending falls with incomes and inflationary pressure is weak. Labour shortages and inflation are features of a boom.
Question 7
Which of the following is an example of an automatic stabiliser?
- A) A one-off increase in road building approved by parliament
- B) A progressive income tax system combined with unemployment benefits
- C) A reduction in the policy interest rate by the central bank
- D) A government decision to devalue the currency
Show answer & explanation
Answer: B) A progressive income tax system combined with unemployment benefits
Automatic stabilisers change without any new policy decision. As incomes fall in a downturn, progressive tax receipts fall and benefit payments rise, cushioning demand; the reverse happens in a boom. The other options are discretionary policy actions.
Question 8
A central bank raises its policy interest rate. Assuming other things remain equal, which of the following is the most likely consequence?
- A) The domestic currency tends to appreciate, making exports less price-competitive
- B) Borrowing becomes cheaper, so consumer spending on durable goods rises
- C) Asset prices such as house and share prices tend to rise
- D) Investment by firms rises because the return on saving increases
Show answer & explanation
Answer: A) The domestic currency tends to appreciate, making exports less price-competitive
Higher interest rates attract inflows of short-term capital, increasing demand for the currency so it tends to appreciate; exports become dearer to foreign buyers. Higher rates also make borrowing more expensive, reduce asset prices and discourage investment.
Question 9
Which of the following is an example of a supply-side policy?
- A) Cutting interest rates to stimulate consumer borrowing
- B) Raising welfare payments to boost aggregate demand
- C) Allowing the exchange rate to depreciate to increase exports
- D) Reforming labour markets and expanding training to raise productivity
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Answer: D) Reforming labour markets and expanding training to raise productivity
Supply-side policies aim to increase the productive capacity of the economy (shifting aggregate supply), for example by improving labour skills, flexibility and incentives. The other options work mainly through aggregate demand.
Question 10
The term 'crowding out' in macroeconomics refers to:
- A) Imports displacing domestically produced goods because of an overvalued currency
- B) Large firms forcing smaller competitors out of a market
- C) Increased government borrowing pushing up interest rates and so reducing private sector investment
- D) Rising population reducing income per head
Show answer & explanation
Answer: C) Increased government borrowing pushing up interest rates and so reducing private sector investment
Crowding out occurs when government borrowing to finance spending competes with the private sector for loanable funds. Interest rates rise and some private investment is displaced, reducing the net effect of the fiscal expansion on aggregate demand.