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CHAPTER 19
Go to memorandum
Answer the following questions by selecting the appropriate answer from the list below.
Question 1
Which one of the following statements is correct?
A. The money market is one of the most important markets in the real sector of the economy.
B. Monetarists believe that an increase in money supply will increase output in the long run.
C. An increase in money supply is one of the main instruments of fiscal policy.
D. Monetarists would recommend that money supply should be increased at approximately the
same rate as real production.
Question 2
Which one of the following statements is incorrect?
A. The aggregate AD-AS model seeks to explain the general price level and the aggregate
production of goods and services.
B. The aggregate demand curve shows the aggregate quantities that are demanded at different
price levels.
C. If aggregate supply falls, there will be an upward pressure on prices, ceteris paribus.
D. In terms of the AD-AS model, if aggregate demand falls, with no change in aggregate supply,
unemployment will tend to decrease.
E. An increase in investment spending will result in a rightward shift of the AD curve.
Question 3
Which one of the following statements is correct?
A. The aggregate demand curve (AD curve) can be shifted by monetary as well as fiscal policy
measures.
B. A restrictive fiscal policy will result in a rightward shift of the aggregate demand curve.
C. A general increase in wages in the economy will, ceteris paribus, shift the aggregate supply
curve downward (to the right).
D. A supply shock results in a simultaneous increase in prices and production in the economy.
E. None of the above statements is correct.
Question 5
The policy recommendations of supply-side economists include that:
A. government needs to increase the quantity of money to bring about full employment.
B. the supply of goods and services produced by the government needs to be increased.
C. the government should introduce specific regulations to see that the correct type of
investment is undertaken.
D. government should reduce its spending and general involvement in the economy.
E. taxes should be increased to provide for a greater supply of government services to the
poor.
Consider the following diagram and answer Questions (a) and (b).
Question (a)
The immediate effect of a decrease in government expenditure will be to:
A. move the AD curve to the left.
B. move the AD curve to the right.
C. move the AS curve to the left.
D. move the AS curve to the right.
E. leave the curves unchanged.
Question (b)
If South Africa were to discover a plentiful supply of cheap oil, this would:
Consider the following diagram and answer Questions (a) and (b).
Question (a)
Which of the following statements is correct?
Question 8
Classical economists who preceded Keynesians believed that:
A. increases in the quantity of money could alter the level of production in the economy.
B. as demand increases, supply increases.
C. economies that do not suffer from government interference will reach full employment
equilibrium.
D. increases in government spending are necessary during times of recession.
Question 9
According to the supply-siders, tax cuts announced by the Minister of Finance:
A. result in higher saving and work effort, which will lead to greater production in the
economy.
B. increase inflation in South Africa.
C. reduce inflation in South Africa.
D. cause both A and C to occur.
Question 10
Stagflation refers to a situation where:
A. an increase in equilibrium income and the price level in the short run.
B. a decrease in equilibrium income and the price level in the short run.
C. an increase in equilibrium income and no change in the equilibrium price level.
D. a decrease in equilibrium income and an increase in the equilibrium price level.
E. an increase in equilibrium income and a decrease in the equilibrium price level.
Question 12
The policy recommendations of the supply-side economists would differ from those of Keynesians as
follows:
A. Keynesians believe that government expenditure should be increased to bring about full
employment, whereas supply-siders believe that government should increase the quantity
of money.
B. Keynesians believe that government often needs to manipulate aggregate demand, whereas
supply-siders believe that it should manipulate aggregate supply by taking over the
production of key goods and services.
C. Keynesians believe that government should control the level of prices whereas supply-siders
do not.
D. Keynesians believe that government needs to intervene in the economy to maintain
stability, whereas supply-siders do not.
E. Keynesians believe that the correct way to stabilise the economy is through the use of fiscal
policy whereas supply-siders believe the appropriate instrument is monetary policy.
Question 13
Which of the following features is not consistent with supply-side theory?
A. Deregulation
B. Privatisation
C. Reductions in marginal tax rates
D. Expansionary fiscal policy
i. Keynesians believe in the use of macroeconomic tools to stabilise the economy whereas
the others do not.
ii. Monetarists believe that monetary policy is more effective than fiscal policy in
eliminating unemployment, whereas Keynesians believe the opposite.
iii. Supply-siders believe that incentives to work, save and invest are more important than
macroeconomic demand manipulation in managing the economy.
iv. The classical economists believed that the monetary and real sides of the economy
were entirely separate, whereas the other schools believe that the monetary sector can
affect the real economy, at least in the short run.
A. i
B. i and ii
C. i, iii and iv
D. ii, iii and iv
E. i, ii, iii and iv
Question 15
Indicate which one of the following statements is false
A. In the AD-AS model prices are regarded as variable.
B. In the AD-AS model wages have no impact on the level of output.
C. In the AD-AS model the impact of monetary policy on the level of output can be analysed.
D. In the AD-AS model the level of economic activity (output) is determined by the interaction
of aggregate demand and supply.
Question 16
Which one of the following statements is true?
A. In the AD-AS model the price level refers to the general level of prices.
B. In the AD-AS model the derivation of the aggregate demand curve and the aggregate supply
curve involves the summation of market demand and supply curves for different goods and
services in the economy.
C. In the AD-AS model it is assumed that aggregate supply adjusts passively to aggregate
demand.
Question 18
Which one of the following statements is incorrect?
Question 19
Which one of the following statements is incorrect?.
A. there is an inverse relationship between the general price level and the volume of goods
and services demanded.
B. there is a positive relationship between the general price level and the volume of goods
and services supplied.
C. the volume of goods and services demanded decreases as the general price level
decreases.
D. the volume of goods and services supplied increases as the general price level increases.
E. the AD curve has essentially the same shape as any normal demand curve.
Question 20
Which one of the following is not a component of aggregate demand in the economy?
Question 22
Which one of the following will give rise to a rightward shift of the AD curve?
Question 23
Which one of the following will give rise to an increase in aggregate demand, illustrated by a
rightward shift of the AD curve?
Question 24
Which one of the following statements about the AS curve is incorrect?
A. An increase in wages.
B. A decrease in wages.
C. An increase in productivity.
D. A decrease in productivity.
E. An increase in spending by households.
Question 26
Which one of the following will give rise to an increase in aggregate supply, illustrated by a rightward
shift of the AS curve?
A. An increase in wages.
B. An increase in productivity.
C. An increase in interest rates.
D. An increase in the price of oil.
E. An increase in government spending.
Question 27
Which one of the following will give rise to a decrease in aggregate supply, illustrated by a leftward
shift of the AS curve?
Question 28
Which one of the following statements is incorrect?
Question 30
Which one of the following statements is incorrect?
Question 31
In the AD-AS model a simultaneous increase in government spending and increase in the price of oil
will lead to:
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the price
level.
E. a decrease in the level of production and income and an indeterminate change in the price
level.
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the price
level.
E. a decrease in the level of production and income and an indeterminate change in the price
level.
Question 33
In the AD-AS model a simultaneous decrease in wages and decrease in consumption spending by
households will lead to:
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the price
level.
E. a decrease in the level of production and income and an indeterminate change in the price
level.
Question 34
A decrease in the price level will:
A. shift the AS curve to the left.
B. shift the AS curve to the right.
C. shift the AD curve to the left.
D. shift the AD curve to the right.
E. leave both the AD curve and the AS curve unchanged.
Question 36
The monetary transmission mechanism:
Question 37
Which one of the following statements is incorrect?
A. When the SARB changes the repo rate, all other short-term interest rates tend to move in
the same direction.
B. In the models we use a single interest rate to represent all interest rates in the economy.
C. A key element of the monetary transmission mechanism is the relationship between the
interest rate and investment spending.
D. The money stock is the most important element of the monetary transmission mechanism.
E. In the AD-AS model the relative impact of a change in the monetary sector on the price
level and the level of total production and income depends on aggregate supply conditions.
In terms of the AD-AS model a decrease in the interest rate leads to a(n) _______________ in
investment spending, a(n) _______________ in aggregate spending, a(n) ______________ in
aggregate demand and, eventually to a(n) ________________ in total production and (or) a(n)
_______________ in the price level.
Question 39
Which one of the following is not a channel in the broad monetary transmission mechanism?
A. The money stock channel.
B. The interest rate channel.
C. The credit channel.
D. The exchange rate channel.
E. The asset price channel.
Question 40
When the SARB adjusts the repo rate, the change in interest rates tends to affect investment
spending and consumption spending in the economy. To which of the channels of the broad
monetary transmission mechanism does this effect belong to?
Question 41
When the SARB adjusts the repo rate, this tends to affect share prices and property prices. This
impact forms part of which channel of the broad monetary transmission mechanism?
Question 43
When the SARB adjusts the repo rate, this may eventually impact on the volume of exports or the
volume of imports. Through which channel of the broad monetary transmission mechanism is this
impact possible?
Question 44
Which one of the following statements is incorrect?
An expansionary monetary policy:
Question 45
Which one of the following statements is incorrect?
A. Recognition lag.
B. Macroeconomic lag.
C. Impact lag.
D. Decision lag.
E. Implementation lag.
Question 47
The fact that the first (provisional) estimates of GDP become available only after a lag of about 6
weeks, forms part of the:
A. recognition lag.
B. macroeconomic lag.
C. impact lag.
D. decision lag.
E. implementation lag.
Question 48
The fact that income tax rates are adjusted annually only, forms part of the:
A. recognition lag.
B. macroeconomic lag.
C. impact lag.
D. decision lag.
E. implementation lag.
Question 49
Which one of the following statements is incorrect?
A. The recognition lag is shorter for monetary policy than for fiscal policy.
B. The decision lag is shorter for monetary policy than for fiscal policy.
C. The implementation lag is shorter for monetary policy than for fiscal policy.
D. The impact lag is longer for monetary policy than for fiscal policy.
E. The impact lag is sometimes also called the outside lag.
A. Monetary policy actions tend to take a long time to have their full impact on the economy.
B. Decisions on fiscal policy can be taken very quickly.
C. Monetary policy is generally more suited to dampening an overheated economy than to
stimulating a depressed economy.
D. Fiscal policy tends to have a shorter impact lag than monetary policy.
E. Because there are various lags associated with monetary and fiscal policy, timing is of the
utmost importance in macroeconomic policy.
Question 51
Which one of the following statements is incorrect?
A. According to Say’s law, there will never be insufficient demand at the macroeconomic
level, since supply creates its own demand.
B. According to John Maynard Keynes, aggregate demand is the driving force behind
aggregate economic activity.
C. According to the monetarists, inflation is the result of excessive increases in the quantity of
money.
D. The monetarists believe that extensive government intervention is required to stabilise the
economy.
E. The monetarists believe that the private sector is inherently stable.
Question 52
Which one of the following economists will prescribe active, discretionary fiscal policy measures to
stabilise the economy?
A. A classical economist.
B. A Keynesian economist.
C. A monetarist.
D. A supply-side economist.
E. A new classical economist.
A. A classical economist.
B. A monetarist.
C. A supply-side economist.
D. A new classical economist.
E. A new Keynesian economist.
MEMORANDUM
Go back to Multiple Choice Questions
Answer the following questions by selecting the appropriate answer from the list below.
Question 1
Which one of the following statements is correct?
A. The money market is one of the most important markets in the real sector of the economy.
B. Monetarists believe that an increase in money supply will increase output in the long run.
C. An increase in money supply is one of the main instruments of fiscal policy.
D. Monetarists would recommend that money supply should be increased at approximately the
same rate as real production.
Question 2
Which one of the following statements is incorrect?
A. The aggregate AD-AS model seeks to explain the general price level and the aggregate
production of goods and services.
B. The aggregate demand curve shows the aggregate quantities that are demanded at different
price levels.
C. If aggregate supply falls, there will be an upward pressure on prices, ceteris paribus.
D. In terms of the AD-AS model, if aggregate demand falls, with no change in aggregate supply,
unemployment will tend to decrease.
E. An increase in investment spending will result in a rightward shift of the AD curve.
A. The aggregate demand curve (AD curve) can be shifted by monetary as well as fiscal policy
measures.
B. A restrictive fiscal policy will result in a rightward shift of the aggregate demand curve.
C. A general increase in wages in the economy will, ceteris paribus, shift the aggregate supply
curve downward (to the right).
D. A supply shock results in a simultaneous increase in prices and production in the economy.
E. None of the above statements is correct.
Question 4
According to supply-side theorists, the aggregate supply curve will shift to the right when:
A. the quantity of money increases.
B. marginal tax rates rise.
C. government spending on on-the-job training increases.
D. unemployment benefits are increased.
E. the government’s education budget is cut.
Question 5
The policy recommendations of supply-side economists include that:
A. government needs to increase the quantity of money to bring about full employment.
B. the supply of goods and services produced by the government needs to be increased.
C. the government should introduce specific regulations to see that the correct type of
investment is undertaken.
D. government should reduce its spending and general involvement in the economy.
E. taxes should be increased to provide for a greater supply of government services to the
poor.
Consider the following diagram and answer Questions (a) and (b).
Question (a)
The immediate effect of a decrease in government expenditure will be to:
A. move the AD curve to the left.
B. move the AD curve to the right.
C. move the AS curve to the left.
D. move the AS curve to the right.
E. leave the curves unchanged.
Question (b)
If South Africa were to discover a plentiful supply of cheap oil, this would:
Consider the following diagram and answer Questions (a) and (b).
Question (a)
Which of the following statements is correct?
Question 8
Classical economists who preceded Keynesians believed that:
A. increases in the quantity of money could alter the level of production in the economy.
B. as demand increases, supply increases.
C. economies that do not suffer from government interference will reach full employment
equilibrium.
D. increases in government spending are necessary during times of recession.
Question 9
According to the supply-siders, tax cuts announced by the Minister of Finance:
A. result in higher saving and work effort, which will lead to greater production in the
economy.
B. increase inflation in South Africa.
C. reduce inflation in South Africa.
D. cause both A and C to occur.
Question 10
Stagflation refers to a situation where:
A. an increase in equilibrium income and the price level in the short run.
B. a decrease in equilibrium income and the price level in the short run.
C. an increase in equilibrium income and no change in the equilibrium price level.
D. a decrease in equilibrium income and an increase in the equilibrium price level.
E. an increase in equilibrium income and a decrease in the equilibrium price level.
Question 12
The policy recommendations of the supply-side economists would differ from those of Keynesians as
follows:
A. Keynesians believe that government expenditure should be increased to bring about full
employment, whereas supply-siders believe that government should increase the quantity
of money.
B. Keynesians believe that government often needs to manipulate aggregate demand, whereas
supply-siders believe that it should manipulate aggregate supply by taking over the
production of key goods and services.
C. Keynesians believe that government should control the level of prices whereas supply-siders
do not.
D. Keynesians believe that government needs to intervene in the economy to maintain
stability, whereas supply-siders do not.
E. Keynesians believe that the correct way to stabilise the economy is through the use of fiscal
policy whereas supply-siders believe the appropriate instrument is monetary policy.
Question 13
Which of the following features is not consistent with supply-side theory?
A. Deregulation
B. Privatisation
C. Reductions in marginal tax rates
D. Expansionary fiscal policy
iii. Supply-siders believe that incentives to work, save and invest are more important
than macroeconomic demand manipulation in managing the economy.
iv. The classical economists believed that the monetary and real sides of the economy
were entirely separate, whereas the other schools believe that the monetary sector
can affect the real economy, at least in the short run.
A. i
B. i and ii
C. i, iii and iv
D. ii, iii and iv
E. i, ii, iii and iv
Question 15
Indicate which one of the following statements is false
A. In the AD-AS model prices are regarded as variable.
B. In the AD-AS model wages have no impact on the level of output.
C. In the AD-AS model the impact of monetary policy on the level of output can be
analysed.
D. In the AD-AS model the level of economic activity (output) is determined by the
interaction of aggregate demand and supply.
Question 16
Which one of the following statements is true?
A. In the AD-AS model the price level refers to the general level of prices.
B. In the AD-AS model the derivation of the aggregate demand curve and the aggregate
supply curve involves the summation of market demand and supply curves for different
goods and services in the economy.
C. In the AD-AS model it is assumed that aggregate supply adjusts passively to aggregate
demand.
Question 18
Which one of the following statements is incorrect?
Question 19
Which one of the following statements is incorrect?.
A. there is an inverse relationship between the general price level and the volume of goods
and services demanded.
B. there is a positive relationship between the general price level and the volume of goods
and services supplied.
C. the volume of goods and services demanded decreases as the general price level
decreases.
D. the volume of goods and services supplied increases as the general price level increases.
E. the AD curve has essentially the same shape as any normal demand curve.
Question 20
Which one of the following is not a component of aggregate demand in the economy?
Question 22
Which one of the following will give rise to a rightward shift of the AD curve?
Question 23
Which one of the following will give rise to an increase in aggregate demand, illustrated by a
rightward shift of the AD curve?
Question 24
Which one of the following statements about the AS curve is incorrect?
A. An increase in wages.
B. A decrease in wages.
C. An increase in productivity.
D. A decrease in productivity.
E. An increase in spending by households.
Question 26
Which one of the following will give rise to an increase in aggregate supply, illustrated by a rightward
shift of the AS curve?
A. An increase in wages.
B. An increase in productivity.
C. An increase in interest rates.
D. An increase in the price of oil.
E. An increase in government spending.
Question 27
Which one of the following will give rise to a decrease in aggregate supply, illustrated by a leftward
shift of the AS curve?
Question 28
Which one of the following statements is incorrect?
Question 30
Which one of the following statements is incorrect?
Question 31
In the AD-AS model a simultaneous increase in government spending and increase in the price of oil
will lead to:
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the
price level.
E. a decrease in the level of production and income and an indeterminate change in the
price level.
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the
price level.
E. a decrease in the level of production and income and an indeterminate change in the
price level.
Question 33
In the AD-AS model a simultaneous decrease in wages and decrease in consumption spending by
households will lead to:
A. a simultaneous increase in the price level and in the level of production and income.
B. an increase in the price level and an indeterminate change in the level of production and
income.
C. a decrease in the price level and an indeterminate change in the level of production and
income.
D. an increase in the level of production and income and an indeterminate change in the
price level.
E. a decrease in the level of production and income and an indeterminate change in the
price level.
Question 34
A decrease in the price level will:
A. shift the AS curve to the left.
B. shift the AS curve to the right.
C. shift the AD curve to the left.
D. shift the AD curve to the right.
E. leave both the AD curve and the AS curve unchanged.
Question 36
The monetary transmission mechanism:
Question 37
Which one of the following statements is incorrect?
A. When the SARB changes the repo rate, all other short-term interest rates tend to move
in the same direction.
B. In the models we use a single interest rate to represent all interest rates in the economy.
C. A key element of the monetary transmission mechanism is the relationship between the
interest rate and investment spending.
D. The money stock is the most important element of the monetary transmission
mechanism.
E. In the AD-AS model the relative impact of a change in the monetary sector on the price
level and the level of total production and income depends on aggregate supply
conditions.
In terms of the AD-AS model a decrease in the interest rate leads to a(n) _______________ in
investment spending, a(n) _______________ in aggregate spending, a(n) ______________ in
aggregate demand and, eventually to a(n) ________________ in total production and (or) a(n)
_______________ in the price level.
Question 39
Which one of the following is not a channel in the broad monetary transmission mechanism?
A. The money stock channel.
B. The interest rate channel.
C. The credit channel.
D. The exchange rate channel.
E. The asset price channel.
Question 40
When the SARB adjusts the repo rate, the change in interest rates tends to affect investment
spending and consumption spending in the economy. To which of the channels of the broad
monetary transmission mechanism does this effect belong to?
Question 41
When the SARB adjusts the repo rate, this tends to affect share prices and property prices. This
impact forms part of which channel of the broad monetary transmission mechanism?
Question 43
When the SARB adjusts the repo rate, this may eventually impact on the volume of exports or the
volume of imports. Through which channel of the broad monetary transmission mechanism is this
impact possible?
Question 44
Which one of the following statements is incorrect?
An expansionary monetary policy:
Question 45
Which one of the following statements is incorrect?
A. Recognition lag.
B. Macroeconomic lag.
C. Impact lag.
D. Decision lag.
E. Implementation lag.
Question 47
The fact that the first (provisional) estimates of GDP become available only after a lag of about 6
weeks, forms part of the:
A. recognition lag.
B. macroeconomic lag.
C. impact lag.
D. decision lag.
E. implementation lag.
Question 48
The fact that income tax rates are adjusted annually only, forms part of the:
A. recognition lag.
B. macroeconomic lag.
C. impact lag.
D. decision lag.
E. implementation lag.
Question 49
Which one of the following statements is incorrect?
A. The recognition lag is shorter for monetary policy than for fiscal policy.
B. The decision lag is shorter for monetary policy than for fiscal policy.
C. The implementation lag is shorter for monetary policy than for fiscal policy.
D. The impact lag is longer for monetary policy than for fiscal policy.
E. The impact lag is sometimes also called the outside lag.
A. Monetary policy actions tend to take a long time to have their full impact on the
economy.
B. Decisions on fiscal policy can be taken very quickly.
C. Monetary policy is generally more suited to dampening an overheated economy than to
stimulating a depressed economy.
D. Fiscal policy tends to have a shorter impact lag than monetary policy.
E. Because there are various lags associated with monetary and fiscal policy, timing is of
the utmost importance in macroeconomic policy.
Question 51
Which one of the following statements is incorrect?
A. According to Say’s law, there will never be insufficient demand at the macroeconomic
level, since supply creates its own demand.
B. According to John Maynard Keynes, aggregate demand is the driving force behind
aggregate economic activity.
C. According to the monetarists, inflation is the result of excessive increases in the quantity
of money.
D. The monetarists believe that extensive government intervention is required to stabilise
the economy.
E. The monetarists believe that the private sector is inherently stable.
Question 52
Which one of the following economists will prescribe active, discretionary fiscal policy measures to
stabilise the economy?
A. A classical economist.
B. A Keynesian economist.
C. A monetarist.
D. A supply-side economist.
E. A new classical economist.
A. A classical economist.
B. A monetarist.
C. A supply-side economist.
D. A new classical economist.
E. A new Keynesian economist.