Macroeconomics practice questions.

Which of the following is an injection into the circular flow of income?

• household saving
• taxation
• investment
• imports

Answer: investment

Injections are investment, government spending and exports. Saving, taxation and imports are leakages (withdrawals).

Unemployment caused by the permanent decline of an industry, leaving workers whose skills no longer match available jobs, is

• frictional unemployment
• seasonal unemployment
• structural unemployment
• cyclical unemployment

Answer: structural unemployment

Structural unemployment results from a mismatch of skills or location as the economy's structure changes; it is tackled by retraining and mobility policies.

Which of the following is a tool of fiscal policy?

• changing the central bank's policy interest rate
• changing government taxation and spending
• conducting open market operations
• adjusting commercial banks' reserve requirements

Answer: changing government taxation and spending

Fiscal policy uses the government budget (taxation and spending). The other three options are instruments of monetary policy.

Which of the following is an example of a supply-side policy?

• raising the central bank interest rate
• investment in education and training
• increasing unemployment benefits
• cutting government spending to reduce a deficit

Answer: investment in education and training

Supply-side policies aim to raise the economy's productive potential (shift LRAS right) by improving the quantity or quality of resources, e.g. education, infrastructure, deregulation.

Which of the following is an example of expansionary fiscal policy?

• raising the central bank's policy interest rate
• increasing government spending on infrastructure
• selling government bonds to commercial banks
• increasing the reserve requirements for banks

Answer: increasing government spending on infrastructure

Fiscal policy uses government spending and taxation; increasing spending stimulates aggregate demand. The other options are monetary policy tools.

Which expression correctly represents the components of aggregate demand?

• C + I + G + (X − M)
• C + I + G + (M − X)
• C + S + T + (X − M)
• C + I + G + X + M

Answer: C + I + G + (X − M)

Aggregate demand is consumption + investment + government spending + net exports (exports minus imports).