National Income Determination and Price Level: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Which of the following will shift Hong Kong's aggregate demand curve to the right?

   A

   A rise in the general price level

   B

   An increase in exports due to faster economic growth in the Mainland

   C

   A rise in wage rates

   D

   An increase in salaries tax rates

2. Question 2Multiple choice · 1 mark

   A sharp rise in world oil prices will, in the short run,

   A

   raise the general price level and lower real output.

   B

   raise the general price level and raise real output.

   C

   lower the general price level and lower real output.

   D

   lower the general price level and raise real output.

3. Question 3Multiple choice · 1 mark

   In the long run, an increase in aggregate demand will raise

   A

   real output only.

   B

   both the general price level and real output.

   C

   the general price level only.

   D

   neither the general price level nor real output.

4. Question 4Multiple choice · 1 mark

   Which of the following will shift the long-run aggregate supply curve to the right?

   A

   An increase in government consumption expenditure

   B

   A cut in interest rates

   C

   An increase in exports

   D

   An improvement in production technology

5. Question 54 marks

   The government increases its spending on infrastructure. With the aid of an AD-AS diagram, explain the short-run effects on the general price level and real output.

   Show worked solution

   Government expenditure is a component of AD, so AD increases. (1)

   Diagram: general price level on the vertical axis, real output on the horizontal axis; AD shifts right from $AD_1$ to $AD_2$ along an upward-sloping SRAS; equilibrium moves from $E_1$ to $E_2$. (1)

   In the short run the general price level rises (1) and real output rises. (1)

6. Question 64 marks

   Explain the short-run effects of a large rise in wage rates on the general price level, real output and unemployment.

   Show worked solution

   Higher wage rates raise the cost of production, so SRAS decreases (shifts left). (1)

   The general price level rises (1) and real output falls. (1)

   With lower output, firms need fewer workers, so unemployment rises. (1)