Macroeconomic Problems and Policies: practice questions

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

1. Question 1Multiple choice · 1 mark

   Hong Kong's labour force is 4 million and 120 000 people are unemployed. The unemployment rate is

   A

   3%

   B

   3.1%

   C

   30%

   D

   0.3%

2. Question 2Multiple choice · 1 mark

   A bank teller loses her job because more customers now use online banking. This is

   A

   frictional unemployment.

   B

   cyclical unemployment.

   C

   structural unemployment.

   D

   underemployment.

3. Question 3Multiple choice · 1 mark

   The table shows a tax schedule.

   Income	$100 000	$200 000	$300 000
   Tax	$5000	$12 000	$21 000

   This tax is

   A

   progressive.

   B

   proportional.

   C

   regressive.

   D

   an indirect tax.

4. Question 4Multiple choice · 1 mark

   Which of the following is an expansionary fiscal policy?

   A

   Raising salaries tax rates

   B

   Cutting government expenditure

   C

   Aiming for a budget surplus

   D

   Increasing government expenditure on infrastructure

5. Question 54 marks

   Explain why the HKMA cannot cut interest rates to fight a recession in Hong Kong.

   Show worked solution

   Under the Linked Exchange Rate System, the HK dollar is linked to the US dollar at about HK$7.80 = US$1, and capital moves freely. (1)

   If Hong Kong interest rates were lower than US rates, investors would sell HK dollars for US dollar assets with higher returns. (1) The HK dollar would weaken towards HK$7.85, and the HKMA would have to buy HK dollars, which reduces the monetary base and pushes Hong Kong interest rates back up. (1)

   So Hong Kong interest rates must follow US interest rates, and Hong Kong has to rely mainly on fiscal policy. (1)

6. Question 64 marks

   The economy is in a recession. With the aid of an AD-AS diagram, explain how an expansionary fiscal policy can reduce cyclical unemployment.

   Show worked solution

   Cyclical unemployment is caused by insufficient aggregate demand. (1)

   Raising government expenditure or cutting taxes increases AD: the AD curve shifts right from $AD_1$ to $AD_2$. (Diagram: general price level against real output, upward-sloping SRAS.) (1)

   Real output rises (1), so firms employ more workers and cyclical unemployment falls. (1)