Question

1. Supply side policies would NOT include:

a. Lowering tax to boost spending

b. Incentives to get people back to work

c. Incentives to get firms to invest

d. Training to give people the skills to accept work

2. What is meant by inflation?

a. A sustained increase in the exchange rate

b. A sustained increase in the general price level

c. A sustained increase in firms' costs

d. A one off increase in prices

3. What could cause cost push inflation?

a. An outward shift in aggregate demand

b. An inward shift in aggregate demand

c. An outward shift in aggregate supply

d. An inward shift of aggregate supply

4. What is an appropriate action to reduce demand-pull inflation?

a. Higher interest rates

b. Lower taxes

c. More government spending

d. Increase in the money supply

Answer 1

1. Lowering tax to boost spending is not a supply side policy because it will increase aggregate demand only, aggregate supply won't be affected.

Answer: option A

2. A sustained increase in the general price level over time is known as inflation.

Answer: option B

3. Cost push inflation occurs when price level increases due to increase in the production cost (increase in the wages of labor, cost of materials etc). Increase in the production cost decreases aggregate supply, shifting the AS curve leftward. As a result, equilibrium price level increases and inflation occurs.

Answer: option D

4. Demand pull inflation occurs due to increase in the aggregate demand. To reduce demand pull inflation, AD should be decreased.

Higher interest rate increases cost of borrowing for investment spending. Therefore, quantity of investment demand decreases. Decrease in investment spending decreases aggregate demand.

Answer: option A