Question

q1:In an open economy, a reduction in domestic demand has:

Select one:

a. a larger effect on output than in a closed economy and a positive effect on the trade balance.

b. a smaller effect on output than in a closed economy and a positive effect on the trade balance.

c. a smaller effect on output than in a closed economy and a negative effect on the trade balance.

d. a smaller effect on output than in a closed economy and a no effect on the trade balance.

e. a larger effect on output than in a closed economy and a negative effect on the trade balance.

Q2:

Policy makers can become concerned if the unemployment rate is too low because:

Select one:

a. output will increase.

b. stock prices will fall.

c. an exchange rate crisis might occur.

d. output will decrease.

e. inflation might increase.

Q3:

When the unemployment rate rises:

Select one:

a. the number of discouraged workers tends to fall.

b. the number of employed workers tends to rise.

c. the number of discouraged workers tends to remain constant.

d. the number of employed workers tends to remain constant.

e. the labour force participation rate tends to fall.

Answer 1

1. Option C.

While considering an open economy, a reduction in domestic demand will only create a smaller effect on output.

This is because, in an open economy which is open to international trade, reduction in domestic goods will not affect the overall international output while considering a closed economy.

This will only create a positive effect on the trade balance as exports tends to rise above the imports when domestic demand decreases.

2. Option E.

Policy makers might become concerned if the unemployment rate decreases so much as inflation might Increase.

Unemployment rate falls when the economic growth improves or when the money supply Increases within the economy.

This will tend to increase the inflation rate within the economy as employment rate increases.

3. Option E.

We know that the labour force participation rate refers to the the number of unemployed and employed people.

When the unemployed people Increases, the unemployment rate also Increases.

This will therefore decrease the labour force participation rate which measures the total number of people who are currently employed or are working.