Economic Theory Test

1
Economic Theory Test

• This test consists of 10 questions designed to
  test your understanding of economic theory.
• The links provide you with a choice of answer,
  along with explanations and solutions.
• You will need a calculator to complete this test.

2
Question 1.

• A product has a price elasticity of
• demand of 1.5. Is this,
• a. inelastic
• b. Elastic
• c. unitary.

3
When Price Elasticity of Demand is greater than
1, the Price Elasticity of Demand is Elastic.
Your answer is correct.
4
When Price Elasticity of Demand is Less than 1,
the Price Elasticity of Demand is Inelastic. Try
again.
5
A Price Elasticity of Demand of 1, means that
Price Elasticity of Demand is Unitary. That is
exactly proportional. Try again.
6
Question 2.

• Fiscal policy can involve?
• A. Increasing the efficiency of labour markets
• B. Altering interest rates
• C. Taxation and spending policy.

7
Wrong. This is an example of a Supply Side policy.
8
Wrong. This is an example of Monetary Policy.
9
Correct.
10
Question 3.

• Gross Domestic Product measures?
• A. the change in real incomes
• B. the total value of a nations output over one
  year.
• C. a change in prices of a basket of goods.

11
This describes a change in standards of
living Try again.
12
Correct.
13
This is a measure of inflation. Try again.
14
Question 4.

• The monetary policy committee of the Bank of
  England has a role in setting?
• A. Government borrowing
• B. Level of pay increases.
• C. Interest rates.

15
This is decided by the PM and chancellor
16
Pay increases (except in the public sector) are
decided by the free market. Try again.
17
Correct. The MPC sets the base rate during its
monthly meetings.
18
Question 5.

• Which of the following defines elastic
  Advertising Elasticity of Demand?
• A. A change in advertising expenditure causes a
  less than proportional change in quantity
  demanded.
• B. A change in advertising expenditure causes a
  more than proportional change in quantity
  demanded.

19
Wrong. This definition covers inelastic advertisin
g elasticity of demand.
20
Correct.
21
Question 6.

• Inflation can be caused by?
• A. a rise in price of imported raw materials
• B. an increase in productivity levels
• C. a fall in demand levels

22
Correct. During the 1970s this was one of
the major causes of UK inflation.
23
Wrong. An increase in productivity may
help reduce prices.
24
A fall in demand, may encourage retailers
and producers to reduce prices. Try again.
25
Question 7.

• Which of the following defines cyclical
• unemployment?
• A. Unemployment resulting from loss of markets to
  foreign producers.
• B. Unemployment resulting from fluctuations
• in the trade cycle

26
Wrong. This is likely to lead to structural
unemployment.
27
Correct. Cyclical unemployment occurs during the
trade cycle.Unemployment increases during
recessionary periods.
28
Question 8.

• Which of the following taxes is a direct tax?
• A. VAT
• B. Corporation Tax
• C. Stamp Duty

29
Wrong. VAT is an indirect tax, a tax on
expenditure.
30
Correct. Corporation tax is a direct tax on the
incomes of limited companies.
31
Wrong. Stamp Duties are an indirect tax, a
tax on share or property purchase.
32
Question 9.

• Which of the following policies is likely to
• reduce inflationary pressure?
• A. An increase in pensions
• B. A fall in interest rates.
• C. An increase in income tax levels

33
Wrong. This is likely to increase demand
levels and so increase inflationary pressure.
34
Wrong. This is likely to increase demand
levels and so increase inflationary pressure.
35
Correct. Individuals will have less disposable
income, so demand is likely to fall, so reducing
inflationary pressure.
36
Question 10.

• Which of the following policies is a supply side
  measure?
• A. Increased government borrowing.
• B. The government reducing the basic rate of
• income tax.
• C. The governments Right To Buy policy.

37
Wrong. This is a Fiscal Policy.
38
Wrong. This is monetary policy.
39
Correct. The conservative government
introduced this scheme to allow purchases of
council houses, at least in part, to increase
labour mobility.
40
You have now completed the test. For further
more detailed revision please use the case
studies on the ALoA web site. Www.aloa.co.uk