Set 13

A government’s attempt to reduce its defence expenditure is an example of (i) , while a government effort to raise interest rates is an example of
1. monetary policy. fiscal policy.
2. fiscal policy. monetary policy.
3. incomes policy. incomes policy.
4. supply-side policy. supply-side policy.
According to the Laffer curve, as tax rates increase, tax revenues
1. decrease continuously.
2. initially decrease and then increase.
3. rise continuously.
4. initially increase and then decrease.
The government imposes a new income tax legislation under which every male taxpayer must pay 15% of his income as taxes, while every female taxpayer must pay 20% of her income as taxes. Such tax legislation violates which equity principle?
1. Both horizontal equity and vertical equity
2. Vertical equity only
3. Horizontal equity only
4. Neither
A 15% VAT is a (n):
1. Proportional income tax.
2. Fixed excise duty.
3. Ad valorem indirect tax.
4. None of the above.
Tax incidence is the
1. ultimate distribution of a tax's burden
2. measure of the impact the tax has on employment and output.
3. behaviour of shifting the tax to another party.
4. structure of the tax.
You know that all taxes are distortionary. Under what conditions will this knowledge lead you to oppose the imposition of every single tax in the economy?
1. If you live in a 1 best world st
2. If you live in a 2 best world nd
3. If the tax rates on some of the items are prohibitively high
4. Either of the above
The automatic stabilisation function of fiscal policy ensures that government expenditures ______(i)______ and government revenues _____(ii)_____ during recessions.
1. decrease decrease
2. decrease increase
3. increase decrease
4. increase increase
Let us assume the South African government is facing a fiscal deficit. Which of the following would not constitute a possible method of financing this deficit?
1. printing Rands (borrowing from the central bank)
2. selling dollars in the foreign exchange market
3. imposing new taxes or raising existing tax rates
4. borrowing from an international financial institution
Which of the following is not a correct argument against a fiscal policy expansion – say a tax cut – aimed at lifting aggregate demand?
1. The expansion might become
  pro-cyclical ex-post, given the lag time required to change fiscal policy.
2. Fiscal policy works with a lag, thus a tax cut introduced today would not have an expansionary effect on aggregate demand till many months later.
3. The fiscal expansion would increase distortion in the economy.
4. Lower taxes would increase the government’s borrowing requirement, which in turn would cause interest rates to rise, which in turn would i) cause the exchange rate to
  appreciate, which in turn would cause the current account to move into deficit, and ii) crowd out private investment.
The increase in base money divided by the corresponding induced increase in commercial bank
deposits is the
1. bank's line of credit.
2. reserve ratio.
3. current ratio.
4. money multiplier.
If the Central Bank of Swaziland wished to pursue a 'tight' monetary policy, it would
1. lower the required reserve ratio and the statutory liquidity ratio.
2. lower interest rates .
3. buy government securities on the open market.
4. sell government securities on the open market.
An item designated as money that is intrinsically worthless could be
1. a currency note.
2. a silver coin.
3. a barter item.
4. any tradeable commodity.
A checking deposit (or current account) held at a commercial bank is considered __________ of that bank.
1. an asset.
2. net worth.
3. a liability.
4. capital.
Which of the following activities is one of the responsibilities of the Central Bank of Swaziland?
1. Monitoring the financial health of banks and non-bank financial insitutions .
2. Auditing the various agencies and departments of the government.
3. Issuing bonds on international capital markets to finance the fiscal deficit.
4. Loaning money to other countries that are friendly to Swaziland.
A bank has excess liquidity reserves to lend but is unable to find a willing borrower. This will __________ the size of the money multiplier.
1. reduce
2. increase
3. have no effect on
4. double
The quantity of money demanded increases with income. Thus if income increases, the opportunity cost of holding mone y must go up in order to reduce money demand and re-establish equilibrium in the money market. This relation is captured by:
1. an upward sloping LM curve.
2. a downward sloping L curve.
3. a downward sloping IS curve.
4. the circular flow of money in the economy.
When economists speak of the 'demand for money,' which of the following questions are they asking?
1. How much cash do you wish you could have?
2. How much wealth would you like?
3. How much income would you like to earn?
4. What proportion of your financial assets do you want to hold in non-interest bearing forms?
Which of the following will not cause money supply to expand, given a fully floating exchange rate regime and a fixed supply of dollars in the market
1. The central bank buying foreign currency in the foreign exchange market
2. redemption of central bank liquidity paper
3. build-up of commercial banks’ deposits held with the central bank
4. decrease in the central bank discount rate
Which of the following events will lead to a decrease in the demand for money?
1. An increase in the level of aggregate output.
2. A decrease in the supply of money.
3. A decrease in the interest rate.
4. A decrease in the price level.
Which of the following is neither a determinant of the slope of the IS curve nor a determinant of the slope of the LM curve?
1. the sensitivity of interest rates to investment
2. the sensitivity of money demand to income
3. the sensitivity of money demand to interest rates
4. the sensitivity of income to investment
Given a Keynesian world, a cut in taxes coupled with a lower reserve ratio for banks would have what effect on equilibrium income and interest rate?
1. Both income and the interest rate will remain unchanged
2. income will come down, but the interest rate will go up
3. income will go up, but the effect on the interest rate cannot be predicted
4. interest rates will go down, but the effect on income cannot be predicted
If the government increases its spending, but this causes prices to rise, what will “eventually” happen to the equilibrium income and interest rate?
1. Both income and the interest rate will remain unchanged
2. income will come down, but the interest rate will go up
3. income will go up, but the effect on the interest rate cannot be predicted
4. interest rates will go down, but the effect on income cannot be predicted
If the income elasticity of money demand and the Keynesian multiplier, both increase in an economy (ceteris paribus), how will the relative effectiveness of monetary and fiscal policy change?
1. Fiscal policy will become relatively more effective than monetary policy
2. Fiscal policy will become relatively less effective than monetary policy
3. The relative effectiveness of fiscal and monetary policy will remain unchanged
4. Both fiscal and monetary policy will become more effective
The intersection of the IS and LM curves captures:
1. the equilibrium of the demand and supply sides of the economy
2. the equivalence of monetary and fiscal policy
3. joint equilibrium in the goods and money markets
4. all of the above

Set 13

Quiz