ECO 2013 Principles of Macroeconomics
Final Assessment Review
(Questions & Solutions)
2025
©2025
, 1. Case Study – Supply Shock and Stagflation
A major oil-exporting country experiences a severe geopolitical crisis,
leading to a dramatic increase in oil prices. Over the following months,
your country faces rising production costs, higher price levels, and
stagnant GDP growth.
Question: Which term best describes this economic situation?
A. Demand-pull inflation
B. Cost-push inflation
C. Hyperinflation
D. Deflation
ANS: B. Cost-push inflation
Rationale: When rising production costs (e.g., from higher oil prices)
push up general price levels while GDP growth stalls, the economy
experiences cost-push inflation—a classic recipe for stagflation.
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2. Case Study – Fiscal Policy Trade-offs
During a deep recession, a government implements expansionary fiscal
policy by increasing public spending and cutting taxes. Over time, while
GDP begins to recover, the national debt also increases significantly.
Question: What is the primary trade-off inherent in such an
expansionary fiscal policy?
A. Enhanced short-term growth vs. increased long-term deficits
B. Lower inflation vs. higher unemployment
C. Reduced government spending vs. increased taxation
D. Decreased consumer confidence vs. increased investment
ANS: A. Enhanced short-term growth vs. increased long-term deficits
Rationale: Expansionary fiscal policies boost aggregate demand and
stimulate growth in the short term, but they also increase government
deficits and national debt, posing risks to long-term fiscal sustainability.
©2025
, ---
3. Case Study – Monetary Policy Tools
In response to rising inflation, a central bank decides to increase its
benchmark interest rate. Following the rate hike, borrowing costs rise,
consumer spending falls, and the domestic currency appreciates against
foreign currencies.
Question: Which policy tool is the central bank employing?
A. Expansionary monetary policy
B. Contractionary monetary policy
C. Quantitative easing
D. Fiscal stimulus
ANS: B. Contractionary monetary policy
Rationale: Raising interest rates is a contractionary monetary policy
designed to dampen spending, cool inflation, and often leads to currency
appreciation.
---
4. Case Study – Long-Run Economic Growth
A country experiences slowing long-run economic growth despite stable
short-term GDP. An analysis reveals minimal investment in technology
and inadequate education systems.
Question: Which factor is most likely contributing to the slowdown in
long-run growth?
A. Reduced aggregate demand
B. Lower levels of productivity-enhancing technological innovation
C. Excessive government regulation
D. A temporary supply shock
ANS: B. Lower levels of productivity-enhancing technological
innovation
Rationale: Long-run growth relies on improvements in productivity,
©2025
Final Assessment Review
(Questions & Solutions)
2025
©2025
, 1. Case Study – Supply Shock and Stagflation
A major oil-exporting country experiences a severe geopolitical crisis,
leading to a dramatic increase in oil prices. Over the following months,
your country faces rising production costs, higher price levels, and
stagnant GDP growth.
Question: Which term best describes this economic situation?
A. Demand-pull inflation
B. Cost-push inflation
C. Hyperinflation
D. Deflation
ANS: B. Cost-push inflation
Rationale: When rising production costs (e.g., from higher oil prices)
push up general price levels while GDP growth stalls, the economy
experiences cost-push inflation—a classic recipe for stagflation.
---
2. Case Study – Fiscal Policy Trade-offs
During a deep recession, a government implements expansionary fiscal
policy by increasing public spending and cutting taxes. Over time, while
GDP begins to recover, the national debt also increases significantly.
Question: What is the primary trade-off inherent in such an
expansionary fiscal policy?
A. Enhanced short-term growth vs. increased long-term deficits
B. Lower inflation vs. higher unemployment
C. Reduced government spending vs. increased taxation
D. Decreased consumer confidence vs. increased investment
ANS: A. Enhanced short-term growth vs. increased long-term deficits
Rationale: Expansionary fiscal policies boost aggregate demand and
stimulate growth in the short term, but they also increase government
deficits and national debt, posing risks to long-term fiscal sustainability.
©2025
, ---
3. Case Study – Monetary Policy Tools
In response to rising inflation, a central bank decides to increase its
benchmark interest rate. Following the rate hike, borrowing costs rise,
consumer spending falls, and the domestic currency appreciates against
foreign currencies.
Question: Which policy tool is the central bank employing?
A. Expansionary monetary policy
B. Contractionary monetary policy
C. Quantitative easing
D. Fiscal stimulus
ANS: B. Contractionary monetary policy
Rationale: Raising interest rates is a contractionary monetary policy
designed to dampen spending, cool inflation, and often leads to currency
appreciation.
---
4. Case Study – Long-Run Economic Growth
A country experiences slowing long-run economic growth despite stable
short-term GDP. An analysis reveals minimal investment in technology
and inadequate education systems.
Question: Which factor is most likely contributing to the slowdown in
long-run growth?
A. Reduced aggregate demand
B. Lower levels of productivity-enhancing technological innovation
C. Excessive government regulation
D. A temporary supply shock
ANS: B. Lower levels of productivity-enhancing technological
innovation
Rationale: Long-run growth relies on improvements in productivity,
©2025
