Sample questions from Macroeconomics: Implementing Policy

Answer each one closed book first, then open the answer.

1. The government budget, types of tax and the budget balance

   What happens to the average rate of tax as income rises under a progressive tax, and under a proportional tax?

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   Under a progressive tax it rises, so higher earners hand over a larger proportion of their income, whereas under a proportional tax it stays the same at every income level.

2. National debt, cyclical and structural deficits and crowding out

   Why is the structural part of a deficit harder to measure than the headline figure?

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   It depends on an estimate of the output gap, and the trend level of output cannot be observed directly, so the figure rests on a model and is frequently revised.

3. The Laffer curve, average and marginal tax rates and limits of fiscal policy

   If a government is on the downward-sloping section of the Laffer curve, what happens to revenue when it cuts the tax rate?

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   Revenue rises, because the increase in declared and taxable activity more than offsets the lower rate charged on each pound.

4. Interest rates, the money supply and inflation targets

   Why does a rise in interest rates reduce planned investment?

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   It raises the cost of borrowing and the opportunity cost of using retained profit, so fewer projects deliver a return above the required rate and firms shelve them.

5. Quantitative easing, the exchange rate and limits of monetary policy

   When does a central bank turn to quantitative easing rather than simply cutting its policy rate?

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   When the policy rate is already close to zero and cannot usefully be cut further, so conventional interest rate policy has run out of room.

6. Privatisation, deregulation and subsidies as supply side policies

   Distinguish market-based from interventionist supply side policies.

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   Market-based measures withdraw government interference and rely on incentives and competition to raise efficiency, while interventionist measures use government spending and regulation to tackle a market failure directly.

7. Competition policy, infrastructure, education and tax and benefit reform

   Investment in infrastructure shifts which curves, and over what timescale?

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   In the short run the construction spending itself shifts aggregate demand to the right, and once the roads, rail or broadband are in use the completed capacity shifts long-run aggregate supply to the right.

8. Labour market flexibility, immigration control and limits of supply side policy

   When evaluating labour market flexibility as a supply side policy, what are the main arguments against it?

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   That the gains come at the cost of job insecurity and in-work poverty, and that firms finance less training for staff they may not keep, which can hold productivity back — so a policy sold as raising long run capacity may erode the human capital that capacity depends on.

The 9 subtopics

One subtopic is one session. Work down the list.

How the guide is worked

Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.

1. Step 1 · Closed book

   Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.

2. Step 2 · Open book

   Go back to the top. Read each printed answer and write it out in full, including the ones you had right.

3. Step 3 · Closed book again

   Same questions, same order, from memory. The gap between pass one and pass three is the session result.

Read the full method, the return schedule and the research behind it.

Nearby topics

All 12 topics · Guide overview