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Unit notes and practice questions

Grade 12 Economics unit 4: Macroeconomic policy instruments

Everything here is for unit 4 of the Grade 12 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

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4
Cards
10
Practice questions on unit 4
72–102
The textbook pages for unit 4

What unit 4 covers

  1. 1.Definition and Types of Macroeconomic Policies
  2. 2.Fiscal Policy
  3. 3.Tools of Fiscal Policy
  4. 4.Types of Fiscal Policy
  5. 5.Monetary Policy
  6. 6.Tools of Monetary Policy
  7. 7.Types of Monetary Policies
  8. 8.Income Policy and Wage
  9. 9.Foreign Exchange Policies

Short notes for unit 4

The cards filed under this chapter on the Grade 12 Economics page. Open one at a time.

Exchange Rate RegimeCurrency Value FallCurrency Value RiseDetermining Mechanism
Fixed Exchange RateDevaluationRevaluationGovernment decision
Flexible Exchange RateDepreciationAppreciationMarket supply and demand

When you use it

Use when classifying foreign exchange rate changes by system type and distinguishing market movements from policy decisions.

Watch out

Devaluation and revaluation occur under fixed exchange rates by government decree, whereas depreciation and appreciation occur under floating regimes through market forces.

Drafted from Grade 12 Economics, pages 72-102, then checked twice before it went up

Policy InstrumentExpansionary ActionContractionary Action
Fiscal: Government SpendingIncrease spendingDecrease spending
Fiscal: TaxationReduce taxesIncrease taxes
Monetary: Discount RateLower discount rateRaise discount rate
Monetary: Open Market OperationsBuy government securitiesSell government securities
Monetary: Required Reserve RatioLower reserve ratioIncrease reserve ratio

When you use it

Use when deciding which macroeconomic policy actions shift aggregate demand to manage recession or inflation.

Watch out

Expansionary policy combats unemployment during a recession, while contractionary policy combats high inflation during economic overheating.

Drafted from Grade 12 Economics, pages 72-102, then checked twice before it went up

When you use it

Use when identifying whether a price ceiling or floor causes a market imbalance.

Watch out

A price ceiling placed above equilibrium or a price floor placed below equilibrium is non-binding and has zero effect on market price and quantity.

Drafted from Grade 12 Economics, pages 72-102, then checked twice before it went up

Control TypeLegal Limit PositionMarket Effect
Price CeilingBelow equilibrium priceShortage (Excess demand)
Price FloorAbove equilibrium priceSurplus (Excess supply)

When you use it

Use when evaluating the market impacts of legally imposed maximum or minimum prices such as rent ceilings and minimum wages.

Watch out

A price ceiling is only effective below the equilibrium price, and a price floor is only effective above the equilibrium price.

Drafted from Grade 12 Economics, pages 72-102, then checked twice before it went up

Practice questions on unit 4

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

According to the textbook, which two of the following are the primary tools of fiscal policy?

  1. A.Open market operations and the discount rate
  2. B.Taxation and government spending
  3. C.Minimum wages and price ceilings
  4. D.Foreign exchange reserves and tariffs
Show the answer and why

Answer: B Taxation and government spending

Why

Fiscal policy is the expenditure and revenue policy of the government. Its two key tools are taxation and government spending.

Question 2

What is a minimum wage?

  1. A.A price ceiling set on basic food staples
  2. B.A legally mandated price floor on hourly wages
  3. C.The highest wage an employer is legally allowed to pay
  4. D.A voluntary monthly bonus paid to civil servants
Show the answer and why

Answer: B A legally mandated price floor on hourly wages

Why

A minimum wage is a legally mandated price floor on hourly wages, below which workers may not be offered or accept a job.

Question 3

What is the main goal of an expansionary monetary policy during an economic slowdown?

  1. A.To increase interest rates and reduce borrowing
  2. B.To raise taxes and decrease public spending
  3. C.To lower interest rates and stimulate investment and consumption spending
  4. D.To sell government bonds to decrease the money supply
Show the answer and why

Answer: C To lower interest rates and stimulate investment and consumption spending

Why

An expansionary (or loose) monetary policy lowers interest rates, making borrowing cheaper and stimulating consumption and investment spending.

Question 4

Under a fixed exchange rate system, what term describes an increase in the exchange rate caused by political and economic decisions of the government?

  1. A.Devaluation
  2. B.Appreciation
  3. C.Depreciation
  4. D.Revaluation
Show the answer and why

Answer: A Devaluation

Why

Under a fixed exchange rate system, an increase in the exchange rate by government decision is called devaluation, whereas under a floating regime it is called depreciation.

Question 5

When a government imposes an effective price ceiling on essential goods below the market equilibrium price, what is the direct market result?

  1. A.A surplus of the product
  2. B.A shortage of the product
  3. C.An immediate shift of the supply curve to the right
  4. D.A permanent drop in total consumer demand
Show the answer and why

Answer: B A shortage of the product

Why

A price ceiling is a legal maximum price set below the equilibrium price. Because quantity demanded exceeds quantity supplied at that lower price, it causes a shortage.

Question 6

If the central bank wants to implement a contractionary monetary policy to control inflation, how will it adjust the required reserve ratio (RRR)?

  1. A.Lower the RRR to increase bank liquidity
  2. B.Increase the RRR to reduce the lending capacity of commercial banks
  3. C.Reduce the RRR to zero to encourage business investment
  4. D.Keep the RRR constant while printing additional paper money
Show the answer and why

Answer: B Increase the RRR to reduce the lending capacity of commercial banks

Why

Increasing the required reserve ratio forces commercial banks to hold more cash in reserve, which reduces their lending capacity and slows money supply growth.

Question 7

An Ethiopian business based in Addis Ababa exports goods abroad and earns US dollars. When the firm converts these earnings to pay its workers in Ethiopian Birr, how does it participate in the foreign exchange market?

  1. A.It supplies Ethiopian Birr and demands US dollars
  2. B.It supplies US dollars and demands Ethiopian Birr
  3. C.It supplies both US dollars and Ethiopian Birr at the same time
  4. D.It demands both currencies without supplying either
Show the answer and why

Answer: B It supplies US dollars and demands Ethiopian Birr

Why

An exporting firm earns foreign currency (US dollars) but needs local currency to pay local costs. Therefore, it is a supplier of US dollars and a demander of Ethiopian Birr.

Question 8

How does a depreciation or devaluation of a country's currency affect its foreign trade prices?

  1. A.It makes exports more expensive and imports cheaper
  2. B.It makes exports cheaper for foreigners and imports more expensive for residents
  3. C.It raises the foreign price of exports without changing import costs
  4. D.It eliminates all tariffs on imported products
Show the answer and why

Answer: B It makes exports cheaper for foreigners and imports more expensive for residents

Why

A depreciation or devaluation lowers the relative price of a country's exports to foreigners and raises the relative price of imports to residents.

Question 9

Which component of government spending consists of direct payments such as unemployment insurance or welfare benefits where no goods or services are provided in return?

  1. A.Grants in aid
  2. B.Government spending on final goods (G)
  3. C.Transfer payments
  4. D.Net interest payments
Show the answer and why

Answer: C Transfer payments

Why

Transfer payments are direct payments to individuals (such as social security or welfare payments) where no goods or services are received in exchange.

Question 10

In January 2012, what specific measure did the National Bank of Ethiopia (NBE) take to encourage commercial banks to lend money?

  1. A.Raised the minimum deposit reserve from 10% to 15%
  2. B.Cut the minimum deposit reserve from 15% to 10%
  3. C.Raised the liquid assets to deposits ratio from 20% to 25%
  4. D.Closed its discount window facility for all commercial banks
Show the answer and why

Answer: B Cut the minimum deposit reserve from 15% to 10%

Why

In January 2012, the NBE cut the minimum deposit reserve from 15% to 10% and lowered the liquid assets to deposits ratio from 25% to 20% to encourage bank lending.

The app holds 12 questions on this unit, marked as you go. These are the first 10.

The textbook pages for unit 4

Unit 4 runs from page 72 to page 102 of the Ministry of Education edition.

Ministry of Education edition, English, 214 pages

Download the PDF

All Grade 12 Economics short notes

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