Drivers of economy

Imagine an economy where the government decides to increase the amount of credit available to consumers. What is the likely short-term effect on the economy?

• Decrease in consumer spending

• Increase in consumer spending

• Stabilization of consumer spending

• No change in consumer spending

Answer explanation

Increasing credit availability typically leads to more consumer borrowing, which boosts consumer spending in the short term. Therefore, the likely effect on the economy is an increase in consumer spending.

A country experiences a sudden increase in productivity growth. How might this affect the long-term economic growth of the country?

• It will have no effect on long-term growth

• It will decrease long-term growth

• It will increase long-term growth

• It will cause short-term economic instability

Answer explanation

A sudden increase in productivity growth typically leads to higher output per worker, which enhances economic efficiency and innovation. This sustained improvement boosts long-term economic growth, making the correct choice 'It will increase long-term growth'.

Consider a scenario where interest rates are significantly reduced. What strategic financial decision might businesses make in response to this change?

• Reduce borrowing and focus on saving

• Increase borrowing to invest in expansion

• Maintain current borrowing levels

• Decrease spending on capital projects

Answer explanation

When interest rates are significantly reduced, borrowing costs decrease. Businesses are likely to increase borrowing to invest in expansion, taking advantage of lower rates to fund growth opportunities.

A borrower defaults on a loan, and the lender seizes the collateral. What does this scenario illustrate about the role of collateral in lending?

• Collateral is irrelevant in lending

• Collateral serves as a backup for lenders

• Collateral increases the borrower's debt

• Collateral decreases the lender's risk

Answer explanation

This scenario illustrates that collateral serves as a backup for lenders. When a borrower defaults, the lender can seize the collateral to recover losses, reducing their financial risk.

In a hypothetical economy without credit, what would be the primary driver of economic growth?

• Increased borrowing

• Increased productivity

• Increased government spending

• Increased consumer confidence

Answer explanation

In a hypothetical economy without credit, increased productivity is the primary driver of economic growth, as it enhances the efficiency of resources and output, leading to higher overall economic performance.

If a government decides to print more money without increasing productivity, what is a potential risk associated with this action?

• Deflation

• Inflation

• Increased productivity

• Economic stability

Answer explanation

Printing more money without a corresponding increase in productivity can lead to inflation, as more money chases the same amount of goods and services, driving prices up.

A company decides to finance its new project through credit. What is a potential benefit of this decision if the project is successful?

• The company will have to pay more taxes

• The company can generate income to repay the debt

• The company will face immediate financial loss

• The company will have to reduce its workforce

Answer explanation

If the project is successful, the company can generate income, which can be used to repay the debt incurred for financing. This is a key benefit of using credit for project funding.

What might be a consequence of a prolonged period of low interest rates on consumer behavior?

• Decreased borrowing and spending

• Increased borrowing and spending

• Increased saving and reduced spending

• No change in borrowing and spending

Answer explanation

Prolonged low interest rates typically encourage consumers to borrow more due to cheaper loans, leading to increased spending. This behavior stimulates the economy, making 'Increased borrowing and spending' the correct choice.

A country is experiencing a long-term debt cycle. What strategic action might the government take to manage this cycle effectively?

• Increase taxes and reduce spending

• Decrease taxes and increase spending

• Maintain current fiscal policies

• Ignore the debt cycle

Answer explanation

Increasing taxes and reducing spending can help a government manage a long-term debt cycle by improving fiscal balance, reducing deficits, and stabilizing the economy, making it a strategic action to address debt effectively.

In an economy with high levels of credit, what is a potential risk if the credit is primarily used for consumption rather than investment?

• Sustainable economic growth

• Increased productivity

• Unsustainable debt levels

• Decreased consumer spending

Answer explanation

When credit is used for consumption rather than investment, it can lead to unsustainable debt levels. This occurs because consumers may borrow excessively, resulting in financial instability and potential defaults.