Acca paper F1 fia diploma in Accounting and Business Accountant in Business (AB/fab) exam kit

95 A 
In extreme cases of inflation the function of money may break down, leading to civil unrest 
and even war. 
96 B 
The country is exporting too much, which means that factors of production could be fully 
utilised, therefore the costs of an additional unit of output will be higher than the costs of 
previous units, thus prices will be raised causing inflation. 
97 D 
‘Demerit’ goods are such things as illegal drugs. A, B and C are examples of the positive 
aspects of growth. A = real growth. B = the benefits of growth are being evenly distributed. 
C = the population, on average, is better off. 
 
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ANSWERS TO PRA C TICE O BJECTIVE TEST QUESTIONS :
S EC T I O N 3
K APLA N PUBLISH ING
135 
98 A 
Keynes argued that it was the government’s role to move the economy to a better 
equilibrium, i.e. one closer to full employment. This involved the government borrowing 
money and injecting it into the economy to stimulate economic growth – or slowing down 
the economy by increasing levels of taxation. 
99 B 
The classical approach is to do nothing and let the economy find its own equilibrium. The 
Keynesian approach (demand side) would involve running a budget surplus/deficit to 
manipulate the economy and help it reach its equilibrium point. This appears to be what 
the government in country K is currently using. The minister is suggesting the removal of 
key market imperfections, such as union activity and monopolies. This is a classic supply-
side or monetarist approach. 
100 A 
Aggregate demand is calculated as consumer spending + investment by firms + government 
spending + exports – imports. If all else stays constant, a rising trade deficit means that 
imports are rising faster than exports, lowering the aggregate demand.
If the imports are also increasing in price, this will cause inflation within country C – 
specifically imported inflation. Monetary inflation occurs when the money supply expands 
too rapidly. 
101 C 
Expenditure reducing strategies involve the government shrinking the domestic economy to 
reduce the demand for imports. A budget surplus would accomplish this. 
Expenditure-switching strategies encourage consumers to switch to domestically produced 
goods. The other three options are examples of these.