Question Simulator

AS & A Level Economics (9708)

Government macroeconomic intervention (A Level) Banker

40 questions · about 5% of the marks we indexed · examined in 9 of 9 sessions.

Questions by year

2026

  • 2026 May/June · Paper 32 · Q201 markEffectiveness of fiscal, monetary and supply-side policy
  • 2026 May/June · Paper 32 · Q211 markPolicy objectives and conflicts
  • 2026 May/June · Paper 32 · Q221 markEffectiveness of fiscal, monetary and supply-side policy
  • 2026 May/June · Paper 32 · Q241 markPolicy objectives and conflicts
  • 2026 May/June · Paper 42 · Q1 (c)7 marksPolicy objectives and conflicts

2025

  • 2025 Oct/Nov · Paper 32 · Q151 markEffectiveness of fiscal, monetary and supply-side policy
  • 2025 Oct/Nov · Paper 32 · Q201 markEffectiveness of fiscal, monetary and supply-side policy
  • 2025 Oct/Nov · Paper 32 · Q211 markPolicy objectives and conflicts
  • 2025 Oct/Nov · Paper 32 · Q231 markPolicy objectives and conflicts
  • 2025 May/June · Paper 32 · Q171 markEffectiveness of fiscal, monetary and supply-side policy
  • 2025 May/June · Paper 32 · Q211 markPolicy objectives and conflicts
  • 2025 May/June · Paper 32 · Q221 markPolicy objectives and conflicts
  • 2025 May/June · Paper 32 · Q241 markEffectiveness of fiscal, monetary and supply-side policy

2024

  • 2024 Oct/Nov · Paper 32 · Q201 markEffectiveness of fiscal, monetary and supply-side policy
  • 2024 Oct/Nov · Paper 32 · Q211 markPolicy objectives and conflicts
  • 2024 Oct/Nov · Paper 32 · Q221 markEffectiveness of fiscal, monetary and supply-side policy
  • 2024 Oct/Nov · Paper 32 · Q231 markPolicy objectives and conflicts
  • 2024 Oct/Nov · Paper 42 · Q1 (d)8 marksPolicy objectives and conflicts
  • 2024 May/June · Paper 32 · Q221 markEffectiveness of fiscal, monetary and supply-side policy
  • 2024 May/June · Paper 32 · Q241 markEffectiveness of fiscal, monetary and supply-side policy
  • 2024 May/June · Paper 32 · Q251 markPolicy objectives and conflicts
  • 2024 May/June · Paper 42 · Q1 (d)8 marksPolicy objectives and conflicts
  • 2024 May/June · Paper 42 · Q410 marksEffectiveness of fiscal, monetary and supply-side policy

2023

  • 2023 Oct/Nov · Paper 32 · Q201 markEffectiveness of fiscal, monetary and supply-side policy
  • 2023 Oct/Nov · Paper 32 · Q211 markPolicy objectives and conflicts
  • 2023 Oct/Nov · Paper 32 · Q231 markEffectiveness of fiscal, monetary and supply-side policy
  • 2023 May/June · Paper 32 · Q231 markEffectiveness of fiscal, monetary and supply-side policy
  • 2023 May/June · Paper 32 · Q241 markPolicy objectives and conflicts
  • 2023 May/June · Paper 32 · Q251 markPolicy objectives and conflicts
  • 2023 May/June · Paper 42 · Q510 marksEffectiveness of fiscal, monetary and supply-side policy

2022

  • 2022 Oct/Nov · Paper 32 · Q251 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 Oct/Nov · Paper 32 · Q271 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 Oct/Nov · Paper 32 · Q291 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 Oct/Nov · Paper 32 · Q301 markPolicy objectives and conflicts
  • 2022 Oct/Nov · Paper 42 · Q5 (b)4.3333 marksEffectiveness of fiscal, monetary and supply-side policy
  • 2022 Oct/Nov · Paper 42 · Q6 (b)4.3333 marksPolicy objectives and conflicts
  • 2022 May/June · Paper 32 · Q261 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 May/June · Paper 32 · Q291 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 May/June · Paper 32 · Q301 markEffectiveness of fiscal, monetary and supply-side policy
  • 2022 May/June · Paper 42 · Q7 (b)4.3333 marksEffectiveness of fiscal, monetary and supply-side policy

References only, not question text. Open Official paper ↗ where Cambridge publishes the paper, or see the official Cambridge past-papers page; for other papers, ask your school. “Paper 42” means Paper 4, variant 2.

Practice questions

Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.

Q1Effectiveness of fiscal, monetary and supply-side policy · Core · Paper 3 style · 1 mark
  1. (a) In an open economy with a government, the marginal propensity to save is 0.1, the marginal tax rate is 0.15 and the marginal propensity to import is 0.25. Government spending rises by $20bn. By how much will national income eventually rise? [1]
Show answer
  1. (a) B $40bn
    Multiplier = 1 ÷ (MPS + MPT + MPM) = 1 ÷ 0.5 = 2. ΔY = 2 × 20 = $40bn. D uses only the MPS (1 ÷ 0.1 = 10), ignoring taxes and imports.
Q2Effectiveness of fiscal, monetary and supply-side policy · Core · Paper 4 style · 6 marks

Invented data: an economy's actual real GDP is $480bn and its potential real GDP is $520bn. The marginal propensity to withdraw (MPS + MPT + MPM) is 0.4.

  1. (a) Calculate the output gap and state whether it is positive or negative. [1]
  2. (b) Calculate the value of the multiplier. [1]
  3. (c) Calculate the increase in government spending needed to close the output gap. [2]
  4. (d) Explain one reason why the increase you calculated in (c) might not close the output gap. [2]
Show answer
  1. (a) $40bn; negative
    1 480 − 520 = −40: negative output gap of $40bn.
  2. (b) 2.5
    1 1 ÷ 0.4 = 2.5.
  3. (c) $16bn
    M1 ΔG = 40 ÷ 2.5. A1 $16bn.
  4. (d) e.g. the multiplier is estimated and may be smaller (higher leakages to imports or saving); crowding out; time lags; private spending may fall because of low confidence; potential output is estimated inaccurately.
    1 reason; 1 explained.
Q3Effectiveness of fiscal, monetary and supply-side policy · Core · Paper 4 style · 6 marks
  1. (a) Explain what is meant by quantitative easing and how it may increase aggregate demand. [4]
  2. (b) Explain one risk of using quantitative easing. [2]
Show answer
  1. (a) The central bank creates money electronically to buy government bonds and other assets from banks and financial institutions. This raises bond prices, lowers long-term interest rates, increases banks' reserves and wealth, encouraging lending, borrowing, consumption and investment.
    1 central bank creates new money; 1 buys bonds/financial assets; 1 lowers long-term interest rates/raises asset prices; 1 more borrowing and spending → AD rises.
  2. (b) e.g. inflation if too much money is created; asset-price bubbles that increase wealth inequality; banks may hoard reserves so little effect; currency depreciation.
    1 risk; 1 explained.
Q4Effectiveness of fiscal, monetary and supply-side policy · Core · Paper 4 style · 5 marks

Invented data: in one year a government spends Rs 9.2 trillion and receives Rs 7.4 trillion in tax revenue. GDP is Rs 106 trillion.

  1. (a) Calculate the budget deficit in Rs trillion and as a percentage of GDP, to one decimal place. [2]
  2. (b) Explain how the budget deficit is likely to change automatically if the economy enters a recession. [3]
Show answer
  1. (a) Rs 1.8 trillion; 1.7% of GDP
    1 9.2 − 7.4 = Rs 1.8 trillion; 1 1.8 ÷ 106 × 100 = 1.7%.
  2. (b) It will increase: lower incomes and spending reduce tax revenue, and spending on transfer payments rises, without any change in policy.
    1 tax revenue falls; 1 government spending on benefits/transfers rises; 1 so the deficit increases (cyclical deficit).
Q5Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 3 style · 1 mark
  1. (a) In which situation is a cut in interest rates least likely to raise aggregate demand? [1]
Show answer
  1. (a) A Interest rates are already close to zero and households and firms expect prices to fall.
    Near-zero rates with deflationary expectations is a liquidity trap: people hold extra money rather than spend it, and real interest rates stay high, so monetary policy has little effect. B, C and D are conditions in which a rate cut works strongly (investment, disposable income, depreciation).
Q6Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 3 style · 1 mark
  1. (a) According to the Laffer curve, which statement is correct? [1]
Show answer
  1. (a) C If the tax rate is above the revenue-maximising rate, a cut in the rate can increase tax revenue.
    The Laffer curve shows revenue rising and then falling as the rate rises, because high rates discourage work and encourage avoidance. Only above the revenue-maximising rate does a cut raise revenue. A is the common misreading: below that rate a cut reduces revenue.
Q7Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 4 style · 7 marks
  1. (a) Explain two supply-side policies that could reduce the natural rate of unemployment. [4]
  2. (b) Consider why the effects of these policies may take a long time to appear. [3]
Show answer
  1. (a) Any two: training and education (reduce skills mismatch/structural unemployment); better job-matching information and job centres (reduce frictional unemployment); reform of benefits to strengthen incentives to work; relocation grants or housing reforms to raise geographical mobility; reducing trade union power/labour market flexibility.
    Up to 2 each: policy identified + how it reduces frictional or structural unemployment.
  2. (b) Training and education take years to raise skills; workers must find and move to new jobs; firms need time to adjust; policies must be funded and implemented; benefit reforms may face resistance.
    1 time lag reason; 1 explained; 1 judgement (e.g. effect depends on the type of unemployment and policy design).
Q8Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 4 style · 8 marks

Invented data for Country M over one year:Central bank policy rate: 12% → 15%Inflation rate: 14% → 9%Real GDP growth: 4.0% → 1.5%The currency appreciated by 6% against the US dollar.

  1. (a) Using the approximation real interest rate = nominal rate − inflation, calculate the real interest rate at the start and at the end of the period. [2]
  2. (b) Explain two ways in which a rise in interest rates can reduce the rate of inflation. [3]
  3. (c) Consider whether the data show that monetary policy was effective. [3]
Show answer
  1. (a) Start: -2%; end: 6%
    1 12 − 14 = −2%; 1 15 − 9 = +6%.
  2. (b) Higher borrowing costs and saving incentive reduce consumption and investment → AD falls; appreciation of the currency makes imports cheaper and exports dearer, lowering imported inflation and AD.
    1 + 1 for two channels identified (spending/borrowing, exchange rate, asset prices/expectations); 1 for explanation linking to lower AD or lower costs.
  3. (c) Inflation fell sharply (14% → 9%) and the currency appreciated, consistent with the policy working; but growth slowed from 4% to 1.5%, inflation remained above most targets, and other factors (falling world prices) may explain the fall.
    1 evidence of success; 1 cost/limitation (lower growth, still high inflation); 1 other factors/time lags, judgement.
Q9Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 4 style · 8 marks
  1. (a) Explain how progressive income taxes and unemployment benefits act as automatic stabilisers. [4]
  2. (b) Consider whether automatic stabilisers are likely to be effective in an economy with a large informal sector. [4]
Show answer
  1. (a) In a downturn incomes fall, so tax revenue falls more than proportionately and benefit payments rise automatically, cushioning disposable income and AD; in a boom tax revenue rises and benefits fall, restraining AD. No new decision is needed.
    1 recession: tax revenue falls; 1 benefit spending rises → supports AD; 1 boom: opposite effect dampens AD; 1 automatic, without discretionary changes.
  2. (b) Less effective: few workers pay income tax or receive unemployment benefits, so revenue and transfers change little with the cycle; the stabilising effect is weak, so discretionary policy is needed. But indirect taxes still vary with spending and cash-transfer programmes may help.
    Analysis (up to 3): narrow tax base, low benefit coverage, small size of government; Consideration (1+): sales taxes, targeted transfers, judgement.
Q10Effectiveness of fiscal, monetary and supply-side policy · Standard · Paper 4 style · 7 marks
  1. (a) Explain how a cut in interest rates may affect the exchange rate and the current account of the balance of payments. [4]
  2. (b) Consider why the effect of the interest rate cut on the current account may be small. [3]
Show answer
  1. (a) Lower rates reduce returns on deposits in the currency → hot money outflows → lower demand for the currency → depreciation; exports become cheaper and imports dearer, which may improve the current account (if Marshall–Lerner holds), but higher domestic spending also raises imports.
    1 capital outflow/less demand for currency; 1 depreciation; 1 exports more price competitive, imports dearer; 1 net effect on current account depends on elasticities/higher income raising imports.
  2. (b) Demand for exports and imports may be price inelastic in the short run (J-curve); higher incomes from cheaper borrowing raise imports; other countries may also cut rates; exchange rates are affected by many other factors.
    1 reason; 1 explained; 1 judgement/second reason.
Q11Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 3 style · 1 mark
  1. (a) In which situation is an increase in government spending financed by borrowing most likely to be offset by crowding out? [1]
Show answer
  1. (a) A The economy is near full capacity and private investment is very sensitive to interest rates.
    Government borrowing raises demand for loanable funds; with little spare capacity and interest-sensitive investment, higher interest rates (and real resource limits) displace private spending. B, C and D all make fiscal expansion more effective, not less.
Q12Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 4 style · 8 marks

The quantity theory of money: MV = PT. In an invented economy the money supply M is $400bn, the velocity of circulation V is 5 and the volume of transactions T is 1,000 billion units.

  1. (a) Calculate the average price level P. [1]
  2. (b) The money supply rises by 10% while V and T are unchanged. Calculate the new price level and the percentage change. [2]
  3. (c) Instead, the money supply rises by 10% while the volume of transactions rises by 4%. Calculate the percentage change in the price level, to one decimal place. [2]
  4. (d) Explain why monetarists assume that V and T are roughly constant in the short run, and one criticism of this assumption. [3]
Show answer
  1. (a) 2
    1 P = MV ÷ T = 400 × 5 ÷ 1,000 = 2.
  2. (b) 2.2; +10%
    M1 440 × 5 ÷ 1,000 = 2.2. A1 +10%.
  3. (c) +5.8%
    M1 P = 440 × 5 ÷ 1,040 = 2.1154. A1 (2.1154 − 2) ÷ 2 = 5.8%.
  4. (d) V depends on slowly changing payment habits and institutions; T is fixed at full-employment output (determined by supply-side factors). Critics: V changes, for example when people hoard money in recessions or with new payment technology, and output is not at full employment, so more money can raise T rather than P.
    1 V determined by habits/institutions; 1 T determined by real factors/full employment; 1 valid criticism (unstable velocity, spare capacity, Keynesian view).
Q13Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate whether supply-side policies are more effective than demand-side policies in achieving sustained economic growth. [20]
Show answer
  1. (a) Supply-side policies raise productive capacity (LRAS), allowing non-inflationary sustained growth, but are slow, costly and uncertain. Demand-side policies act faster to close negative output gaps but cannot raise capacity and risk inflation or debt if used alone. Supply-side policies are more effective for sustained growth, with demand management needed for stability.
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: AD/AS diagrams — AD shift (actual growth, inflation near capacity), LRAS shift (potential growth); market-based supply-side policies (tax cuts, deregulation, privatisation, labour market reform) and interventionist ones (education, infrastructure, R&D); fiscal and monetary demand management. Evaluation: time lags; cost to the budget; effectiveness depends on country (infrastructure gaps, governance); some policies (infrastructure spending) work on both sides; demand needed to use new capacity; inequality from market-based reforms. Judgement on 'more effective' for 'sustained' growth.
Q14Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate the effectiveness of monetary policy in controlling inflation in an economy that relies heavily on imported fuel and food. [20]
Show answer
  1. (a) Monetary policy reduces demand-pull inflation and can strengthen the currency to lower import prices, but much inflation in such an economy is cost-push from world prices and exchange-rate shocks; controlling it through interest rates requires large output losses. Effectiveness depends on the cause of inflation, credibility, transmission and fiscal discipline.
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: transmission mechanism (interest rates → consumption, investment, exchange rate, expectations); AD/AS diagram; appreciation lowers import costs (SRAS shifts right). Evaluation: imported cost-push inflation (world oil and food prices) not caused by domestic demand; small formal credit market weakens transmission; fiscal dominance (large deficits financed by borrowing); central bank independence and credibility; time lags; conflict with growth and debt servicing; alternatives (supply-side, targeted subsidies, exchange-rate policy). Conclusion.
Q15Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate whether an increase in government spending is an effective way to reduce unemployment during a recession. [20]
Show answer
  1. (a) Higher G raises AD with a multiplier effect, increasing output and cyclical employment; effectiveness depends on the size of the multiplier, spare capacity, crowding out, time lags, financing and the type of unemployment (it does little for structural unemployment).
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: AD/AS diagram with negative output gap; multiplier (k = 1/MPW) and derived demand for labour; reduces cyclical unemployment. Evaluation: size of multiplier (leakages to imports); crowding out (less likely in deep recession); time lags in planning projects; debt and future taxes, Ricardian equivalence; type of spending (infrastructure vs transfers); structural and frictional unemployment need supply-side policies; compare with monetary policy, especially if rates near zero. Conclusion.
Q16Effectiveness of fiscal, monetary and supply-side policy · Challenge · Paper 4 style · 8 marks

Invented data. A government is choosing between raising its spending by $10bn and cutting income tax by $10bn. Households spend 0.8 of any increase in disposable income on consumption in the first round. The marginal propensity to withdraw from national income is 0.5.

  1. (a) Calculate the eventual change in national income from the increase in government spending. [2]
  2. (b) Calculate the eventual change in national income from the income tax cut. [2]
  3. (c) Explain why the tax cut has a smaller effect than the same increase in government spending. [2]
  4. (d) Consider one reason why the tax cut might have an even smaller effect than calculated. [2]
Show answer
  1. (a) +$20bn
    M1 multiplier = 1 ÷ 0.5 = 2. A1 10 × 2 = $20bn.
  2. (b) +$16bn
    M1 initial rise in consumption = 0.8 × 10 = $8bn (the rest is saved or spent on imports, treated as already part of the withdrawals). A1 8 × 2 = $16bn.
  3. (c) All of the extra government spending is an injection into the circular flow in the first round, whereas part of a tax cut is withdrawn before it is spent.
    1 G adds directly to AD; 1 only part (MPC) of the tax cut is spent in the first round.
  4. (d) e.g. households expect future tax rises to repay borrowing and save the tax cut (Ricardian equivalence); low confidence; much spending goes on imports; benefit mostly to high earners with low MPC.
    1 reason; 1 explained.
Q17Policy objectives and conflicts · Core · Paper 3 style · 1 mark
  1. (a) An economy is on its short-run Phillips curve. Aggregate demand rises. What is likely to happen in the short run? [1]
Show answer
  1. (a) A Unemployment falls and inflation rises.
    Higher AD raises output and employment but also bids up prices and wages, so the economy moves up and to the left along the short-run Phillips curve. B describes a shift (e.g. a supply shock), not a movement along the curve.
Q18Policy objectives and conflicts · Core · Paper 4 style · 5 marks
  1. (a) State four main macroeconomic objectives of a government. [2]
  2. (b) Explain why using contractionary fiscal policy to reduce inflation may conflict with the objective of low unemployment. [3]
Show answer
  1. (a) Low and stable inflation; low unemployment; sustained economic growth; a sustainable current account position (balance of payments stability). Also accepted: fair distribution of income.
    2 marks for four correct; 1 mark for two or three.
  2. (b) Higher taxes or lower government spending reduce AD; firms sell less and need fewer workers (derived demand), so cyclical unemployment rises while inflation falls.
    1 contractionary fiscal policy reduces AD; 1 lower inflation; 1 lower output → higher unemployment (movement along SRPC).
Q19Policy objectives and conflicts · Core · Paper 4 style · 6 marks
  1. (a) Explain what is meant by the natural rate of unemployment. [2]
  2. (b) Explain two factors that determine the natural rate of unemployment. [4]
Show answer
  1. (a) The rate of unemployment when the labour market is in equilibrium and inflation is stable: it consists of frictional and structural unemployment, with no cyclical unemployment.
    1 equilibrium/stable inflation (NAIRU idea); 1 voluntary, frictional and structural unemployment only.
  2. (b) Any two: occupational and geographical mobility of labour; level and availability of unemployment benefits; information about vacancies; trade union power and minimum wages; skills mismatch from structural change.
    Up to 2 each: factor identified + explained.
Q20Policy objectives and conflicts · Standard · Paper 3 style · 1 mark
  1. (a) Which statement describes the monetarist view of the long-run Phillips curve? [1]
Show answer
  1. (a) B It is vertical at the natural rate of unemployment, so trying to keep unemployment below that rate leads to accelerating inflation.
    When expectations adjust, workers demand higher money wages and unemployment returns to the natural rate at a higher inflation rate; the long-run curve is vertical. A describes only the short-run trade-off.
Q21Policy objectives and conflicts · Standard · Paper 4 style · 7 marks

Invented data for Country N:Year: 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026Unemployment (%): 5.0, 6.5, 5.5, 4.5, 4.0, 5.5, 7.0, 6.5Inflation (%): 4.0, 2.5, 3.5, 6.0, 9.0, 10.5, 7.0, 5.0

  1. (a) Identify one period in the data that supports the existence of a short-run Phillips curve and one period that does not. [3]
  2. (b) Explain why the short-run relationship between inflation and unemployment might break down. [4]
Show answer
  1. (a) Supports: 2021 to 2023 (unemployment fell from 5.5% to 4.0% while inflation rose from 3.5% to 9.0%); also accept 2019–2020, 2020–2021 or 2024–2025. Does not support: 2023 to 2024 (unemployment and inflation both rose: 4.0% → 5.5% and 9.0% → 10.5%); also accept 2025–2026 (both fell).
    1 supporting period with data; 1 non-supporting period with data; 1 explanation of the inverse relationship.
  2. (b) Supply shocks (e.g. higher oil prices) shift SRAS left causing stagflation; inflation expectations rise so workers demand higher wages and the short-run Phillips curve shifts upward; changes in the natural rate.
    Up to 2 for supply shock explained; up to 2 for expectations shifting the curve (or another valid reason).
Q22Policy objectives and conflicts · Standard · Paper 4 style · 8 marks
  1. (a) Explain, using a long-run Phillips curve, why monetarists believe that expansionary demand-side policy cannot permanently reduce unemployment below the natural rate. [4]
  2. (b) Consider the implications of this view for a government that wants to reduce unemployment. [4]
Show answer
  1. (a) Expansion moves the economy up the short-run curve: unemployment falls and inflation rises. Workers then expect higher inflation and demand higher money wages; real wages return to equilibrium and unemployment returns to the natural rate at a higher inflation rate. The long-run curve is vertical at the natural rate.
    1 short-run movement along SRPC; 1 adaptive expectations/higher wage demands; 1 SRPC shifts up, unemployment returns to natural rate; 1 vertical LRPC → only higher inflation.
  2. (b) It should use supply-side policies to lower the natural rate rather than demand expansion; but Keynesians argue demand policy can reduce cyclical unemployment when there is a negative output gap, and expectations may adjust slowly.
    Analysis (up to 3): supply-side measures; risk of accelerating inflation; credibility of low-inflation policy. Consideration (1+): Keynesian view/hysteresis/slow adjustment; judgement.
Q23Policy objectives and conflicts · Standard · Paper 4 style · 7 marks

Invented data. In an emerging economy, real GDP growth rose from 3% to 6% in two years, while the current account deficit rose from 1.5% to 4.7% of GDP.

  1. (a) Explain why rapid economic growth may cause the current account deficit to increase. [3]
  2. (b) Consider which policies could reduce the conflict between growth and the current account. [4]
Show answer
  1. (a) Higher incomes raise consumer spending, much of which goes on imports (high MPM); investment needs imported machinery and fuel; domestic producers may switch sales from export to home market; inflation may reduce competitiveness.
    1 rising incomes; 1 higher imports (consumer goods, capital goods, energy); 1 further link (diverted exports, inflation, reduced competitiveness).
  2. (b) Supply-side policies to raise productivity and export capacity, import substitution in energy, and policies to attract FDI into export industries allow growth without such a large deficit; demand restraint (higher interest rates, contractionary fiscal policy) reduces the deficit but at the cost of growth.
    Analysis (up to 3): expenditure-switching and supply-side measures explained; expenditure-reducing policies as trade-off. Consideration (1+): time lags, cost, retaliation, dependence on imported oil; judgement.
Q24Policy objectives and conflicts · Standard · Paper 4 style · 6 marks
  1. (a) Explain how supply-side policies can reduce the conflict between economic growth and low inflation. [4]
  2. (b) Explain one reason why supply-side policies may fail to remove this conflict. [2]
Show answer
  1. (a) They increase productive capacity (LRAS shifts right) and productivity, so real output can grow without AD outrunning capacity; unit costs fall, reducing cost pressures. Growth can therefore occur with stable or lower prices.
    1 supply-side policy example (training, infrastructure, deregulation); 1 LRAS/productive capacity rises; 1 real output increases; 1 price level stable or lower (diagram may be used).
  2. (b) e.g. long time lags, so in the short run demand-led growth still causes inflation; high cost to the budget; uncertain effectiveness; may be undermined by external cost shocks.
    1 reason; 1 explained.
Q25Policy objectives and conflicts · Standard · Paper 4 style · 8 marks
  1. (a) Explain how a depreciation of the currency intended to reduce a current account deficit may conflict with the objective of low inflation. [4]
  2. (b) Consider whether this conflict is likely to be serious for an economy that imports most of its energy. [4]
Show answer
  1. (a) Depreciation makes imports dearer in domestic currency (imported fuel, food, raw materials) → cost-push inflation; exports become cheaper, so net exports and AD rise → demand-pull pressure; workers may demand higher wages.
    1 imports more expensive; 1 higher costs → SRAS left → cost-push; 1 higher net exports raise AD → demand-pull; 1 second-round wage effects.
  2. (b) Likely serious: energy demand is price inelastic, so the import bill rises and prices of transport and electricity increase throughout the economy; the current account may even worsen in the short run (J-curve). It is less serious if the central bank is credible, there is spare capacity, or world energy prices are falling.
    Analysis (up to 3): inelastic energy imports; wide pass-through; J-curve and Marshall–Lerner condition. Consideration (1+): credibility, spare capacity, offsetting policies; judgement.
Q26Policy objectives and conflicts · Challenge · Paper 3 style · 1 mark
  1. (a) In an invented economy the short-run Phillips curve is: inflation (%) = 12 − 1.5 × unemployment (%). The central bank's inflation target is 3%. What unemployment rate is consistent with meeting the target in the short run? [1]
Show answer
  1. (a) C 6%
    3 = 12 − 1.5U → 1.5U = 9 → U = 6%. D (9%) forgets to divide by 1.5; B uses 12 ÷ 3.
Q27Policy objectives and conflicts · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate whether a government can achieve low inflation and low unemployment at the same time. [20]
Show answer
  1. (a) In the short run demand-side policy faces a trade-off (short-run Phillips curve), but both can be achieved if unemployment is at or above a low natural rate and inflation expectations are anchored; supply-side policies that lower the natural rate and raise productivity make both possible; supply shocks make it harder.
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: short-run Phillips curve and AD/AS; demand-pull trade-off; long-run vertical Phillips curve; natural rate; supply-side policies shifting LRAS right and the LRPC left; credibility of an independent central bank anchoring expectations. Evaluation: supply shocks (oil, food, exchange rate) create stagflation; time lags of supply-side policies; hysteresis; evidence of periods with low inflation and low unemployment (e.g. flattened Phillips curves); country context. Conclusion on 'can'.
Q28Policy objectives and conflicts · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate the view that economic growth should be the most important macroeconomic objective for a low-income country. [20]
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  1. (a) Growth raises incomes, creates jobs, funds public services and reduces poverty, so it is often a priority; but without price stability, external balance and fair distribution, growth may be unsustainable (boom–bust, inflation, debt crises) or fail to reach the poor; environmental sustainability also matters. Growth is necessary but not sufficient; priority depends on current conditions.
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: benefits of growth (real GDP per head, employment, tax revenue, poverty reduction); links to other objectives — growth may raise inflation and the current account deficit; trickle-down vs inclusive growth. Evaluation: high inflation hurts the poor most; balance-of-payments crises and IMF programmes can stop growth; unequal distribution; environmental costs; population growth means GDP growth may not raise GDP per head; quality of growth. Conclusion.
Q29Policy objectives and conflicts · Challenge · Paper 4 style · 20 marks
  1. (a) Evaluate whether reducing a large budget deficit is compatible with achieving economic growth and low unemployment. [20]
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  1. (a) Short run: cutting spending or raising taxes reduces AD, growth and employment (multiplier). Long run: lower borrowing may reduce interest rates, crowding in, restore confidence and avoid debt crises, supporting growth. Compatibility depends on the state of the economy, the method of deficit reduction and the response of monetary policy.
    Mark bands (20): Level 4 (15–20) accurate, well-explained analysis of both sides, relevant diagram(s) fully used, and a reasoned conclusion that answers the question in context; Level 3 (10–14) mostly accurate analysis, some evaluation but conclusion partly asserted; Level 2 (5–9) limited or partly inaccurate analysis, evaluation mostly descriptive; Level 1 (1–4) a few relevant points. One-sided answers are capped at Level 2. Analysis: contractionary fiscal policy and AD/AS; multiplier; cyclical vs structural deficits; crowding out/crowding in; debt sustainability and interest costs. Evaluation: timing (in recession vs boom); composition (cutting investment harms long-run growth; cutting wasteful subsidies or broadening the tax base may not); expansionary fiscal contraction debate; accompanying monetary easing or depreciation; credibility with lenders; distributional effects. Conclusion on 'compatible'.
Q30Policy objectives and conflicts · Challenge · Paper 4 style · 7 marks

In an invented economy the expectations-augmented Phillips curve is:actual inflation (%) = expected inflation (%) + 10 − 2 × unemployment (%)

  1. (a) Calculate the inflation rate when unemployment is 4% and expected inflation is 3%. [1]
  2. (b) Workers now expect inflation to be the rate you calculated in (a). The government keeps unemployment at 4%. Calculate the new inflation rate. [2]
  3. (c) Calculate the rate of unemployment at which actual inflation equals expected inflation. [1]
  4. (d) Explain what these results show about the trade-off between inflation and unemployment. [3]
Show answer
  1. (a) 5%
    1 3 + 10 − 8 = 5%.
  2. (b) 7%
    M1 expected inflation = 5. A1 5 + 10 − 8 = 7%.
  3. (c) 5%
    1 10 − 2U = 0 → U = 5%.
  4. (d) Holding unemployment below 5% (the natural rate) gives ever-rising inflation (5%, then 7%, ...) as expectations adjust; the trade-off exists only in the short run, and the long-run Phillips curve is vertical at 5%.
    1 inflation accelerates when U is held below the natural rate; 1 because expectations adjust upward each period; 1 so no permanent trade-off/vertical LRPC at 5%.

Similar questions

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Effectiveness of fiscal, monetary and supply-side policy Banker23 questions · 9/9 sessions
Policy objectives and conflicts Banker17 questions · 8/9 sessions

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Effectiveness of fiscal, monetary and supply-side policy Banker47.66669/9
Policy objectives and conflicts Banker40.33338/9

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