The macroeconomy (A Level) Banker

1. (a) In Keynes's liquidity preference theory, which motive for holding money is most sensitive to changes in the rate of interest?A the speculative motiveB the transactions motiveC the precautionary motiveD the store of value motive [1]

A central bank in South Asia has raised its policy rate three times this year and has also lent emergency funds to a small commercial bank.

1. (a) Distinguish between narrow money and broad money. [2]
2. (b) Explain two functions of a central bank. [4]

Extract (invented for practice): In an East African country, the number of people using mobile-phone wallets has risen from 9 million to 31 million in six years. Market traders, taxi drivers and utility companies now accept wallet payments, and the share of payments made in cash has fallen from 70 % to 40 %.

1. (a) Explain two characteristics of money that a digital wallet balance must have if it is to function as money. [4]
2. (b) Explain how a shift from cash to digital payments could affect commercial banks' ability to create credit. [3]

1. (a) Commercial banks keep 8 % of deposits as reserves and lend the rest. A customer deposits $40 million of new cash. Assuming no cash leaks out of the banking system, what is the maximum total increase in bank deposits?A $500 millionB $460 millionC $320 millionD $43.2 million [1]

Data (invented for practice): A customer deposits PKR 10 million of cash in Bank A. All banks keep 10 % of every deposit as reserves and lend out the rest, and all loans are redeposited in the banking system.

1. (a) Calculate the new loans made in each of the first three rounds of lending, starting with Bank A. [3]
2. (b) Calculate the maximum total increase in bank deposits that could result from the original deposit. [1]
3. (c) Explain two reasons why the actual increase in deposits is likely to be smaller than this. [4]

1. (a) Evaluate the extent to which commercial banks' ability to create credit is limited. [20]

1. (a) According to the quantity theory of money (MV = PT), the money supply rises by 8 %, the velocity of circulation is unchanged and the number of transactions rises by 3 %. By approximately how much does the price level change?A a rise of 4.9 %B a rise of 8.0 %C a rise of 11.2 %D a fall of 2.7 % [1]

Data (invented for practice): In an economy the demand for money is given by Md = 600 − 40r, where Md is in $ billion and r is the rate of interest in per cent. The money supply is fixed by the central bank.

1. (a) Calculate the equilibrium rate of interest when the money supply is $360 billion. [2]
2. (b) The central bank increases the money supply to $400 billion. Calculate the new equilibrium rate of interest. [1]
3. (c) Explain what is meant by a liquidity trap and why, in a liquidity trap, a further increase in the money supply would not reduce the rate of interest. [3]

1. (a) Evaluate the view that controlling the money supply is the most effective way to control inflation. [20]

1. (a) Which change would show potential economic growth rather than only actual economic growth?A an outward shift of the economy's long-run aggregate supply curveB a movement from a point inside the production possibility curve to a point on itC an increase in aggregate demand when there is a large negative output gapD a fall in unemployment caused by higher consumer spending [1]

1. (a) Distinguish between actual and potential economic growth. [2]
2. (b) Explain two causes of potential economic growth. [4]

1. (a) State two possible costs of rapid economic growth. [2]
2. (b) Explain how economic growth could increase income inequality. [3]

Data (invented for practice): Country G's nominal GDP was 50 000 billion in 2024 and 56 100 billion in 2025 (in local currency). The GDP deflator was 100 in 2024 and 108 in 2025.

1. (a) Calculate real GDP in 2025 at 2024 prices and the rate of real economic growth between 2024 and 2025. Give real GDP to one decimal place and the growth rate to two decimal places. [3]
2. (b) Explain why real GDP is a better measure of economic growth than nominal GDP. [2]

Data (invented for practice): In 2025 a South Asian country's real GDP grew by 4.2 % and its population grew by 2.4 %. Much of the growth came from farming that depends on pumping groundwater, and from clearing forest for new farmland.

1. (a) Calculate the growth rate of real GDP per head in 2025. Give your answer to two decimal places. [2]
2. (b) Explain two reasons why the country's present rate of economic growth may not be sustainable. [4]

1. (a) Evaluate the view that investment in human capital is the most important cause of long-run economic growth. [20]

Extract (invented for practice): A Southeast Asian country's real GDP is US$300 billion. The government targets real growth of 5 % a year while cutting carbon emissions from electricity by 30 % by 2035. Coal still provides 60 % of its electricity.

1. (a) Calculate the country's real GDP after four years if it grows at 5 % a year. Give your answer to two decimal places. [2]
2. (b) Explain how a carbon tax on electricity generators could affect the country's long-run aggregate supply. [3]
3. (c) Consider whether the government can achieve both rapid economic growth and environmental sustainability. [3]

1. (a) Evaluate whether policies to achieve sustainable economic growth must reduce the rate of economic growth. [20]

1. (a) In an open economy with a government, the marginal propensity to save is 0.1, the marginal rate of tax is 0.15 and the marginal propensity to import is 0.25 (all measured as fractions of national income). Government spending rises by $30 billion. What is the final increase in national income?A $60 billionB $120 billionC $300 billionD $40 billion [1]

1. (a) Explain the difference between injections and withdrawals in the circular flow of income of an open economy with a government sector. [3]
2. (b) Explain what happens to national income when injections are greater than withdrawals. [3]

Data (invented for practice), in $ billion for one period: national income 1200; saving 120; taxation 180; imports 60; investment 90; government spending 150; exports 90.

1. (a) Calculate total injections and total withdrawals in the period. [2]
2. (b) State and explain what is likely to happen to national income in the next period. [2]
3. (c) Explain the role of the financial sector in linking saving and investment in the circular flow. [3]

Data (invented for practice): When national income in a country rose by $400 billion, households' spending on domestically produced goods rose by $240 billion. The government now plans to spend an extra $12 billion on rural roads.

1. (a) Calculate the marginal propensity to consume domestically produced goods. [1]
2. (b) Calculate the value of the multiplier and the eventual increase in national income caused by the extra government spending. [2]
3. (c) Explain two reasons why the actual increase in national income may be smaller than this. [4]

1. (a) Evaluate whether an economy with a high marginal propensity to import should rely on increasing exports, rather than increasing government spending, to raise its national income. [20]

1. (a) In an economy, investment is $120 billion, government spending is $200 billion and exports are $180 billion; these do not depend on income. Saving, taxes and imports are 15 %, 20 % and 15 % of national income respectively. Exports then rise by $50 billion. What is the new equilibrium level of national income?A $1100 billionB $1050 billionC $1000 billionD $1333 billion [1]

Table 11: Real GDP of Country D ($ billion; data invented for practice)Year 1: actual 820; potential 850Year 2: actual 860; potential 870Year 3: actual 905; potential 890Year 4: actual 930; potential 910

1. (a) Calculate the output gap as a percentage of potential output for each year. Give your answers to two decimal places. [3]
2. (b) Identify the first year in which there was an inflationary (positive) output gap and explain why inflation might rise in that year. [2]
3. (c) Explain why it is difficult for a government to measure the output gap accurately. [3]

1. (a) Evaluate the view that, because of the multiplier, an increase in government spending will always be an effective way to end a recession. [20]

1. (a) In a country, the working-age population is 140 million, the labour force is 84 million and 78.12 million people are employed. What are the unemployment rate and the labour force participation rate?A unemployment rate 7.0 %, participation rate 60.0 %B unemployment rate 4.2 %, participation rate 60.0 %C unemployment rate 7.0 %, participation rate 55.8 %D unemployment rate 4.2 %, participation rate 55.8 % [1]

A textile region in a South Asian country has lost many jobs as factories move to automated production, while technology firms in the capital report shortages of programmers.

1. (a) Distinguish between frictional unemployment and structural unemployment. [2]
2. (b) Explain what is meant by the natural rate of unemployment and one factor that could reduce it. [3]

1. (a) Evaluate whether reducing structural unemployment should be a higher priority for a government than reducing demand-deficient (cyclical) unemployment. [20]

Table 12: Inflation and unemployment in Country E (data invented for practice)Year 1: inflation 4.1 %; unemployment 8.2 %Year 2: inflation 5.3 %; unemployment 6.9 %Year 3: inflation 6.8 %; unemployment 5.6 %Year 4: inflation 9.5 %; unemployment 5.4 %Year 5: inflation 12.0 %; unemployment 5.5 %

1. (a) Describe the relationship between inflation and unemployment shown in the data. [2]
2. (b) Using the expectations-augmented Phillips curve, explain the pattern in Years 3 to 5. [4]

1. (a) Evaluate the view that there is a trade-off between unemployment and inflation in the long run. [20]