Demand management (demand side policies)—monetary policy Paper 1| IBDP Economics HL |

IBDP Economics HL – Macroeconomics – Demand management (demand side policies)—monetary policy -Paper 1 Exam Style Practice Questions

Exam Style Questions..

IBDP Economic SL- All Topics

Question

Evaluate government policies to deal with the different types of unemployment.

▶️Answer/Explanation

Answers may include:

definitions of government policies and frictional, structural, seasonal and cyclical (demand-deficient) unemployment
diagrams might include AD/AS showing how government policies can increase AD leading to an increase in real GDP and/or a diagram to show how an increase in AD can reduce structural unemployment and the natural rate of unemployment
explanation that fiscal, monetary or supply-side policies can all be used to reduce the different types of unemployment. Outlining the transmission mechanism involved
examples of situations where a country has reduced a type of unemployment
synthesis or evaluation.

Question

Explain two tools open to a central bank to conduct expansionary monetary policy.

▶️Answer/Explanation

Answers may include:

Definition: expansionary monetary policy.
Explanation: of any two of the following instruments—open market operations, minimum reserve requirement, base rate changes and quantitative easing.
Diagram: money market diagram to show interest rates falling or AD/AS diagram.

Question

Using real-world examples, evaluate the effectiveness of monetary policy to achieve low unemployment.

▶️Answer/Explanation

Answers may include:

Definition: monetary policy, low unemployment.
Explanation: of the impacts that might occur on the economy as a result of its use on employment, growth, inflation and trade.
Diagram: AD/AS diagram.
Synthesis (evaluate): strengths and limitations of monetary policy in achieving low unemployment. Monetary policy is incremental, easily changed, flexible, fast to implement, does not burden the government’s budget; it is less effective with close to zero interest rates, and ineffective when business/consumer confidence is low; effectiveness may depend on the type of unemployment.
Examples: real-world examples where governments have attempted to lower unemployment using monetary policy.

Question

Using real-world examples, evaluate the effectiveness of monetary policy in reducing a large deflationary (recessionary) gap.

▶️Answer/Explanation

Answers may include:

Terminology: monetary policy, deflationary (recessionary) gap.
Explanation: of how expansionary monetary policy can be used to counter a deflationary gap using the various tools of monetary policy, such as open market operations/quantitative easing, minimum reserve requirements and changes in the central bank’s minimum lending rate.
Diagram: AD/AS diagram to show AD shifting right with the deflationary gap being closed/eliminated.
Synthesis (evaluate): evaluation of the effectiveness of monetary policy in terms of the limitations, eg limited scope for lowering interest rates when close to zero, low consumer confidence, ineffective in relation to structural unemployment and the possibility of greater inflation; and its strengths, eg short time lags, incremental, flexible and easily reversible; comparison between the effectiveness of monetary and fiscal policy when there is a large recessionary gap.
Examples: real-world examples of monetary policy being used to counter a deflationary gap.