Macroeconomic objectives Paper 1

IBDP Economics  HL – Macroeconomics – Macroeconomic objectives -Paper 1 Exam Style Practice Questions

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Macroeconomic objectives Paper 1? 

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Exam Style Question for IBDP Economics HL- Macroeconomic objectives -Paper 1

Question

Explain how an increase in unemployment might lead to a loss of gross domestic product (GDP) and a budget deficit.

▶️Answer/Explanation

Answers may include:

  • definition of unemployment, GDP, budget deficit
  • diagram to show aggregate demand (AD) and/or aggregate supply (AS) shifting to the left
  • explanation of how higher unemployment might lead to a loss of GDP and a budget deficit, via the loss of tax revenue and increase in government spending
  • examples of instances where rising unemployment has caused a loss of GDP and/or a budget deficit.

Question

Discuss the view that there will always be a trade-off between the unemployment rate and the inflation rate.

▶️Answer/Explanation

Answers may include:

  • definition of trade-off, unemployment rate, inflation rate
  • diagrams to show the short-run and long-run Phillips curves
  • explanation of the view in terms of the short-run Phillips curve relationship
  • examples of such a trade-off and/or absence of such a trade-off
  • synthesis and evaluation (discuss).

Question

Explain why there is a possible trade-off between the unemployment rate and the inflation rate in the short run.

▶️Answer/Explanation

Answers may include:

  • definitions of unemployment (rate), inflation (rate)
  • diagram of the short-run Phillips curve to illustrate the trade-off between inflation and unemployment and AD/AS diagram to support the explanation
  • explanation that, in the short-run, if aggregate demand in the economy increases, this would lead to increase in national output, forcing firms to hire more workers and decreasing the unemployment rate, while simultaneously increasing the inflationary pressures in the economy, and/or vice versa
  • examples of countries that have possibly experienced a trade-off between inflation and unemployment.

Question

Discuss the view that the redistribution of income is the most important impact that inflation has on an economy.

▶️Answer/Explanation

Answers may include:

  • definition of inflation
  • AD/AS diagram to show the increase in the price level or a Lorenz curve to show changed distribution of income
  • explanation that (unexpectedly) high inflation affects positively the real income/wealth of borrowers and the groups in society with variable income while affecting negatively the real income/wealth of lenders and the groups in society with fixed income
  • examples of countries that have experienced inflation with attempt to identify consequences of inflation
  • synthesis or evaluation (discuss).

Question

Explain why measuring unemployment in a country is difficult. 

▶️Answer/Explanation

Answers may include:

  • definition of unemployment
  • a diagram is not required for full marks, but candidates may use a labour market diagram, AD/AS diagram or Phillips curve diagram
  • explanation of the challenges in measuring the exact number of people of working age who are without work, available for work and actively seeking work, resulting in inability to assess the underemployment/the hidden unemployment and the unreported employment in the informal(underground) economy
  • examples of specific cases or countries where there is unemployment that may be difficult to measure.

Question

Discuss whether the most important consequence of unemployment is a loss of income for individuals.

▶️Answer/Explanation

Answers may include:

  • definition of unemployment
  • appropriate diagram(s) to show the loss of income due to unemployment and/or other consequences of unemployment
  • explanation of the different economic (loss of income), social and political consequences of unemployment
  • examples of the consequences of unemployment for individuals, communities and/or countries
  • synthesis or evaluation (discuss).

Question

Explain two causes of demand-pull inflation.

▶️Answer/Explanation

Answers may include:

  • definition of inflation, demand-pull inflation
  • diagram showing rising average price level due to an increase in AD
  • explanation that AD may increase because of a change in any of the determinants affecting component(s) of AD
  • examples of economies that have experienced demand-pull inflation.

Question

Explain two causes of structural unemployment.

▶️Answer/Explanation

Answers may include:

  • definition of unemployment, structural unemployment
  • diagram(s) that show the demand curve for labour shifting to the left and/or surplus of labour due to minimum wage legislation/labour unions
  • explanation that a (permanent) decrease in demand for particular labour skills, changes in the geographical location of industries and labour market rigidities, would lead to a surplus of workers (and therefore unemployment)
  • examples of industries that have experienced structural unemployment due to relevant causes (e.g. coal miners losing their job due to foreign competition or the advent of alternative sources of energy, workers in the newspaper and retailing businesses losing their jobs due to online competition and new technologies, low-skilled workers remaining unemployed due to minimum wage legislation, etc.).

Question

Discuss the consequences of different types of unemployment.

▶️Answer/Explanation

Answers may include:

  • definitions of unemployment, frictional unemployment, structural unemployment, seasonal unemployment, cyclical unemployment
  • diagram(s) showing decreasing GDP due to falling AD or LRAS
  • explanation of the economic consequences of different types of unemployment in terms of effects on government budget, personal incomes and real GDP, and personal or social consequences such as increased inequality in the distribution of income, the possibility of increased crime rates, increased stress levels, increased indebtedness, homelessness and family breakdown
  • examples of specific cases where unemployment has led to economic, personal and social consequences (e.g. geographical areas with declining industries, the Great Depression)
  • synthesis or evaluation (discuss).

Question

Explain the causes of cost-push inflation.

▶️Answer/Explanation

Answers may include:

  • definitions of inflation, cost-push inflation
  • diagram showing cost-push inflation (increase in the price level due to decrease in SRAS)
  • explanation that cost-push inflation is caused by an increase in the costs of factors of production 
  • example(s) of specific policies/events that may cause cost-push inflation, examples of economies that have experienced cost-push inflation (e.g. USA in the 1970s).

Question

Discuss the view that deflation is more harmful than inflation.

▶️Answer/Explanation

Answers may include:

  • definitions of inflation, deflation 
  • diagrams showing deflation and inflation
  • explanation of the possible consequences of high inflation rates (increased uncertainty and more difficult planning, wealth/income redistribution and social tensions, lower savings rate/higher consumption, lower export competitiveness) and the possible consequences of deflation (increased debt burden, bankruptcies and cyclical unemployment, wealth/income redistribution and social tensions, higher savings rate/lower consumption)
  • examples of economies that have experienced high inflation rates (e.g. Weimar Republic, Zimbabwe, Venezuela), examples of economies that have experienced deflation (e.g. USA during the Great Depression, Japan), examples of specific cases of negative and/or positive consequences
  • synthesis or evaluation (discuss).

Discussion may include: in a progressive taxation system the inflation pushes individuals and businesses into higher income brackets, leading to higher tax revenue for the government and higher tax burden for individuals and businesses; the effect of inflation/deflation on groups with fixed incomes versus the effect on groups with incomes that change with the price level; the importance of the magnitude of price changes (low inflation rates of about 2 % or less may be beneficial for the economy); the importance of how prolonged the inflation/deflation is, whether the inflation/deflation is anticipated or not anticipated, whether the deflation is caused by supply-side or demand-side factors, whether the inflation is demand-pull or cost-push (mild demand-pull inflation may stimulate employment and economic growth, increase profits); the possibility that inflation may get out of control and inflation rates may reach astronomical levels.

Question

Explain how rising commodity prices and wages might lead to cost-push inflation.

▶️Answer/Explanation

Answers may include:

  • definitions of inflation, cost-push inflation, (primary) commodity
  • AD/AS diagram showing a shift of the short-run aggregate supply curve to the left and higher average price level
  • an explanation of how cost-push inflation is caused by the increase in the costs of production due to the rising commodity prices and wages
  • examples of countries where cost-push inflation has taken place.

Question

Discuss the possible consequences of deflation for an economy.

▶️Answer/Explanation

Answers may include:

  • definition of deflation
  • AD/AS diagram(s) showing either AD or AS shifting and a lower average price level
  • an explanation of possible consequences of deflation such as deflationary spiral with high levels of cyclical unemployment and/or bankruptcies due to rising real value of debt
  • examples of countries that have experienced deflation
  • synthesis or evaluation (discuss).

Question

Explain how a better trained and educated labour force might affect economic growth.

▶️Answer/Explanation

Answers may include:

  • definition of economic growth, labour (force)
  • AD/AS diagram with LRAS shifting to the right or PPC diagram with the production possibilities curve shifting to the right
  • an explanation of how improved education and training might lead to increasing productivity and hence economic growth
  • examples of countries where improved education and training have possibly affected economic growth.

Question

Discuss the view that economic growth always leads to rising living standards.

▶️Answer/Explanation

Answers may include:

  • definition of economic growth
  • AD/AS diagram showing increasing real GDP, negative externality diagram, PPC diagram, poverty cycle diagram or Lorenz curve diagram
  • an explanation of the impacts economic growth might have on living standards through changes in employment, tax revenue used to finance government spending, sustainability in resource use and the distribution of income
  • examples of cases where economic growth has led to changes in the standard of living
  • synthesis or evaluation (discuss).

Discussion may include: the advantages and disadvantages of economic growth, the extent to which economic growth affects different stakeholders and material and non-material aspects of the standard of living, consideration of the word “always”.

Question

Explain why a sustainable level of government (national) debt is an important macroeconomic objective.

▶️Answer/Explanation

Answers may include:

  • Terminology: Government (national) debt, sustainable government (national) debt.
  • Diagrams: Candidates might use an AD/AS diagram to illustrate changes in government spending, but the question can be answered without the use of a diagram.
  • Theory: An explanation of how government debt might be measured as a percentage of GDP. Candidates may also explain how a budget deficit is related to government (national) debt. Candidates might explain sustainable debt in terms of servicing costs, credit ratings and how future taxation and government spending might be impacted by debt and whether these are sustainable.

Question

Using real-world examples, discuss the potential trade-off between unemployment and inflation.

▶️Answer/Explanation

Answers may include:

  • Terminology: Unemployment, inflation.
  • Diagrams: AD/AS diagrams, Phillips curve diagram.
  • Theory: An explanation of the potential trade-off between unemployment and inflation in the long run and in the short run.
  • Synthesis (discuss): Discussion of the relationship between inflation and unemployment in the short run and in the long run. A consideration of the trade-off revealed by the short-run Phillips curve and the lack of a trade-off indicated by the long run Phillips curve in which the economy is assumed to be operating at the natural rate of unemployment.
  • Example(s): A relevant real-world example(s) in which a potential trade-off between unemployment and inflation is claimed to exist.

Question

Explain why structural unemployment might occur in an economy.

▶️Answer/Explanation

Answers may include:

  • definitions of unemployment and structural unemployment
  • diagram to show structural unemployment
  • explanation of how structural unemployment might occur
  • examples of situations when structural unemployment has occurred.

Question

Explain the natural rate of unemployment.

▶️Answer/Explanation

Answers may include:

  • Terminology: the natural rate of unemployment (NRU).
  • Explanation: of the NRU as a result of structural, frictional and seasonal unemployment and an explanation of each of these.
  • Diagram: showing a decrease in the demand for labour for a particular market or geographical area for structural unemployment; or a business cycle diagram (or AD/AS diagram) showing actual GDP being equal to potential GDP at the NRU, or use of a long-run Phillips curve diagram, or a labour market diagram with the wage above the equilibrium.

Question

Explain two economic costs of high unemployment.

▶️Answer/Explanation

Answers may include:

  • Terminology: unemployment.
  • Explanation: of any two economic costs such as a loss of real output; higher spending and lower tax revenues for the government with the possibility of a larger budget deficit/ a smaller budget surplus; a more unequal distribution of income; costs to the government of dealing with social problems caused by unemployment; unemployed people may have difficulty finding work in the future; specific problems related to the type of unemployment, eg structural or cyclical.
  • Diagram: any relevant diagram related to the particular cost being explained, eg use of a PPC diagram or an AD/AS diagram.

Question

Using real-world examples, discuss the view that low unemployment can only be achieved at the expense of higher inflation.

▶️Answer/Explanation

Answers may include:

  • Terminology: unemployment, inflation.
  • Explanation: of the view in terms of higher AD as unemployment falls and thus higher demand inflation and/or in terms of the short-run Phillips curve relationship.
  • Diagram: use of an AD/AS diagram, a short-run Phillips curve diagram and/or a long-run Phillips curve diagram
  • Synthesis (discuss): a challenge to the view in terms of the importance of the type of unemployment being tackled, eg structural or cyclical, and the way in which it is tackled, eg through the use of demand-side or supply-side policies; Monetarist/new classical perspectives versus Keynesian perspectives; the possibility of higher inflation and higher unemployment; the possibility of no negative stable relationship between unemployment and inflation using the long-run Phillips curve; consideration of the importance of technological progress; consideration of the word “only”.
  • Examples: real-world examples of situations where low unemployment may or may not have coincided with higher inflation; use of empirical evidence.
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