Variations in economic activity—aggregate demand and aggregate supply Paper 1

IBDP Economics  HL – Macroeconomics –  Variations in economic activity—aggregate demand and aggregate supply -Paper 1 Exam Style Practice Questions

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Variations in economic activity—aggregate demand and aggregate supply Paper 1? 

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Exam Style Question for IBDP Economics HL- Variations in economic activity—aggregate demand and aggregate supply -Paper 1

Question

Explain the possible impact of an increase in wealth and consumer confidence on aggregate demand.

▶️Answer/Explanation

Answers may include:

  • definitions of wealth, consumer confidence, aggregate demand (AD)
  • diagram(s) to show AD shifting to the right
  • explanation of the possible impact of an increase in wealth and consumer confidence on AD
  • examples of increases in wealth and consumer confidence.

Question

Examine why, in contrast to the monetarist/new classical model, the economy will not automatically return to the full employment level of output in the Keynesian model.

▶️Answer/Explanation

Answers may include:

  • definitions of full employment level of output, Keynesian model, monetarist/new classical model
  • diagram(s) to show equilibrium in the two models
  • explanation of the mechanisms through which an economy may remain stuck in a deflationary gap in the Keynesian system but will always return to full employment equilibrium in the monetarist/new classical model in the long run
  • examples of the two models applying in practice
  • synthesis or evaluation (examine).

Question

Explain the potential effects on the economic growth rate from a substantial increase in the number of skilled people of working age entering a country.

▶️Answer/Explanation

Answers may include:

  • definitions of economic growth, growth rate
  • diagram(s) to show how an outward shift of the AD curve and/or an outward shift of the LRAS/production possibility curve would lead to economic growth
  • explanation of how an increase in the population leads to an increase in AD in the short term (resulting in short-term economic growth) and/or how an increase in the number and qualification of the workforce leads to an increase in the quality and quantity of labour (resulting in long-term economic growth)
  • examples of immigration affecting economic growth rates of countries.

Question

Explain how a deflationary gap might occur.

▶️Answer/Explanation

Answers may include:

  • definition of deflationary gap
  • Keynesian or monetarist/new classical diagram to show a macroeconomic equilibrium at a level of real output below the full employment level
  • explanation of factors (events) that may depress the aggregate demand and lead to a macroeconomic equilibrium at a level of real output below the full employment level
  • examples of countries that have experienced a deflationary gap.

Question

Using the monetarist/new classical model and the Keynesian model, discuss the view that increases in aggregate demand will inevitably be inflationary.

▶️Answer/Explanation

Answers may include:

  • definitions of inflation, inflationary, aggregate demand (AD), monetarist/new classical model, Keynesian model
  • diagrams to show the impact of an increase in AD in the two different models
  • explanation why in the monetarist/new classical model an increase in AD will be inflationary
  • examples of cases where an increase in AD either has or has not been inflationary
  • synthesis and evaluation (discuss).
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