Macroeconomic objectives Paper 1

IBDP Economics  SL  – 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 Macroeconomics-Macroeconomic objectives Paper 1

Question

Explain how an increase in investment might lead to economic growth.

▶️Answer/Explanation

Answers may include:

  • definitions of investment and economic growth
  • diagrams might include AD/AS/LRAS or PPC to show the impact of investment on economic growth
  • explanation of how investment in physical capital, human capital and natural capital can lead to increases in the quantity and quality of resources and subsequently an increase in productivity and/or how investment might increase aggregate demand (AD)
  • examples of types of investment that have caused this or countries that have grown as a result of increased investment.

Question

Explain the role of improved productivity in achieving economic growth.

▶️Answer/Explanation

Answers may include:

  • definition of productivity, improved productivity, economic growth
  • diagram to show a shift of short-run aggregate supply (SRAS) to the right and/or long-run aggregate supply (LRAS) to the right or use of a production possibility diagram
  • explanation that improved productivity will reduce unit costs of production in the SR and shift the SRAS to the right, leading to an increase in gross domestic product (GDP) and short-run economic growth; and/or an explanation that improved productivity will increase the productive capacity of the economy in the LR, thus shifting LRAS to the right and causing long-run economic growth
  • examples of improved productivity in relation to a particular economy.

Question

Discuss the view that economic growth can only be achieved at the expense of other macroeconomic objectives such as a low and stable rate of inflation and equity in the distribution of income.

▶️Answer/Explanation

Answers may include:

  • definition of economic growth, inflation, low and stable inflation, equity in the distribution of income
  • diagram to show growth through either an increase in aggregate demand (AD) or a shift of LRAS to the right, or any other relevant diagram
  • explanation of how economic growth might conflict with other macroeconomic objectives, such as low and stable prices and a more equitable distribution of income and/or low unemployment, a satisfactory balance of payments (external balance) and environmental objectives
  • examples of instances where growth has improved or worsened one or more of the above macroeconomic objectives
  • synthesis and evaluation (discuss).

Question

Explain, using a production possibilities curve (PPC) diagram, an increase in the actual output of an economy.

▶️Answer/Explanation

Answers may include:

  • definitions of production possibilities curve, actual output
  • PPC diagram to show an increase in actual output
  • explanation that an increase in actual output results from increased utilization of resources, showing a movement towards the production possibility curve
  • example of actual growth in specific countries.

Question

Discuss the view that economic growth always leads to a rise in living standards.

▶️Answer/Explanation

Answers may include:

  • definitions of economic growth, living standards
  • PPC diagram or AD/AS diagram to depict economic growth
  • explanation of why economic growth leads to a rise in living standards because, for example, of rising incomes and employment
  • example of economic growth leading to changes in living standards
  • synthesis or evaluation (discuss).

Question

Explain why cyclical (demand-deficient) unemployment may occur in an economy.

▶️Answer/Explanation

Answers may include:

  • definition of unemployment, cyclical (demand-deficient) unemployment
  • diagram to show cyclical (demand-deficient) unemployment 
  • explanation of how cyclical (demand-deficient) unemployment is caused by a fall in AD, which may arise from a fall in any or all of the components of AD (C + I + G + X − M)
  • examples of cyclical (demand-deficient) unemployment occurring in practice.

Question

Explain two possible causes of deflation.

▶️Answer/Explanation

Answers may include:

  • Definition: deflation.
  • Explanation: any determinant of AD that could shift it to the left, eg falling consumer or business confidence, falling consumption, falling investment, falling government spending, or any determinant that shifts AS to the right, eg falling costs of raw materials or labour, increased productivity, rising exchange rate.
  • Diagram: AD/AS diagram to show falling AD or increasing AS in such a way that the average price level falls.

Question

Discuss the possible consequences of economic growth on living standards, unemployment and inflation.

▶️Answer/Explanation

Answers may include:

  • definitions of economic growth, living standards, unemployment and inflation
  • diagrams might include AD/LRAS showing an increase in AD or LRAS and impact on real GDP/living standards and inflation and/or labour market diagram showing an increase in AD, and accept ADL
  • explain how an increase in economic growth potentially raises living standards and decreases unemployment due to an increase in real output. Incomes are raised and due to the increase in demand for goods and services more workers are employed. In addition, the impact on inflation could be positive or negative depending on the cause of the economic growth
  • examples of countries that have experienced economic growth and the subsequent effect on living standards, unemployment and inflation
  • synthesis or evaluation (discuss).

Question

Using real-world examples, discuss the view that economic growth will always lead to economic development.

▶️Answer/Explanation

Answers may include:

  • Terminology: economic growth, economic development.
  • Explanation: of the view in terms of the impact that economic growth may have on output and employment, on real GDP/GNI per capita at PPP and thus on human welfare and living standards; the impact on government tax revenues and the ability of governments to increase their spending on education, health care and infrastructure; GNI per capita at PPP as part of the HDI.
  • Diagram: use of a PPC diagram to show the difference between growth and development and/or the use of an AD/AS diagram to show economic growth.
  • Synthesis (discuss): a challenge to the view in terms of the fact that development is multi-dimensional and an increase in GDP/GNI might have no impact on several indicators of development such as health and education, economic, social and gender inequality, energy, quality of the environment; consideration of “always”.
  • Examples: real-world examples of countries which have experienced growth and development and/or countries that have experienced growth without development.

Question

Explain two costs of deflation.

▶️Answer/Explanation

Answers may include:

  • Terminology: deflation.
  • Explanation: of any two costs of deflation such as uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment, risk of bankruptcies, negative economic growth/recession, an increase in the real value of debt, inefficient resource allocation and policy ineffectiveness.
  • Diagram: use of an AD/AS diagram showing AD shifting to the left or AS shifting to the right.

Question

Using real-world examples, discuss the view that high inflation is a more significant problem than high unemployment.

▶️Answer/Explanation

Answers may include:

  • Terminology: inflation, unemployment.
  • Explanation: explanation of the view in terms of the various costs of inflation such as uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation.
  • Diagram: AD/AS diagram(s) showing inflation and/or demand-deficient unemployment, and/or a demand for and supply of labour diagram to show structural unemployment.
  • Synthesis (discuss): a challenge to the view in terms of the various costs of unemployment such as the various economic, social and personal costs; the importance of the types of inflation and unemployment occurring, the duration and rates of inflation and unemployment, the relative difficulty of implementing policies to address inflation and unemployment; consideration of “more significant” and the possibility that they are both equally serious.
  • Examples: real-world examples of the impact of high rates of inflation and unemployment.
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