Variations in economic activity Paper 1- IBDP Economics SL

IBDP Economics SL – Macroeconomics- Variations in economic activity Paper 1- Exam Style Practice Questions

Exam Style Questions..

IBDP Economic SL- All Topics

Question

Explain how aggregate demand in an economy might be affected by a rise in the exchange rate and a decrease in the income of major trading partners.

▶️Answer/Explanation

Answers may include:

definition of aggregate demand (AD), exchange rate
diagram to show AD shifting to the left
explanation of the linkages between a rise in the exchange rate and a decrease in the income of major trading partners on a country’s AD
examples of economies which have experienced a rise in the exchange rate and/or a decrease in the income of major trading partners.

Question

Explain why a reduction in interest rates might lead to an increase in aggregate demand.

▶️Answer/Explanation

Answers may include:

definitions of aggregate demand, interest rates
diagram to show how a reduction in interest rates increases aggregate demand
explanation that a reduction in interest rates increases consumption and investment, leading to an increase in aggregate demand
examples of how a reduction in interest rates increases aggregate demand in practice and/or of countries where reduced interest rates have increased aggregate demand.

Question

Explain how a decrease in business confidence can affect the real GDP of an economy that is producing below the full employment level of output

▶️Answer/Explanation

Answers may include:

definitions of real GDP, business confidence, full employment level of output
diagram to show how a decrease in business confidence will shift AD to the left, resulting in a decrease in real GDP
explanation that business confidence is a determinant of investment and a decrease in confidence will lead to a decrease in AD and a decrease in real GDP
examples of situations where business confidence has fallen.

Question

Evaluate the view that a decrease in aggregate demand would always be deflationary.

▶️Answer/Explanation

Answers may include:

definitions of aggregate demand, deflationary
diagram to show a fall in AD leading to a fall in the average price level in the neo classical/monetarist model
explanation that in the neo classical/monetarist model a fall in AD would be deflationary because a fall in AD leads to a new equilibrium income at a lower average price level and real GDP
examples of economies that have experienced a decrease in AD, which is deflationary
synthesis or evaluation.

Question

Explain how aggregate demand is likely to be affected by an increase in the wealth of consumers and an increase in business confidence.

▶️Answer/Explanation

Answers may include:

definitions of aggregate demand, wealth, business confidence
diagram to show the AD curve shifting to the right
explanation that an increase in the wealth of consumers may have a positive wealth effect whereby consumption increases as consumers feel richer and are more willing to spend, or can borrow more on the basis of their greater wealth; that an increase in business confidence in relation to being more optimistic about future sales and profits is likely to increase investment; and that the increase in C and I will increase AD
examples of an increase in consumers’ wealth and/or business confidence increasing AD in practice.

Question

Explain how in the Keynesian AD/AS model an economy can be in equilibrium while producing below the full employment level of output.

▶️Answer/Explanation

Answers may include:

definitions of equilibrium, full employment level of output
diagram to show the Keynesian model of an economy at equilibrium income below the full employment level of output
explanation of how an economy can be in equilibrium income below full employment when AD falls, leading to a deflationary gap when wage and price rigidity keep the economy below the full employment level of output
examples of when economies have experienced equilibrium income below the full employment level of output.

Question

Discuss the view that economies will always return to the full employment level of output in the long run.

▶️Answer/Explanation

Answers may include:

definition of full employment, full employment level of output
diagrams to show the two different views of the economy
explanation of the monetarist/new classical view that the economy will always return to the full employment level of output in the long run
examples of situations where economies either have or have not returned to full employment in the long run
synthesis and evaluation (discuss).