Economics HL
Macroeconomics — Unit 3 HL
- 1.
An economy experiences a fall in business confidence, causing firms to reduce planned investment. (a) Using the concept of the multiplier, explain how this initial fall in investment could lead to a larger fall in national income. (b) State one factor that determines the size of the multiplier.
[4 marks] · no calculator - 2.
Marking analysis: A learner attempts the following task: “An economy experiences a fall in business confidence, causing firms to reduce planned investment. (a) Using the concept of the multiplier, explain how this initial fall in investment could lead to a larger fall in national income. (b) State one factor that determines the size of the multiplier.” Their response addresses only this point: “Explains that the fall in investment reduces the income of workers and firms supplying investment goods.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 3.
In a given year, a country records: household consumption $420bn, gross investment $95bn, government spending $110bn, exports $150bn and imports $130bn. (a) Calculate GDP using the expenditure approach. (b) State the value of net exports. (c) Explain one reason GDP might not accurately reflect the standard of living of the country's residents.
[5 marks] - 4.
Marking analysis: A learner attempts the following task: “In a given year, a country records: household consumption $420bn, gross investment $95bn, government spending $110bn, exports $150bn and imports $130bn. (a) Calculate GDP using the expenditure approach. (b) State the value of net exports. (c) Explain one reason GDP might not accurately reflect the standard of living of the country's residents.” Their response addresses only this point: “States net exports = exports − imports = $20bn.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 5.
A country's nominal GDP was $500bn in Year 1 and $560bn in Year 2. The GDP deflator was 100 in Year 1 and 106 in Year 2. (a) Calculate real GDP in Year 2, expressed in Year 1 prices. (b) Calculate the percentage growth in real GDP between Year 1 and Year 2. (c) Explain why using nominal GDP growth alone would overstate the increase in the country's actual output. (d) The country's population grew by 3% over the same period. Calculate the approximate percentage change in real GDP per capita. (e) Comment on what this suggests about the change in average living standards.
[7 marks] - 6.
Marking analysis: A learner attempts the following task: “A country's nominal GDP was $500bn in Year 1 and $560bn in Year 2. The GDP deflator was 100 in Year 1 and 106 in Year 2. (a) Calculate real GDP in Year 2, expressed in Year 1 prices. (b) Calculate the percentage growth in real GDP between Year 1 and Year 2. (c) Explain why using nominal GDP growth alone would overstate the increase in the country's actual output. (d) The country's population grew by 3% over the same period. Calculate the approximate percentage change in real GDP per capita. (e) Comment on what this suggests about the change in average living standards.” Their response addresses only this point: “Uses real GDP = (nominal GDP / GDP deflator) × 100.” Evaluate the response against the complete 7-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[7 marks] - 7.
In an economy, the marginal propensity to consume (MPC) is 0.75, with no taxes or imports to consider. (a) Calculate the value of the multiplier. (b) If planned investment rises by $20m, calculate the resulting change in equilibrium national income.
[3 marks] - 8.
Marking analysis: A learner attempts the following task: “In an economy, the marginal propensity to consume (MPC) is 0.75, with no taxes or imports to consider. (a) Calculate the value of the multiplier. (b) If planned investment rises by $20m, calculate the resulting change in equilibrium national income.” Their response addresses only this point: “Uses the multiplier formula k = 1/(1 − MPC).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 9.
In a more realistic economy, the marginal propensity to save (MPS) is 0.4, the marginal rate of tax (MRT) is 0.2, and the marginal propensity to import (MPM) is 0.1. (a) Calculate the value of the multiplier, using all three withdrawals. (b) If government spending increases by $50m, calculate the resulting change in equilibrium national income, to 1 decimal place.
[4 marks] - 10.
Marking analysis: A learner attempts the following task: “In a more realistic economy, the marginal propensity to save (MPS) is 0.4, the marginal rate of tax (MRT) is 0.2, and the marginal propensity to import (MPM) is 0.1. (a) Calculate the value of the multiplier, using all three withdrawals. (b) If government spending increases by $50m, calculate the resulting change in equilibrium national income, to 1 decimal place.” Their response addresses only this point: “Uses the multiplier formula k = 1/(MPS + MRT + MPM).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 11.
An economy's consumption function is C = 80 + 0.8Y, where C is consumption and Y is national income, both in $bn. (a) State the value of autonomous consumption. (b) State the value of the marginal propensity to consume. (c) Calculate the level of consumption when national income Y = $600bn. (d) Identify, within your answer to (c), the portion of consumption that is induced (income-dependent) rather than autonomous.
[5 marks] - 12.
Marking analysis: A learner attempts the following task: “An economy's consumption function is C = 80 + 0.8Y, where C is consumption and Y is national income, both in $bn. (a) State the value of autonomous consumption. (b) State the value of the marginal propensity to consume. (c) Calculate the level of consumption when national income Y = $600bn. (d) Identify, within your answer to (c), the portion of consumption that is induced (income-dependent) rather than autonomous.” Their response addresses only this point: “States autonomous consumption = $80bn (the intercept, consumption at zero income).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 13.
An economy has the following relationships (all in $bn): C = 100 + 0.8Y, I = 50, G = 70, X = 40, M = 20 + 0.1Y. (a) Write an expression for aggregate demand (AD) as a function of Y, simplifying fully. (b) Using the equilibrium condition Y = AD, calculate the equilibrium level of national income.
[5 marks] - 14.
Marking analysis: A learner attempts the following task: “An economy has the following relationships (all in $bn): C = 100 + 0.8Y, I = 50, G = 70, X = 40, M = 20 + 0.1Y. (a) Write an expression for aggregate demand (AD) as a function of Y, simplifying fully. (b) Using the equilibrium condition Y = AD, calculate the equilibrium level of national income.” Their response addresses only this point: “Substitutes AD = C + I + G + (X − M) = (100 + 0.8Y) + 50 + 70 + (40 − (20 + 0.1Y)).” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 15.
The monetarist/new classical model of the economy draws the long-run aggregate supply (LRAS) curve as a vertical line at the full-employment level of output. (a) Explain why LRAS is drawn as vertical in this model. (b) Explain the implication of a vertical LRAS for the effectiveness of an increase in aggregate demand at achieving a permanent increase in real output in the long run.
[4 marks] · no calculator - 16.
Marking analysis: A learner attempts the following task: “The monetarist/new classical model of the economy draws the long-run aggregate supply (LRAS) curve as a vertical line at the full-employment level of output. (a) Explain why LRAS is drawn as vertical in this model. (b) Explain the implication of a vertical LRAS for the effectiveness of an increase in aggregate demand at achieving a permanent increase in real output in the long run.” Their response addresses only this point: “Explains that in the long run, wages and prices are assumed to be fully flexible, so output is determined only by the economy's real productive capacity (factors of production and technology), not by the price level.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 17.
The Keynesian aggregate supply (AS) curve is typically drawn in three distinct ranges: a horizontal range at low levels of output, an upward-sloping range as output approaches full employment, and a vertical range at full-employment output. (a) Explain why AS is horizontal at low levels of output, referring to spare capacity. (b) Explain why an increase in aggregate demand in the horizontal range has a very different effect on the price level compared with the same increase in the vertical range.
[4 marks] · no calculator - 18.
Marking analysis: A learner attempts the following task: “The Keynesian aggregate supply (AS) curve is typically drawn in three distinct ranges: a horizontal range at low levels of output, an upward-sloping range as output approaches full employment, and a vertical range at full-employment output. (a) Explain why AS is horizontal at low levels of output, referring to spare capacity. (b) Explain why an increase in aggregate demand in the horizontal range has a very different effect on the price level compared with the same increase in the vertical range.” Their response addresses only this point: “Explains that at low output, there is significant spare capacity (unemployed resources), so firms can increase output by employing idle resources without needing to bid up wages or prices.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 19.
An economy is initially at the natural rate of unemployment with stable, correctly anticipated inflation. The government then unexpectedly increases aggregate demand. (a) Using the short-run Phillips curve (SRPC), explain the initial effect on unemployment and inflation. (b) Explain, using the concept of adaptive expectations, why unemployment is likely to return to its original (natural) rate over time, even though inflation remains higher.
[4 marks] · no calculator - 20.
Marking analysis: A learner attempts the following task: “An economy is initially at the natural rate of unemployment with stable, correctly anticipated inflation. The government then unexpectedly increases aggregate demand. (a) Using the short-run Phillips curve (SRPC), explain the initial effect on unemployment and inflation. (b) Explain, using the concept of adaptive expectations, why unemployment is likely to return to its original (natural) rate over time, even though inflation remains higher.” Their response addresses only this point: “Explains that the unexpected rise in AD moves the economy along the existing SRPC, lowering unemployment below its natural rate and raising inflation above what was anticipated.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 21.
Using the quantity theory of money, MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is real output. In a given year, the money supply grows by 8%, the velocity of circulation is assumed constant, and real output (Q) grows by 3%. (a) State the approximate percentage change implied for the price level P. (b) Explain the economic significance of this result for a central bank concerned about inflation.
[4 marks] - 22.
Marking analysis: A learner attempts the following task: “Using the quantity theory of money, MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is real output. In a given year, the money supply grows by 8%, the velocity of circulation is assumed constant, and real output (Q) grows by 3%. (a) State the approximate percentage change implied for the price level P. (b) Explain the economic significance of this result for a central bank concerned about inflation.” Their response addresses only this point: “States the approximate growth-rate version of the equation: %ΔM + %ΔV ≈ %ΔP + %ΔQ.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 23.
Economic development is sometimes measured using a single indicator, such as GNI per capita, and sometimes using a composite indicator, such as the Human Development Index (HDI), which combines income, education and health statistics. (a) Distinguish between a single indicator and a composite indicator of development. (b) Explain one limitation of relying solely on GNI per capita to assess a country's level of development.
[3 marks] · no calculator - 24.
Marking analysis: A learner attempts the following task: “Economic development is sometimes measured using a single indicator, such as GNI per capita, and sometimes using a composite indicator, such as the Human Development Index (HDI), which combines income, education and health statistics. (a) Distinguish between a single indicator and a composite indicator of development. (b) Explain one limitation of relying solely on GNI per capita to assess a country's level of development.” Their response addresses only this point: “States that a single indicator, such as GNI per capita, measures development using one statistic, whereas a composite indicator combines multiple statistics into a single index.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 25.
Economists distinguish between absolute poverty (being unable to afford a fixed minimum standard of living) and relative poverty (having an income significantly below the average income in a particular society). (a) Explain why strong economic growth is likely to reduce the rate of absolute poverty in a country over time. (b) Explain why the same economic growth might not reduce, and could even increase, the rate of relative poverty.
[4 marks] · no calculator - 26.
Marking analysis: A learner attempts the following task: “Economists distinguish between absolute poverty (being unable to afford a fixed minimum standard of living) and relative poverty (having an income significantly below the average income in a particular society). (a) Explain why strong economic growth is likely to reduce the rate of absolute poverty in a country over time. (b) Explain why the same economic growth might not reduce, and could even increase, the rate of relative poverty.” Their response addresses only this point: “Explains that economic growth raises average incomes over time, which, if it reaches lower-income households, can lift their income above the fixed minimum threshold that defines absolute poverty.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 27.
A country's tax and benefit system includes a progressive income tax and unemployment benefits, which automatically adjust as the economy moves through the business cycle without any new legislation being passed. (a) Identify the term used to describe fiscal tools of this kind. (b) Explain how a progressive tax system and unemployment benefits help to smooth out fluctuations in the business cycle, referring to both a boom and a recession.
[4 marks] · no calculator - 28.
Marking analysis: A learner attempts the following task: “A country's tax and benefit system includes a progressive income tax and unemployment benefits, which automatically adjust as the economy moves through the business cycle without any new legislation being passed. (a) Identify the term used to describe fiscal tools of this kind. (b) Explain how a progressive tax system and unemployment benefits help to smooth out fluctuations in the business cycle, referring to both a boom and a recession.” Their response addresses only this point: “Identifies these as automatic stabilisers.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 29.
A government runs a large budget deficit, financed by borrowing heavily in domestic financial markets, in an attempt to stimulate a weak economy. (a) Explain how this increased government borrowing could raise the equilibrium interest rate in domestic financial markets. (b) Explain how a higher interest rate resulting from this could 'crowd out' private-sector investment, partially offsetting the intended stimulus.
[4 marks] · no calculator - 30.
Marking analysis: A learner attempts the following task: “A government runs a large budget deficit, financed by borrowing heavily in domestic financial markets, in an attempt to stimulate a weak economy. (a) Explain how this increased government borrowing could raise the equilibrium interest rate in domestic financial markets. (b) Explain how a higher interest rate resulting from this could 'crowd out' private-sector investment, partially offsetting the intended stimulus.” Their response addresses only this point: “Explains that a large government deficit increases the government's demand for loanable funds in domestic financial markets.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator