Macroeconomic objectives and policies practice questions (A-Level Economics)

Sample questions

All 4 free A-Level Economics questions on this topic, from the free A-Level Economics Multiple Choice Questions with Answers and the free A-Level Economics Essay Questions and Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 11 mark · Monetary policy
   The central bank unexpectedly raises its policy interest rate. Through the exchange-rate channel of the transmission mechanism, the most likely sequence of effects is:
   • A.
     hot money flows out, the currency depreciates, exports become more competitive and aggregate demand rises
   • B.
     the currency appreciates, import prices rise and cost-push inflation increases
   • C.
     the currency appreciates, exports become more competitive and aggregate demand rises
   • D.
     hot money flows in, the currency appreciates, exports become less competitive and imports cheaper, so net exports and aggregate demand fall
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
2. Question 21 mark · Fiscal policy
   A government's budget deficit remains at 3 percent of GDP even when the economy is operating at full employment. This deficit is best described as:
   • A.
     a structural deficit
   • B.
     a cyclical deficit
   • C.
     the national debt
   • D.
     a current account deficit
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
3. Question 31 mark · Economic growth: supply-side
   Which of the following is most likely to raise an economy's long-run rate of economic growth by shifting the long-run aggregate supply curve to the right?
   • A.
     A cut in the central bank's policy interest rate
   • B.
     An increase in state pension payments
   • C.
     A depreciation of the currency that raises demand for exports
   • D.
     Government investment in education and training that raises the productivity of the labour force
   Show answerFrom the free A-Level Economics Multiple Choice Questions with Answers →
4. Question 440 marks · Supply-side policies, LRAS, types of unemployment, demand-side policy
   Supply-side policies and unemployment. Over the past decade, several advanced economies have combined relatively low national unemployment rates with weak productivity growth. At the same time, unemployment has stayed persistently higher in regions where traditional industries such as manufacturing and mining have declined, and many employers report difficulty finding workers with the skills they need.
   (a)

   Using an aggregate demand and aggregate supply diagram, explain how supply-side policies could increase an economy's long-run aggregate supply.

   [15]
   (b)

   Evaluate the view that supply-side policies are the most effective way to reduce unemployment.

   [25]
   Show answerFrom the free A-Level Economics Essay Questions and Answers →

Key terms

The definitions and formulas A-Level Economics expects for macroeconomic objectives and policies, typeset as they appear on the paper.

Macroeconomic objectives

Economic growth, low unemployment, low and stable inflation (the UK target is 2 percent CPI), a sustainable balance of payments, balanced public finances, a fair distribution of income and environmental protection. Most essays turn on a conflict between two of them.

Monetary policy

The central bank changing Bank Rate and, since 2009, using quantitative easing to influence AD. The transmission runs through borrowing costs, asset prices, confidence and the exchange rate, with a lag of up to two years.

Fiscal policy

Government spending and taxation to influence AD. A budget deficit is one year's shortfall of revenue against spending; the national debt is the accumulated stock. Expansionary fiscal policy may crowd out private spending.

$$\text{budget balance} = T - G$$

Supply-side policies

Policies that raise LRAS: market-based (tax cuts, deregulation, privatisation, labour market flexibility) and interventionist (education, infrastructure, support for research). They work slowly and have no direct effect on AD.

Phillips curve and policy conflicts

The short-run trade-off between unemployment and inflation means demand-side policy cannot deliver both objectives at once. Other conflicts: growth versus the environment and the current account; inflation targeting versus unemployment.

Evaluating policy effectiveness

Depends on the size of the output gap, the elasticity of AS, time lags, the state of confidence, the position in the economic cycle and side effects such as inequality or debt. Mark schemes reward "it depends on" arguments with a final judgement.

Frequently asked questions

Other A-Level Economics topics

• Nature of economics and economic methodology
• How markets work: demand, supply, elasticity
• Market failure and government intervention
• Measures of economic performance
• Aggregate demand and aggregate supply
• National income, growth and the multiplier
• Business growth, market structures and the labour market
• Globalisation, trade and exchange rates
• Poverty, inequality and development
• The financial sector

All A-Level Economics topics · A-Level Economics exam guide · All free practice exams