Macroeconomics practice questions (IB Economics)

Sample questions

All 2 free IB Economics questions on this unit, from the free IB Economics Practice Exam and the free IB Economics Paper 1 Practice Exam. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 120 marks · Monetary policy & inflation (macro)
   Study the following extract and answer the questions that follow. — "Orvia's central bank tightens again." The Central Bank of Orvia has raised its policy interest rate from 3.0 percent to 5.5 percent, tightening monetary policy for the third time this year in an effort to return inflation to its 2 percent target. Over the past twelve months the consumer price index has risen from 125.0 to 134.0, driven by strong consumer spending and wage growth of 6 percent. The governor said that "demand is running ahead of what the economy can supply", but acknowledged that around 60 percent of Orvian mortgages are on variable interest rates. Business groups warn that higher borrowing costs will delay investment projects and could push the economy into recession.
   (a)

   Define the following terms from the text: (i) inflation; (ii) monetary policy.

   [4]
   (b)

   Using the consumer price index figures in the text, calculate the rate of inflation over the past twelve months, and hence calculate the real rate of interest after the increase in the policy rate. Show your working.

   [3]
   (c)

   Using an AD/AS diagram, explain how the increase in the interest rate is intended to reduce the rate of inflation in Orvia.

   [4]
   (d)

   Using information from the text and your knowledge of economics, evaluate the likely consequences of the Central Bank of Orvia's decision to raise interest rates.

   [9]
   Show answerFrom the free IB Economics Practice Exam →
2. Question 225 marks · Monetary policy, inflation, AD–AS, policy effectiveness
   Question 2 — Macroeconomics: monetary policy and inflation.
   (a)

   Explain how a central bank can use monetary policy to reduce demand-pull inflation.

   [10]
   (b)

   Using real-world examples, discuss the effectiveness of monetary policy in achieving low and stable inflation.

   [15]
   Show answerFrom the free IB Economics Paper 1 Practice Exam →

Key terms

The definitions and formulas IB Economics expects for macroeconomics, typeset as they appear on the paper.

Aggregate demand (AD)

Total planned spending on an economy's output at each price level. Its components are consumption, investment, government spending and net exports, and a change in any of them shifts the AD curve.

$$AD = C + I + G + (X - M)$$

Short-run and long-run aggregate supply

SRAS slopes upward because wages and some costs are fixed in the short run. In the monetarist/new classical model LRAS is vertical at potential output; in the Keynesian model AS has a horizontal section, an upward section and a vertical section.

Inflation and the consumer price index

A sustained rise in the general price level, measured as the percentage change in a weighted basket of consumer goods. Demand-pull inflation comes from AD rising faster than output; cost-push inflation from SRAS shifting left.

$$\text{inflation rate} = \frac{CPI_t - CPI_{t-1}}{CPI_{t-1}} \times 100$$

Unemployment rate

The unemployed as a percentage of the labour force. Cyclical (demand-deficient) unemployment rises in a recession; structural, frictional and seasonal unemployment exist even at full employment, making up the natural rate.

$$\text{unemployment rate} = \frac{\text{unemployed}}{\text{labour force}} \times 100$$

Monetary policy

The central bank changing interest rates (and the money supply) to influence aggregate demand. Lower rates reduce the cost of borrowing, raise consumption and investment and tend to depreciate the currency; the effect comes with time lags.

Keynesian multiplier (HL)

The ratio of the final change in real GDP to the initial injection of spending. It is larger when the marginal propensities to save, tax and import are smaller.

$$k = \frac{1}{1 - MPC} = \frac{1}{MPS + MPT + MPM}$$

Phillips curve (HL)

The short-run trade-off between inflation and unemployment: expansionary demand-side policy lowers unemployment at the cost of higher inflation. The long-run Phillips curve is vertical at the natural rate of unemployment.

Frequently asked questions

Other IB Economics topics

• Introduction to economics
• Microeconomics
• The global economy

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