9
The macro
economy
Ideas for answers to Progress
Questions
1
Using a diagram, explain what is meant by potential growth and why/how it
is important. Using a diagram, explain what is meant by actual growth and
why/how it is important. Then provide a supported conclusion based on
this information.
2
Using diagrams, explain how investment can lead to both actual and
potential growth. Explain two or three other factors that can lead to growth.
If appropriate, diagrams should be drawn or those used for investment
can be referred to. The answer might include: natural resources, education
and training, rate of savings, labour productivity, improved health care etc.
A supported conclusion should be provided. One possible approach is to
explain that investment is the most important because without it the others
would not be possible, but there is no one correct answer.
3
Explain the benefits of economic growth, e.g. increased standard of living, better
education and health, more revenue for the government, increase in confidence
etc. As always, it is better to do three well than more too briefly. Explain the costs
of economic growth, e.g. unequal benefits, lower quality of life, environmental
damage etc. Again, it is better to do three well than more too briefly. Then
provide a supported conclusion that clearly addresses “to what extent”.
4
a
The economic implications of an aging population include: higher
dependency to labour force ratio, need to raise the age of retirement, older
people less adaptable to change, need to increase health spending etc. It is
better to explain three well than many poorly.
b
The economic implications of a young population include: need for
expenditure on education, more open to change, may lead to poorer living
conditions as young migrate to towns for work etc.
5
Explain what is meant by living standards; how living standards can be
compared, e.g. by using real GDP per capita; and three or four problems
when so doing, e.g. conversion to a common currency, different amounts spent
on defence as compared to social security, variation in quality of goods and
services, hours of leisure etc.
6
Explain what is meant by living standards; explain how real GDP per capita
has changed over the last 50 years; explain the problems in measuring
standards of living over time in a country, e.g. goods and services change,
income distribution etc.; and provide a supported conclusion that clearly
addresses “to what extent”.
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1
7
Explain what is meant by labour productivity and explain the importance of
labour productivity, e.g. increased output, higher economic growth etc.
8
Explain a number of possible causes of unemployment. Select one and explain
why it is the main cause rather than the others. To justify you must say not
only why this is the main cause, but also why the others are not the main cause.
9
Explain four problems. These could include: different methods, difficulty
of obtaining information, inactive workers, discouraged workers, part-time
workers, unreported legal employment, unreported illegal employment etc.
10 Use diagrams to explain how policies can reduce unemployment. Refer to
fiscal, monetary, supply-side policies, and explain their effectiveness. This
should include reference to short run and long run as well as other points
such as cause of unemployment.
11 Explain what is meant by investment giving at least two examples, then
explain what is meant by savings giving at least two examples.
12 a
The answer should:
uuDefine closed economy, i.e. one without foreign trade
uuState that here Y = C + I + G and the multiplier is
1
MPS + MRT
uuUse a numerical example to show how an increase in G would affect
the economy, e.g. if G increased by $100 million and MPS = 0.1 and
MRT = 0.15 then Y = 100 × 4 = $400 million.
b
The answer should:
uuDefine open economy
uuState that Y = C + I + G + (X − M) and the multiplier is
1
MPS + MRT + MPM
uuUse a numerical example to show how an increase in G would affect
the economy, e.g. if G increased by $100 million and MPS = 0.1,
MRT = 0.15, and MPM = 0.15 then Y = 100 × 2.5 = $250 million
uuExplain that introducing exports and imports will lower the value of
the multiplier and thus the effect on any injection.
13 Draw a diagram or diagrams to show how an injection shifts the C + I + G curve
upwards and/or leads to an upward shift in the injections curve. Then explain
what the diagram(s) show(s) and how this comes about via the multiplier.
14 Draw a diagram showing an inflationary gap and explain what this means for
inflation and for employment. Draw a diagram showing a deflationary gap
and explain what this means for inflation and for employment.
15 Explain three ways in which the government could decrease the money supply,
e.g. raise interest rates, increase the credit ratio, issue less notes and coins etc.
Then provide a supported conclusion based on the above as to which method
would be best.
16 The answer should:
uuExplain how Keynesians would control the economy, e.g. fiscal policy etc.
Diagrams should be drawn and explained.
uuExplain how monetarists would control the economy, e.g. fiscal policy etc.
Diagrams should be drawn and explained.
uuExplain clearly what the main differences between the two are.
2
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17 State what is meant by active and idle balances; draw a liquidity preference
diagram to show active and idle balances; and explain why interest rates do not
affect the former but do affect idle balances making reference to the diagram.
18 Draw the Liquidity Preference Diagram – see Figs. 9.24 and 9.25. Draw two
MS lines to show how as MS increases the rate of interest falls. Explain how
this occurs.
Ideas for answers to Case Study
Questions
Health improvements for longer life expectancy
in China
1
The answer should:
uuState what the measures are: increased spending on health care; reducing
the cost of individual medical care; expanding basic medical insurance;
better insurance programmes for serious diseases; increasing the number
of GPs; free public health services.
uuExplain how these might increase life expectancy. There is no need to go
through the list one by one. The measures can be grouped and/or a you
can write generally about health care increasing life expectancy, making
clear reference to all of them in so doing.
2
Identify two measures, e.g. better education, improved sanitation, better diet
and food etc., and then explain both.
Development in Nigeria
1
The answer to this question is based on a case study so that all the material
needed to answer the question has been provided. Own knowledge can be
used as well, but not in place of the case study. Explain the successful aspects,
e.g. rise in real GDP per capita and in adult literacy etc.; explain the less
successful aspects, e.g. poverty; quality of tertiary education etc.; and provide
a conclusion supported by the explanations provided.
Benefits and costs of growth in China
1
Two possible benefits are given in the text: major world producer and
improved living standards. Other benefits may be provided.
2
Reference can be made to: health problems, lower labour productivity as a
result of health problems, effects on tourism, negative externalities etc. The
answer should contain an explanation of why these would be of concern and
not just list them.
3
Explain what the effects of water pollution could be, e.g. decline in
agricultural production, lack of clean water for drinking, reduction in tourism
etc., and explain three effects. Then provide a supported conclusion that
compares the effects and decides which might be most important and why.
Multidimensional Poverty Index (MPI)
1
It says “compare”, so the answer should not just describe. Bangladesh reduced
poverty across all dimensions. Kenya reduced its MPI mainly through
improvements in living standards. Bolivia made great strides in improving
3
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school attendance and sanitation but less progress in reducing under-nutrition.
Points of comparison could include: Bolivia has only succeeded in some areas
while Bangladesh has done so in all; Kenya has emphasised living standards
while Bolivia has focused on a narrow range of school attendance and
sanitation; it is difficult to know the extent of the improvements so comparisons
may be meaningless etc.
2
It says “such as”, so the answer may just take MPI or any other or a
combination of two or more. They should explain how MPI (or any other
appropriate index) works and why it is seen as useful; explain why real GDP
per capita is widely used; and provide a supported conclusion that clearly
addresses the issue of “more useful”.
Urbanisation
1
The passage gives the following problems: fragmentation, social exclusion and
inequity; lack of access to water, sanitation, secure tenure and good housing;
exposure to pollution and violence; together with unemployment. Three
should be stated.
2
Explain for each of the three problems chosen why they are a problem,
e.g. poor sanitation can lead to diseases which reduce people’s ability to work
and/or be very productive thus leading to low levels of output and loss of
the potential workforce.
3
Provide a supported conclusion that explains ways in which the three
problems chosen could be overcome and indicates the best ways of so doing.
Indonesian development
1
PPP is a way of showing the exchange rate in terms of how much a typical
basket of goods costs in one country compared to another country and then
explain why it is advantageous.
2
Explain that working in the primary sector usually leads to low wages; that
subsistence farming does not allow any excess to be sold to increase income; rural
areas may lack sanitation; education etc. Explain a maximum of three factors.
3
Research a number of rapidly developing countries to find out what is
happening in those countries. Using the case study, the answer should explain
what has happened in Indonesia and then explain what has happened in the
other countries. Use that information to provide a supported conclusion as to
whether this pattern of consumption is typical.
4
There are a number of different ways to approach this. One way is:
uuExplain the effects that greatly increasing expenditure on infrastructure
would have on the economy, the environment and the poor. These effects
could be positive and/or negative.
uuExplain the effects that greatly increasing expenditure on health and social
welfare would have on the economy, the environment and the poor. These
effects could be positive and/or negative.
uuProvide a supported conclusion using your explanation. In this it could
be pointed out that spending on education, or any other aspect, might be
better or that this expenditure is the best way.
4
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Employment in Mauritius
1
Only use the information in the case study, e.g. decline in primary and
secondary, but increase in tertiary; state the figures and if possible an indication
of the percentage change which is bigger for primary than for secondary.
2
Explain two reasons, e.g. better education providing the skills for tertiary
employment, greater job opportunities in tertiary, e.g. tourism, better wages,
urbanisation etc. No specialist knowledge of Mauritius is required.
3
Research employment trends in you country and then try to offer at least two
reasons as to why these changes have come about.
Mauritius
1
Give two reasons probably from the point of more female participation, e.g.
better education for women, better population control leading to lower birth
rates, better health care, increasing cost of living etc.
2
Research the trends for males and females and then offer at least two reasons
for these changes, or possibly no change. The reasons may be the same as
above or different.
Youth unemployment in Tanzania
1
Explain why agriculture can lead to disguised unemployment – probably in
terms of family members working on the farm, but they are not working full
time, so there is under-employment. Other valid ideas are acceptable.
2
Two causes from, lack of education, jobs, self-employment skills, credit,
information; and increased farming technology driving people from the land.
Explain any two in terms of youth unemployment. Both advantages and
disadvantages must be explained.
3
Advantages could include: improve their skills to bring back, send money
home to alleviate poverty and/or support other family members in education
etc., give more opportunities for those remaining etc. Disadvantages could
include: loss of skills as probably the most educated will leave, may lead
to an aging population, loss of potential revenue to the government etc.
A supported conclusion should be provided.
The multiplier in different countries
1
10 × 3.20 = 32 million rupiah.
2
Calculate the change in national income of all the countries and then explain
two different effects. One affect is the difference in growth due to the
multiplier, while the other could be on employment, on other businesses etc.
3
One other effect, so you cannot repeat an effect from answer 2.
US housing crisis
1
Use a simple calculation of the credit creation multiplier to show how this would
come about, e.g. originally the credit ratio was 10 per cent so the multiplier was
10. If the money available was £100 then this would lead to a rise of 100 × 10 =
£1000. If the credit ratio rose to 12.5 per cent the multiplier would be 8 giving
100 × 8 = £800.
2
The answer should:
uuState what is meant by loss of confidence
uuExplain how this could lead to people not willing to borrow money, e.g.
afraid they could not pay it back etc.
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uuExplain how this could lead to people not being willing to lend money, e.g.
afraid they might not get it back, afraid it would have lost value etc.
uuProvide a supported conclusion as to the main reasons why a loss of
confidence would cause less borrowing and lending.
Money supply
1
Remember to compare and not to describe. Comparisons could include:
uuExcept for 2007 when Morocco had the highest growth, China had the
highest growth each year
uuMorocco’s growth has been the most erratic, fluctuating between third
and first place
uuJapan is the only country that has had negative growth.
At least five comparisons should be provided.
2
The following should be identified using only the information in the chart:
uuJapan has had negative or only very low growth
uuChina had high and rising growth 2000–2009, but it is now falling
uuMorocco
uuThailand.
3
At least two ways should be explained, e.g. cut interest rates, quantitative
easing, print more money, buy up government securities etc.
Japan and low interest rates
1
Rate of interest adjusted for inflation. You should give an example, e.g. interest
rate 10 per cent, inflation rate 6 per cent then the real rate of interest is
4 per cent.
2
When there is deflation or the price level is falling, i.e. the rate of inflation
is negative.
3
The answer should:
uuContain the liquidity preference diagram showing the liquidity trap
uuExplain what this means in terms of all extra money is added to it
uuExplain how this links with “the Bank of Japan lowered interest rates
to almost zero. This did not, however, lead to the expected increase
in demand”.
Competition and growth in Rwanda
1
Begin by explaining the advantages of trade for development, e.g. gaining
absolute or comparative advantage, specialisation, more efficient use of
resources etc. Then explain the disadvantages of competition from trade, e.g.
cannot compete so industries fail, infant industry, trade depends on ability to
move goods and use resources etc. Then provide a supported conclusion.
Sierra Leone and the UAE: trade and investment
1
Explain two reasons, e.g. lack of domestic investment, bring new ideas/
techniques, establish trade links etc.
2
Explain two reasons, e.g. diversification, may provide a source for exports, gain
access to Sierra Leone’s natural resources etc.
6
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3
Explain at least two advantages, e.g. develop faster, can exploit its natural
resources more easily, leads to economic growth etc.; explain at least two
disadvantages, e.g. profits from investment will be sent back to UAE, possible
exploitation of workers, increased negative externalities etc.; and provide a
supported conclusion.
Answers to Activities
The multiplier
1
1
1
=
=
=4
1 − MPC 1 − 0.75 0.25
1
1
1
2 k=
=
=
=2
0.5
MPS + MRT + MPM 0.2 + 0.15 + 0.15
3 Y = ∆J × k = 20 + 20 +10 × 2 = 50 × 2 = 100
1
k=
Aggregate expenditure and national income
∆C 40
=
= 0.8
∆Y
50
C 250
2 APC = =
= 0.833
Y 300
3 −10 as C = 10 so savings must be negative as ∆Y = ∆C + ∆S
1
MPC =
4
150 as Y = C + I
5
250 as Y = C + I
Credit creation
a
b
12.5 per cent
Bank
Liabilities: deposits
Assets: loans Reserves Total assets
Bank 1
100.00
80.00
20.00
100.00
Bank 2
80.00
64.00
16.00
80.00
Bank 3
64.00
51.20
12.80
64.00
Total
800.00
640.00
160.00
800.00
Bank
Liabilities: deposits
Assets: loans Reserves Total assets
Bank 1
100.00
92.00
8.00
100.00
Bank 2
92.00
73.60
8.40
92.00
Bank 3
73.60
58.88
14.72
73.60
Total
1250.00
1000.00
250.00
1250.00
8 per cent
Ideas for answers to Exam-Style
Questions
1
a
The answer should:
uuExplain potential growth using a diagram, e.g. Figure 9.1 or Figure 9.3
uuExplain actual growth using a diagram, e.g. Figure 9.2.
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7
b
The answer should:
uuExplain how investment leads to economic growth and why it is important.
uuExplain two other potential factors and their importance.
uuDiscuss whether investment is more important than your other two
factors. This argument must be supported by the points already made.
2
a
The answer should:
uuExplain what is meant by the Multidimensional Poverty Index (MPI),
including what is included in the Index
uuExplain how this relates to living standards.
b
The answer should:
uuExplain the advantages and disadvantages of real GDP per capita for
comparing living standards.
uuExplain two other ways of comparing living standards, e.g. HDI and
MEW.
uuIn the light of you explanations discuss whether real GDP per capita
is the best method. Decide that it is the best available method even
though there are problems. Because it says “best” there can be only be a
supported yes/no answer.
3
4
a
Explain three causes of unemployment. You may acknowledge that there are
others, but you will not gain credit for a long list. It is better to offer three
well-explained causes to show you have taken note of the command word
“explain”.
b
Explain three, maximum four, methods of tackling unemployment making
use, where appropriate, of diagrams. Remember a diagram is worthless
unless you explain what it shows. Discuss which of these methods your
government should use and why – in this case you may suggest more
than one method. You could also differentiate between the short and long
terms especially if referring to supply-side policies. Note that there is no
one right answer to this question.
a
Using a diagram, explain what is meant by an inflationary gap. Using a
diagram, explain what is meant by a deflationary gap. You can either draw
two diagrams or use the same one for both if it is clearly labelled.
b
The answer should:
uuExplain how Keynesians would deal with these gaps using fiscal policy,
drawing and explaining one or more diagrams
uuExplain how monetarists would deal with these gaps using monetary
policy, drawing and explaining one or more diagrams
uuAlthough it says “compare” it is essential that you come to a supported
conclusion looking at their differences and similarities.
5
The answer is B. If money supply increases by 5 per cent but prices increase
by only 3 per cent, this means that the excess money supply has been
absorbed by an increase in real output.
6
The answer is C.
1
1
1
K=
=
=
= 2.5
MPS + MRT + MPM 0.05 + 0.15 + 0.2 0.4
8
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