AQA A-level Economics: Conflicts between macroeconomic objectives and the Phillips curve (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (7135 and 7136), version 1.3, sub-section “Possible conflicts between macroeconomic policy objectives” (4.2.3.4 in the combined PDF; 3.2.3 on the AQA website and this site’s map). Every country and figure is invented for illustration. Learn the ideas first in the study guide and the revision notes. The AQA A-level Economics hub and checklist show the wider course, and the free diagnostics test where to start.

Questions

1. Define a negative output gap. [2]

2. Country S has potential output of 1,250 and actual output of 1,200 (illustrative units). Calculate the output gap as a percentage of potential output, and state what it suggests about unemployment. [3]

3. The table gives points on a short-run Phillips curve for Country M (illustrative).

Unemployment (%)	4	5	7	9
Inflation (%)	7.0	5.0	3.0	2.5

(a) Calculate the points of inflation gained per point of unemployment saved when unemployment falls from 5% to 4%, and lost when it rises from 7% to 9%. [2] (b) Explain why the curve is steeper at low unemployment. [2]

4. In Country T the price level index rises from 110 to 114.4 while real output falls from 900 to 864 after a rise in imported fuel costs.

(a) Calculate the percentage change in the price level and in real output. [2] (b) Using AD/AS analysis, explain why a change in aggregate demand cannot cure both problems. [2]

5. Country U has the long-run rate of unemployment of 5%. Inflation follows: inflation = expected inflation − 0.8 × (unemployment − 5). Workers expect this year’s inflation to equal last year’s. Expected inflation is 1.5% in year 1 and the government holds unemployment at 3.5%.

(a) Calculate inflation in years 1, 2 and 3. [3] (b) Explain what this shows about the short-run Phillips curve and the long-run, L-shaped curve. [3]

6. In Country X, inflation = expected inflation − 0.4 × (unemployment − 5), where 5% is the long-run rate. Inflation and expected inflation are both 6%. The central bank holds unemployment at 10% and expectations follow last year’s inflation.

(a) Calculate inflation in years 1 and 2. [2] (b) Calculate the excess unemployment, in percentage-point years, per point of inflation removed. [2] (c) State one reason a credible inflation target could lower this cost. [1]

7. Country V has GDP of 2,000 and a current account deficit of 20. GDP grows by 60. The marginal propensity to import is 0.25 and exports rise by 8.

(a) Calculate the new deficit. [3] (b) Explain why this illustrates a conflict between macroeconomic objectives. [2]

8. Country Y trains workers and cuts barriers to hiring, which lowers its long-run rate of unemployment from 7% to 6%. Expected inflation is 3% and inflation = expected inflation − 0.5 × (unemployment − long-run rate).

(a) Calculate inflation at 6% unemployment before and after the reform. [2] (b) Explain how supply-side policy can ease the conflict between unemployment and inflation. [4]

9. Evaluate the monetarist/supply-side view that the major macroeconomic objectives are compatible in the long run. [9]

10. Country W has potential output of 1,000. Actual output is 1,032 and inflation has been rising.

(a) Calculate the output gap. [1] (b) Evaluate whether the government should tighten policy. [9]

11. Estimates of Country Z’s potential output are 1,000 (by one agency) and 1,040 (by another). Actual output is 1,010.

(a) Calculate the output gap on each estimate. [2] (b) State why this matters for policy. [1]

Answers

1. Actual output is below potential output [1], so the economy has spare capacity [1]. [2] Examiner insight: A definition that names both actual and potential output and gives the direction of the difference is the safest route; “output is low” on its own is too vague.

2. Gap = (1,200 − 1,250)/1,250 × 100 [1] = −4.0% [1]. Spare capacity suggests high cyclical (demand-deficient) unemployment [1]. [3] Examiner insight: Answers tend to lose credit by dividing by actual output or leaving off the minus sign; show the formula before the numbers.

3. (a) 5% to 4%: (7.0 − 5.0)/1 = 2.0 points per point [1]. 7% to 9%: (3.0 − 2.5)/2 = 0.25 points per point [1]. [2] (b) At low unemployment labour is scarce and firms compete for workers, so wages and prices rise faster [1]. At high unemployment there is slack, so each extra point of unemployment does little to wage growth [1]. [2] Examiner insight: Dividing by the change in unemployment, not just reading the inflation change, is the step that shows you understand the trade-off ratio.

4. (a) Prices: (114.4 − 110)/110 × 100 = 4.0% [1]. Output: (864 − 900)/900 × 100 = −4.0% [1]. [2] (b) The cost shock shifts short-run AS left, raising the price level and cutting output [1]. Raising AD restores output but lifts prices further; cutting AD lowers prices but deepens the output loss [1]. [2] Examiner insight: Naming the shift (short-run AS, not AD) and the direction on each variable usually gains more credit than a general statement that “the economy suffers”.

5. (a) Year 1: 1.5 − 0.8 × (3.5 − 5) = 2.7% [1]. Year 2: 2.7 + 1.2 = 3.9% [1]. Year 3: 3.9 + 1.2 = 5.1% [1]. [3] (b) Holding unemployment below the long-run rate pushes inflation above expectations [1]. Expectations then rise and the short-run curve shifts up each year [1]. Unemployment can be held down only with ever-faster inflation, so there is no permanent trade-off and the long-run curve is vertical at 5% [1]. [3] Examiner insight: Linking the numbers to a shift of the curve, rather than describing a rise in inflation alone, shows the idea of expectations.

6. (a) Year 1: 6 − 0.4 × (10 − 5) = 4% [1]. Year 2: 4 − 2 = 2% [1]. [2] (b) Excess unemployment is 5 points for 2 years, which is 10 point-years [1]. Inflation fell by 4 points, so 10/4 = 2.5 point-years per point [1]. [2] (c) Expectations fall faster, so inflation drops sooner and unemployment need not stay high as long [1]. [1] Examiner insight: Giving the unit (point-years) and showing both the numerator and denominator makes a ratio answer easy to follow.

7. (a) Imports rise by 0.25 × 60 = 15 [1]. Net change = 8 − 15 = −7 [1]. New deficit = 20 + 7 = 27 [1]. [3] (b) Growth raises incomes and import spending faster than exports [1]. So the growth objective worsens the current account balance objective, at least in the short run [1]. [2] Examiner insight: A statement of conflict gains credit when it names both objectives and gives the transmission link, here rising income pulling in imports.

8. (a) Before: 3 − 0.5 × (6 − 7) = 3.5% [1]. After: 3 − 0.5 × (6 − 6) = 3.0% [1]. [2] (b) Supply-side measures such as training lower structural unemployment [1], moving the vertical long-run curve left [1]. The short-run curve shifts inward, so the same unemployment comes with lower inflation [1]. This eases the conflict without demand-led pressure on prices [1]. [4] Examiner insight: Strong answers say both curves move and tie the shift to a stated policy rather than writing “supply-side policy helps”.

9. Points that can earn credit, in a developed chain: Long-run AS is fixed by supply-side factors, so AD changes affect only prices [1]. Expectations adjust, so the long-run Phillips curve is vertical and there is no lasting trade-off [1]. Low, stable inflation reduces uncertainty and encourages investment [1], raising long-run AS and growth [1], which cuts structural unemployment [1]. Competitiveness helps the current account [1]. Against: wages and prices are sticky, so a negative gap can persist [1]; long unemployment erodes skills and may raise the long-run rate [1]. Judgement: the view fits demand-pull better than shocks, and the answer depends on the length of “the long run” and the credibility of policy [1]. [9] Examiner insight: Evaluation tends to gain credit when it ends in a supported judgement about time and circumstances, not just a list of “however” points.

10. (a) Gap = (1,032 − 1,000)/1,000 × 100 = +3.2% [1]. [1] (b) The positive gap, scarce labour and rising inflation suggest overheating, so tighter fiscal or monetary policy would reduce AD and ease prices [1]. The Phillips curve implies this costs jobs and output [1]. Rising inflation can shift the short-run curve up as expectations rise, so waiting raises the later cost [1]. Against: the gap is an estimate of potential and may be overstated [1]. If inflation comes from cost-push pressures, tightening mainly lowers output [1]. Supply-side policy may be better in the long run but is slow [1]. Tightening risks unemployment and slower growth [1]. The current account may improve as import demand falls [1]. Judgement: tighten modestly if the gap is confirmed and inflation is demand-led, with supply-side support [1]. [9] Examiner insight: Answers earn credit for judgement when they say what evidence would change the decision, such as the cause of inflation or doubt about potential output.

11. (a) On 1,000: (1,010 − 1,000)/1,000 × 100 = +1.0% [1]. On 1,040: (1,010 − 1,040)/1,040 × 100 = −2.9% [1]. [2] (b) The estimates give opposite signs, so policy might tighten or expand depending on the estimate [1]. [1] Examiner insight: Working both gaps from the same actual figure shows the effect of the estimate, rather than just asserting that estimates are uncertain.

Where marks are usually lost

• Dividing the output gap by actual instead of potential output.
• Describing stagflation as a movement along the short-run curve.
• Giving a trade-off ratio without dividing by the change in unemployment.
• Not showing that expectations drive the shift of the curve.
• Writing “supply-side policy helps” without naming a policy or the curve that moves.
• Evaluating with a list and no judgement.
• Forgetting that potential output is estimated.
• Treating short run and long run as the same time period.

Next steps

• Re-read the revision notes and the study guide.
• Open the AQA A-level Economics hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

AQA AS and A-level Economics (7135 and 7136), specification for first teaching from September 2015, version 1.3, 29 June 2022, published by AQA. Combined PDF section 4.2.3.4.