AQA A-Level Economics: The Measurement of Macroeconomic Performance — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: The Measurement of Macroeconomic Performance study guide | The Measurement of Macroeconomic Performance revision notes

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Section A

1. State the four main objectives of government macroeconomic policy named in the specification. [4]

2. State two objectives, beyond the four main ones, that governments may also pursue. [2]

Section B

3. Explain why a government’s objectives of economic growth and a stable balance of payments on current account might conflict in the short run. [6]

4. A price index rises from 100 in Year 1 to 106 in Year 2, then to 111 in Year 3. Calculate the percentage change in the index between Year 1 and Year 3, and explain what this figure represents. [5]

5. Explain why pursuing low unemployment through expansionary fiscal policy might conflict with the objective of price stability. [6]

6. Match each of the following macroeconomic indicators to the objective it is primarily used to measure: real GDP per capita, the Consumer Prices Index, the unemployment rate, the balance of payments on current account. [4]

7. Explain what is meant by the “base year” and “weighting” in the construction of a price index. [4]

8. A country’s real GDP per capita index falls from 100 to 94 over one year, while its Consumer Prices Index rises from 100 to 105 over the same period. Explain what these two changes suggest about the country’s macroeconomic performance. [6]

9. Evaluate the extent to which a government can pursue all four main macroeconomic policy objectives simultaneously. [9]

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Answers

1. Economic growth [1]; price stability [1]; minimising unemployment [1]; a stable balance of payments on current account [1].

2. Any two: balancing the government’s budget [1]; achieving a more equitable distribution of income [1].

3. Economic growth is often pursued through policies that raise aggregate demand [1]. Rising incomes that result increase consumer spending, including spending on imported goods [1] [1]. If imports rise faster than exports as a result of growth-boosting policy, the current account balance can worsen [1] [1], creating tension between the objective of pursuing growth and the objective of maintaining a stable external balance [1].

4. Calculation: percentage change = ((111 − 100) / 100) × 100 = 11% [1] [1]. Explanation: this means prices have risen by 11% relative to the base year (Year 1, set at 100) [1] [1], not that prices have risen by “11” in absolute terms — the index is a relative measure [1].

5. Expansionary fiscal policy (increased government spending) aims to reduce unemployment by raising aggregate demand, increasing output and employment [1] [1]. However, if the economy is close to full capacity, this rise in demand can also push up prices [1] [1], generating demand-pull inflation [1], which creates tension between the objective of minimising unemployment and the objective of price stability [1].

6. Real GDP per capita → economic growth / living standards [1]. Consumer Prices Index → price stability [1]. Unemployment rate → minimising unemployment [1]. Balance of payments on current account → stable balance of payments [1].

7. The base year is the reference year in an index number series, conventionally set to a value of 100, against which changes in later years are measured [1] [1]. Weighting is the relative importance assigned to different items (such as categories of spending in a basket of goods) when calculating a composite index, so items that take up a larger share of typical spending have a proportionally larger effect on the index [1] [1].

8. The fall in real GDP per capita from 100 to 94 suggests average living standards have fallen by 6% relative to the base year, indicating weaker economic growth performance [1] [1]. The rise in the Consumer Prices Index from 100 to 105 suggests prices have risen by 5% relative to the base year, indicating the country is moving away from the price stability objective [1] [1]. Together, these two changes suggest the country’s macroeconomic performance has worsened on both the growth and price stability objectives simultaneously over the period, rather than improving on one while worsening on the other [1] [1].

9. Case that objectives can be pursued together: in some circumstances, appropriate policy can support multiple objectives at once — for example, supply-side policies that raise productive capacity can support economic growth without necessarily generating the inflationary pressure that demand-side stimulus creates [1] [1]. Case that conflicts are frequent: the specification itself highlights that conflicts commonly arise — growth-boosting demand-side policy can worsen the balance of payments through higher import demand, and expansionary policy aimed at reducing unemployment can generate demand-pull inflation, undermining price stability [1] [1]; because different objectives often require different policy responses (or the same policy pulling different objectives in different directions), achieving all four simultaneously is difficult, particularly in the short run [1]. Judgement: while carefully designed policy, particularly supply-side measures with effects over the longer run, can reduce some of these conflicts, the specification’s own emphasis on “conflict, at least in the short run” suggests that governments realistically face trade-offs between objectives more often than they achieve all four at once, especially when relying on demand-side tools [1] [1].

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Where marks are usually lost

• Listing the four policy objectives without being able to explain a specific conflict between any two of them.
• Naming a macroeconomic indicator without linking it to the specific objective it measures.
• Treating an index number as an absolute value rather than a relative measure anchored to a base year.
• Assuming detailed technical knowledge of RPI/CPI construction is required, when the specification only expects awareness of underlying features such as base year, weighting and the “basket of goods.”
• Ending an evaluation question without a reasoned judgement on the extent to which the objectives can genuinely be pursued together.

Approaching macroeconomic performance questions

For any “explain the conflict” question, use the same objective-effect-objective-conflict structure every time: name the first objective and the policy used to pursue it, state the effect that policy has, name the second objective, then explain precisely how that effect creates tension with it — having two or three of these prepared in advance (growth versus balance of payments, and unemployment versus inflation, are the two most commonly examined pairs) is more valuable than trying to construct one from scratch under exam conditions. For any index-number question, always convert the index change into a percentage relative to the base year rather than quoting the raw point change, and state explicitly that the base year is set at 100 — this distinction between an absolute point change and a relative percentage change is exactly what separates a strong answer from a weak one on this sub-topic.