Pearson Edexcel IAL Economics: Macroeconomic objectives and conflicts (YEC11) – 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 Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018, sub-topic 2.3.6 items 1 and 2: the macroeconomic objectives and the conflicts between them. The specification places this in Unit 2, an IAS compulsory unit that is also part of the full International Advanced Level. All countries and data are invented (Country T).

Links: Edexcel A Level Economics hub, printable checklist, study guide, revision notes and 10-minute diagnostics.

Questions

1. Explain two reasons why a government might aim for a low and stable rate of inflation rather than a zero rate. [4]

2. Country T’s nominal GDP rises from 1,260 to 1,350 while its GDP deflator rises from 100 to 103.5. Calculate real GDP growth to 1 decimal place. [3]

3. In Country T, 15.4 million people are employed and 1.1 million are unemployed.

(a) Calculate the unemployment rate to 1 decimal place. [2] (b) Next year 15.8 million are employed and 0.8 million are unemployed. Calculate the new rate to 1 decimal place. [2]

4. Country T’s goods exports are 380 and goods imports 425. Net services are +22, net primary income is -11 and net secondary income is +3. GDP is 1,260. Work out the current account balance, then give it as a share of GDP to 1 decimal place. [3]

5. Country T’s government revenue is 410 and spending is 452. GDP is 1,260 and opening national debt is 520. Assume the deficit is financed by borrowing.

(a) Work out the budget deficit as a share of GDP to 1 decimal place. [2] (b) Calculate national debt as a percentage of GDP after the borrowing, to 1 decimal place. [2]

6. In Country T the top 20% of households receive 52% of income and the bottom 20% receive 4%. After taxes and benefits the shares are 45% and 7%. Calculate the ratio of top to bottom share before and after, to 1 decimal place, and state what has happened to income equality. [3]

7. The short-run relationship in Country T is: unemployment 3% with inflation 7.5%; 4% with 5.0%; 6% with 3.0%; 9% with 2.0%.

(a) Calculate the extra inflation per percentage point of unemployment removed when unemployment falls (i) from 4% to 3% and (ii) from 9% to 6% (2 decimal places). [2] (b) Explain why the short-run Phillips curve flattens as unemployment rises. [3]

8. A rise in imported fuel prices adds 2.0 points to inflation at every rate of unemployment in Country T.

(a) Using question 7, state inflation at 4% unemployment after the shock. [1] (b) Explain, using aggregate demand and supply, why this moves the curve rather than moving the economy along it. [3]

9. Country T’s real output rises 2.5% and emissions per unit of output fall 1.0%.

(a) Calculate the change in total emissions to 1 decimal place. [2] (b) Calculate the fall in emissions per unit of output (to 1 decimal place) needed to keep total emissions unchanged. [2] (c) Explain one reason why GDP growth may overstate the rise in wellbeing if emissions rise. [2]

10. Country T’s prices rise 7.0% while its trading partners’ prices rise 2.5%, with a fixed exchange rate. Goods exports are 380 and imports 425. The price elasticity of demand for exports is 1.4 and for imports 1.1. Treat percentage changes in quantity as changes in value.

(a) Calculate the rise in Country T’s prices relative to partners’ to 2 decimal places. [2] (b) Using that figure, calculate the new goods balance. [4] (c) Explain one reason why the actual worsening could be smaller. [2]

11. The bottom 20% of Country T’s households have a mean income of 3,000 cu and the top 20% have 36,000 cu. Over a year the bottom group’s income rises 1.0% and the top group’s rises 4.2%. Average income rises 3.0%.

(a) Calculate the ratio of top to bottom mean income before and after, to 1 decimal place. [3] (b) Evaluate whether the government should give income equality a higher priority than growth in Country T. [7]

Answers

1. Reason 1: stable, predictable prices let firms and households plan wages, prices and investment [1]; swings in inflation add uncertainty and discourage investment [1]. Reason 2: a zero or negative rate risks deflation, where buyers delay purchases expecting lower prices, so aggregate demand and output fall [1] and debts become heavier in real terms [1]. [4] Examiner insight: Answers that link each reason to a consequence for decisions tend to read as explanations; a bare list of drawbacks is easier to leave unrewarded.

2. Real GDP = 1,350 / 1.035 = 1,304.3 [1]. Growth = (1,304.3 - 1,260) / 1,260 [1] = 3.5% [1]. [3] Examiner insight: Show the deflator step so the method is visible even if the final figure slips; quoting nominal growth of 7.1% answers a different question.

3. (a) Labour force = 15.4 + 1.1 = 16.5 million [1]. Rate = 1.1 / 16.5 = 6.7% [1]. (b) Labour force = 15.8 + 0.8 = 16.6 million [1]. Rate = 0.8 / 16.6 = 4.8% [1]. [4] Examiner insight: Divide by the labour force, not by the employed total or the population; the labour force itself changed between the two years.

4. Goods balance = 380 - 425 = -45 [1]. Balance = -45 + 22 - 11 + 3 = -31 [1]. As a share of GDP: -31 / 1,260 = -2.5% [1]. [3] Examiner insight: Keep the minus sign and say whether it is a deficit; a positive 2.5% describes the opposite situation.

5. (a) Deficit = 452 - 410 = 42 [1]; 42 / 1,260 = 3.3% [1]. (b) New debt = 520 + 42 = 562 [1]; 562 / 1,260 = 44.6% [1]. [4] Examiner insight: Keep the flow (deficit) apart from the stock (debt); the debt ratio uses the new debt total, not the deficit.

6. Before: 52 / 4 = 13.0 [1]. After: 45 / 7 = 6.4 [1]. The ratio has fallen, so incomes are more equal [1]. [3] Examiner insight: Finish with a statement in words; a pair of ratios with no conclusion about equality leaves the question unanswered.

7. (a) (i) (7.5 - 5.0) / 1 = 2.50 points [1]. (ii) (3.0 - 2.0) / 3 = 0.33 points [1]. (b) At low unemployment labour is scarce, so firms compete for workers and wages rise quickly [1]. Firms pass higher costs on, so a small fall in unemployment adds a lot of inflation [1]. At high unemployment there is spare labour, so extra unemployment barely slows wage growth and inflation falls by less per point [1]. [5] Examiner insight: Quote figures from the table when describing the flattening; per-point gradients make the comparison precise.

8. (a) 5.0 + 2.0 = 7.0% [1]. (b) Higher fuel prices raise firms’ costs, so short-run aggregate supply shifts left [1]. The price level rises and real output falls, so unemployment rises while inflation rises [1]. Each unemployment rate is now linked with higher inflation, so the whole curve shifts outwards instead of the economy moving along it (stagflation) [1]. [4] Examiner insight: Say explicitly whether it is a shift or a movement along, and name the cause of each.

9. (a) 1.025 x 0.99 = 1.01475 [1], a rise of 1.5% [1]. (b) 1 / 1.025 = 0.9756 [1], so intensity must fall by 2.4% [1]. (c) GDP counts the output but not the cost of pollution [1]. Emissions harm health, resources and future generations, so wellbeing improves by less than GDP suggests [1]. [6] Examiner insight: Answer (a) in terms of total emissions; the 1.0% intensity fall is a different measure, and the fall is not enough for absolute decoupling.

10. (a) 1.07 / 1.025 = 1.0439 [1], so 4.39% [1]. (b) Exports fall 1.4 x 4.39 = 6.15% [1]; imports rise 1.1 x 4.39 = 4.83% [1]. New exports = 380 x 0.9385 = 356.6 and new imports = 425 x 1.0483 = 445.5 [1]. Balance = 356.6 - 445.5 = -88.9, compared with -45 [1]. (c) If the exchange rate is floating and the currency depreciates, exports become cheaper and imports dearer abroad, offsetting the relative price rise [1]. Demand may also be inelastic in the short run, so quantities respond less than assumed [1]. [8] Examiner insight: Follow the chain relative price → quantities → balance and state the assumption used; evaluation points tied to elasticity or the exchange rate tend to be stronger than generic remarks.

11. (a) Before: 36,000 / 3,000 = 12.0 [1]. After: 36,000 x 1.042 = 37,512 and 3,000 x 1.01 = 3,030 [1]; ratio = 12.4 [1]. (b) Average income rose 3.0%, so growth raised living standards on average [1]. But the bottom group gained 30 cu while the top gained 1,512 cu, so the gap widened [1]. A widening gap may reduce opportunity and social cohesion, which supports prioritising equality [1]. Redistribution through higher taxes may weaken incentives to work and invest, slowing growth and the income to be shared [1]. Growth can fund transfers and public services without cutting anyone’s income [1]. The answer depends on the time frame and on how the equality is pursued: targeted spending on skills may help both [1]. A supported judgement, for example that the government should aim for growth while directing some of it to the bottom group, completes the evaluation [1]. [10] Examiner insight: Evaluation that weighs both sides and ends with a judgement tied to the data tends to read better than a restated list of figures.

Where marks are usually lost

• Using nominal rather than real GDP growth.
• Dividing unemployment by the population instead of the labour force.
• Dropping the minus sign on a deficit.
• Mixing the deficit with the debt.
• Stating a ratio without saying what it means for equality.
• Describing a shift of the Phillips curve as a movement along it.
• Calling any growth harmful to the environment without referring to total emissions.
• Giving conflicts as certain, with no reference to size, time or cause.

Next steps

• Revisit the revision notes and the study guide.
• Check coverage on the course hub and the checklist.
• Take all free 10-minute diagnostics at /diagnostics/.
• Book a free trial class at /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018 (first teaching September 2018), Pearson Education Limited; sub-topic 2.3.6, items 1 and 2.