IB DP Economics: Measuring and Managing the Economy (Unit 3.1-3.3) -- 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 – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

Related: Measuring and Managing the Economy revision notes and the study guide.

Section A

1. Distinguish GDP from GNI. [2]

2. Name the four phases of the business cycle in order. [2]

3. State the four macroeconomic objectives. [4]

Section B

4. State which of the two AD-AS curves shifts in each scenario, with a brief reason:

(a) Government spending increases. [1] (b) The cost of imported raw materials rises sharply. [1] (c) Consumer confidence falls, reducing consumption spending. [1] (d) A new technology improves productivity across the economy. [1]

5. A country’s real GDP growth falls from 3% to 0.5% over one year, while inflation falls from 4% to 1% over the same period.

(a) Using the AD-AS model, explain whether this pattern is more consistent with a demand-side or a supply-side change. [3] (b) Justify your answer by explaining what a demand-side explanation would predict for both variables, and why the data does not match it. [2]

Section C

6. A government pursues an expansionary policy aimed at boosting economic growth. Evaluate the extent to which this policy might conflict with the objective of low and stable inflation. [8]

7. Using real-world or hypothetical data, explain how a government could use the AD-AS model to distinguish between a recession caused by falling consumer confidence and one caused by a sharp rise in global oil prices, and why this distinction matters for policy choice. [8]

Worked answers

1. GDP is the total output/income of an economy; GNI additionally accounts for income earned by residents abroad. [2] (1 mark for each correct definition, with the distinction stated explicitly)

2. Expansion, peak, contraction (recession), trough. [2]

3. Economic growth, low unemployment, low and stable inflation, equity in income distribution. [4]

4. (a) AD shifts (rightward) – government spending is one of AD’s four components. [1] (b) AS shifts (leftward) – rising input/production costs reduce aggregate supply. [1] (c) AD shifts (leftward) – consumption is one of AD’s four components. [1] (d) AS shifts (rightward) – improved productivity increases productive capacity. [1]

5. (a) This pattern is more consistent with a demand-side change (a leftward shift in AD), since both real output growth and inflation fell together. [3] (b) A supply-side (leftward AS shift) explanation would predict falling output but rising inflation (price level increasing while output falls) – the opposite of what occurred here. Since both output growth and inflation fell together, this matches a fall in aggregate demand, which reduces both the price level and output simultaneously, rather than a supply shock, which would move them in opposite directions. [2]

6. A strong evaluation explains the mechanism first: an expansionary policy (e.g. increased government spending, tax cuts, or lower interest rates) shifts AD rightward, which the AD-AS model shows raises both real output (growth) and the price level (inflation) simultaneously, at least in the short run. This creates a genuine potential conflict between the growth and inflation objectives, since the same policy that helps meet one macroeconomic objective directly risks worsening progress toward the other. However, a well-evaluated answer recognises this conflict is not automatic or fixed in size: how much inflation results depends on how close the economy already is to full capacity (a demand expansion in an economy with substantial spare capacity may raise output with only mild inflationary pressure, since AS can respond without cost pressure, whereas the same policy in an economy near full capacity may produce much larger inflationary effects for a similar output gain) and on whether supply-side improvements are occurring simultaneously to shift AS rightward and offset some of the pressure. A strong conclusion argues that the conflict is real and well-established by the model but its severity is context-dependent, rather than asserting the two objectives are always or never in tension. [8] (Marks for correct AD-AS mechanism, an accurate account of the growth-inflation trade-off, and genuine evaluation of the conditions that vary its severity.)

7. A strong answer sets up both scenarios on the AD-AS model explicitly: a recession from falling consumer confidence is a leftward shift in AD (since consumption is one of AD’s four components), which the model predicts reduces both real output and the price level (or inflation rate) together; a recession from a sharp rise in global oil prices is a leftward shift in short-run AS (since oil is a production cost), which the model predicts reduces real output while raising the price level (a combination sometimes called stagflation). The key distinguishing evidence is therefore the direction of the price level/inflation change alongside falling output – falling inflation alongside falling output points to a demand-side cause, while rising inflation alongside falling output points to a supply-side cause. This distinction matters for policy choice because demand-side recessions are typically addressed with expansionary demand-side policy (fiscal or monetary stimulus, which further shifts AD right without the same inflationary risk, since inflation is already falling), whereas supply-side recessions are more effectively addressed with supply-side policy (aimed at reducing costs or increasing productive capacity), since further demand-side stimulus in a supply-shock recession would worsen the existing inflation problem rather than resolve the underlying cost-side cause. [8] (Marks for correctly modelling both scenarios on AD-AS, correctly identifying the distinguishing price-level evidence, and a reasoned link to appropriate policy choice for each.)

Why questions 6 and 7 stay diagram-anchored

Both extended-response questions require the AD-AS model to do genuine analytical work rather than appearing as a decorative diagram, because the revision notes identify exactly this – using the direction of both output and price-level change together, not just one variable in isolation – as the specific skill IB data-response and extended-response questions on this sub-topic test. Question 7 in particular is written to require distinguishing the two most commonly confused causes of recession, mirroring the two worked examples the revision notes themselves use to build this skill.

Official syllabus

International Baccalaureate Organization, Diploma Programme Economics guide, published February 2020, updated to October 2020, first assessment 2022, sub-topics 3.1-3.3 – ibo.org – the same source cited by the Measuring and Managing the Economy revision notes.