IB DP Economics: Measuring and Managing the Economy (Unit 3.1-3.3) – 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 – 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 three macroeconomic objectives of sub-topic 3.3 that apply at both SL and HL, and the additional objective that applies at HL only. [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 supply-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 produced within an economy; GNI is GDP plus net income from abroad (income received from abroad minus income paid abroad), which can be negative, so GNI can be above or below GDP. [2] (1 mark for each correct definition, with the distinction stated explicitly)

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

3. Economic growth [1]; low unemployment [1]; a low and stable rate of inflation [1]; HL only: a sustainable level of government (national) debt [1]. [4] (SL students answer the first part only, out of [3].) Equity in income distribution is not a 3.3 objective: 3.3 treats it only as a potential conflict with economic growth, and it is developed in 3.4 Economics of inequality and poverty.

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 [1]. Neither variable has fallen in level: real output is still growing (by 0.5%) and the price level is still rising (by 1%), so this is a slowdown, not a recession or deflation. It fits AD growing more slowly than before (a smaller rightward shift in AD each year relative to the growth in productive capacity) [1], which the AD-AS model shows slows both the growth of real output and the rise in the price level together, so the growth rate and the inflation rate fall at the same time [1]. [3] (b) A supply-side change moves the two rates in opposite directions: weaker supply (an adverse cost shock, or slower growth in productive capacity) slows output growth while pushing inflation up, and stronger supply raises output growth while easing inflation [1]. Here the growth rate and the inflation rate both fell, moving in the same direction, which matches slower growth in aggregate demand rather than a supply-side cause [1]. [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 May, August and 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.