OCR A Level Economics: Macroeconomics — 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 available free from your board.

Related: Macroeconomics study guide | Macroeconomics revision notes

The real paper has three sections: candidates answer the single compulsory data-response question in Section A (about 30 marks), then choose one essay from Section B and one essay from Section C (25 marks each). This paper follows that structure; only one essay option is given in each of Section B and Section C.

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Section A — Data response

The real Section A is a single compulsory data-response question with several lettered parts, ending on a higher-tariff evaluative part — this paper follows that structure rather than setting several free-standing questions.

Stimulus: A country’s central bank has just cut its main interest rate from 4% to 3%. The finance ministry estimates the marginal propensity to consume in the economy is 0.8, and ministers are separately considering a £15 million increase in government spending on infrastructure. Economists have raised concerns that faster growth could widen the current account deficit.

1(a) Distinguish between a shift of the aggregate demand curve and a movement along it, giving an example of each. [4]

1(b) State the three main types of macroeconomic policy. [3]

1(c) Using the marginal propensity to consume given in the stimulus, calculate the value of the national income multiplier. [2]

1(d) Explain the effect on national income of the £15 million increase in government spending described in the stimulus. [4]

1(e) Explain the difference between the short-run and long-run Phillips Curve. [4]

1(f) Evaluate the extent to which the interest rate cut described in the stimulus is likely to achieve its aim of stimulating economic growth without creating a conflict with other macroeconomic objectives. [12]

(This Section A totals 29 marks, close to the live paper’s 30.)

Section B — Essay (choose one; one option given here)

2. Evaluate the extent to which expansionary fiscal policy is likely to create a conflict between the objectives of economic growth and the balance of payments. [25]

Section C — Essay (choose one; one option given here)

3. Evaluate whether expansionary monetary policy is an effective way to reduce unemployment during an economic downturn. [25]

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Answers

1(a) A movement along the aggregate demand curve is caused by a change in the price level [1] [1] — for example, a fall in the general price level causing a movement down the AD curve to a higher quantity demanded. A shift of the whole aggregate demand curve is caused by a change in any of its components (consumption, investment, government spending, net exports) for a reason other than price [1] [1] — for example, a rise in consumer confidence increasing consumption and shifting AD to the right.

1(b) Fiscal policy, monetary policy, and supply-side policy [1] [1] [1].

1(c) Multiplier = 1 ÷ (1 − 0.8) = 1 ÷ 0.2 = 5 [2].

1(d) The initial £15 million injection is not the full effect on national income [1]; because the multiplier is 5, the eventual total increase in national income is £15 million × 5 = £75 million [1], as the initial spending is re-spent through successive rounds of the economy, each round adding a smaller additional amount governed by the marginal propensity to consume [2].

1(e) The short-run Phillips Curve shows a trade-off between inflation and unemployment — policies that reduce unemployment tend to be associated with rising inflation, and vice versa [1] [1]. The long-run Phillips Curve is vertical at the natural rate of unemployment (NAIRU), reflecting the view that in the long run, unemployment returns to its natural rate regardless of the inflation rate, so there is no lasting trade-off available to policymakers once expectations adjust [1] [1] — attempting to hold unemployment below the natural rate only results in accelerating inflation without a permanent employment gain.

1(f) Mechanism (4 marks): a cut in domestic interest rates makes borrowing cheaper and saving less attractive, encouraging firms to invest and consumers to spend, which raises aggregate demand and supports economic growth [1] [1]; it also makes the currency less attractive to hold, since savers and investors earn a lower return on assets denominated in it, which typically causes the exchange rate to depreciate [1], making exports cheaper for foreign buyers and imports more expensive for domestic buyers [1]. Possible conflicts (4 marks): the weaker currency can raise cost-push inflation through more expensive imported goods, conflicting with the price-stability objective [1]; whether the current account genuinely improves depends on the Marshall-Lerner condition being satisfied, i.e. the combined price elasticities of demand for exports and imports exceeding one [1] [1]; and in the short run the effect may follow a J-curve, with the trade balance initially worsening before it improves as buyers respond to the new prices [1]. Judgement (4 marks): the cut is more likely to achieve its growth aim without a lasting conflict if it operates mainly through investment and confidence rather than a large currency depreciation [1]; the outcome also depends on how open the economy is to trade, since a more open economy sees a larger net-export effect from any given depreciation, for better or worse [1]; and demand-side stimulus of this kind raises growth in the short run but, unlike supply-side policy aimed at the economy’s productive capacity, does little to prevent the same conflicts recurring if used repeatedly [1]; overall, some tension with the current account and inflation objectives is likely, but its severity is conditional on these factors rather than automatic [1].

2. Mechanism (5 marks): expansionary fiscal policy — for example, increased government spending or tax cuts — raises aggregate demand [1], which boosts economic growth by increasing output and incomes [1]. However, higher aggregate demand also increases consumer spending on imports, since rising incomes typically raise import demand [1]; if this rise in imports is not matched by an equivalent rise in exports, the current account of the balance of payments moves further into deficit [1], meaning the pursuit of higher growth can directly worsen the balance of payments objective [1]. Developing the conflict (8 marks): the size of the conflict depends on the marginal propensity to import, since an economy that imports a large share of any extra income sees a bigger deterioration in the current account for a given rise in growth [1] [1]; it also depends on the state of the economy when the policy is applied — stimulating an economy already close to full capacity is more likely to raise import spending and inflation than stimulating one with a large output gap, where extra output can be met from domestic spare capacity [1] [1]; the exchange rate response matters too, since if the higher growth attracts foreign investment inflows the currency may appreciate, worsening export competitiveness on top of the direct import effect [1] [1]; and the conflict can be partly offset if the government spending is directed at domestically-produced investment goods (such as infrastructure) rather than import-intensive consumption, which raises growth with a smaller import content [1] [1]. Limits to the conflict (5 marks): the effect is not automatic — a fiscal expansion financed by, or accompanied by, supply-side improvements can raise growth while also raising exports if it improves competitiveness [1] [1]; a small, open economy with a high propensity to import will experience the conflict more severely than a large, relatively closed economy [1] [1]; and if the fiscal expansion successfully raises long-run productive capacity (e.g. via infrastructure spending) rather than only short-run demand, the growth-versus-balance-of-payments trade-off may not persist once supply expands to meet the higher demand [1]. Judgement (7 marks): a conflict between growth and the balance of payments is a plausible and common outcome of expansionary fiscal policy, especially in import-intensive economies operating near full capacity [1] [1]; but it is not inevitable, and its size depends heavily on the marginal propensity to import, the output gap, the exchange rate response, and the composition of the spending itself [1] [1]; a full evaluation should therefore weigh these specific circumstances rather than assert the conflict as a fixed rule, and should note that policymakers can design fiscal expansions (e.g. targeted at capacity-raising investment) to reduce the severity of the trade-off [1] [1] [1].

3. For (4 marks): expansionary monetary policy — lower interest rates and/or quantitative easing — reduces the cost of borrowing, encouraging firms to invest and consumers to spend, which raises aggregate demand and can create jobs to meet the higher demand [1] [1]; lower rates can also weaken the currency, boosting export competitiveness and supporting export-related employment [1]; quantitative easing specifically increases the money supply directly, which can support demand even when interest rates are already very low [1]. Against (4 marks): there can be a significant time lag between a monetary policy change and its full effect on unemployment, meaning it may not respond quickly enough to an urgent downturn [1]; if interest rates are already close to zero, further cuts have limited additional effect (“liquidity trap”), reducing the policy’s power precisely when it may be needed most [1]; lower interest rates can also fuel asset price bubbles or excessive borrowing, creating risks to future financial stability [1]; and if the downturn is caused by a supply-side shock rather than weak demand, monetary policy targeting demand may do little to address the actual cause of rising unemployment [1]. Developing the evaluation (8 marks): the effectiveness also depends on the state of confidence in the economy, since firms and consumers may not borrow and spend more even at lower rates if they expect the downturn to persist (“pushing on a string”) [1] [1]; the banking sector’s willingness to lend matters as much as the policy rate itself, since a lower base rate does not guarantee cheaper or more available credit if banks are themselves risk-averse [1] [1]; the openness of the economy affects how much of the currency depreciation feeds through to net exports rather than simply raising import prices [1] [1]; and unconventional measures such as quantitative easing have distributional effects, since they tend to raise asset prices that benefit asset-owning households more than others, which is a further consideration beyond the direct effect on unemployment [1] [1]. Judgement (9 marks): the effectiveness of expansionary monetary policy depends on how much room interest rates have to fall [1], the cause of the downturn [1], and how quickly firms and consumers respond to lower rates [1]; it is generally more effective against a demand-driven downturn than a supply-side one [1], since it works by stimulating spending rather than addressing a constraint on production [1]; it is also less effective once interest rates are already very low, which is precisely when quantitative easing or fiscal policy may need to take the larger share of the burden [1]; and it works best when combined with fiscal or supply-side measures rather than relied on alone [1], since no single policy instrument reliably addresses every possible cause of rising unemployment [1], so a full evaluation should conclude that its effectiveness is conditional rather than fixed [1].

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Where marks are usually lost

• Describing a change in aggregate demand caused by price level as a “shift” rather than a “movement along” the curve.
• Explaining the multiplier’s effect using only the initial injection figure, without calculating the full multiplied effect on national income.
• Treating the Phillips Curve as a single, permanent relationship rather than distinguishing its short-run and long-run forms.
• Discussing a policy’s benefit toward one objective without identifying which other objective it might conflict with.
• Confusing demand-side and supply-side policy, or giving a supply-side example (such as training investment) when a demand-side policy is asked for.
• Answering a Section B or C essay at only an “explain” level, without a clear judgement that weighs the specific circumstances described in the question.

Approaching macroeconomics questions

For any question involving the multiplier, always calculate the full multiplied effect on national income rather than stopping at the initial injection figure, since the specification tests this calculation specifically because it is easy to underestimate the eventual scale of the effect. When a question involves a policy’s effect on the economy, actively look for a second objective it might threaten even if the question does not explicitly ask for a conflict, since OCR’s Component 2 papers reward this evaluative habit throughout section 3.4 and beyond. For exchange-rate questions, work through the causal chain explicitly in order — the policy change, its effect on the exchange rate, and then the resulting effect on trade or inflation — rather than jumping straight to a conclusion, since method marks are available for each correctly identified step. Finally, for the Section B and C essays specifically, always end with a judgement that weighs the specific circumstances described in the question — such as how much room interest rates have to fall, or the underlying cause of a downturn — rather than concluding with a generic restatement of both sides.