OCR A Level Economics: Macroeconomics — 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: Macroeconomics study guide | Macroeconomics revision notes

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Section A

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

2. State the three main types of macroeconomic policy. [3]

Section B

3. The marginal propensity to consume in an economy is 0.8.

(a) Calculate the value of the national income multiplier. [2] (b) Explain the effect on national income of a £15 million increase in government spending. [4]

4. Explain the difference between the short-run and long-run Phillips Curve. [6]

5. Explain how expansionary fiscal policy could create a conflict between the objectives of economic growth and the balance of payments. [7]

6. Explain how a cut in domestic interest rates could affect a country’s exchange rate, and explain one consequence of this for the balance of payments. [6]

7. Explain the difference between demand-side and supply-side policy, giving one example of each. [5]

8. Evaluate whether expansionary monetary policy is an effective way to reduce unemployment during an economic downturn. [12]

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Answers

1. 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.

2. Fiscal policy, monetary policy, and supply-side policy [1] [1] [1].

3. (a) Multiplier = 1 ÷ (1 − 0.8) = 1 ÷ 0.2 = 5 [2]. (b) 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].

4. 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) [1], 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].

5. Expansionary fiscal policy — for example, increased government spending or tax cuts — raises aggregate demand, which boosts economic growth by increasing output and incomes [1] [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] [1], meaning the pursuit of higher growth directly worsens the balance of payments objective [1] — a clear example of the policy conflicts the specification explicitly requires students to evaluate, since achieving one macroeconomic objective can come at the expense of another [1].

6. A cut in domestic interest rates makes the currency less attractive to hold, since savers and investors earn a lower return on assets denominated in that currency [1] [1]; this typically causes the exchange rate to depreciate [1]. A weaker currency makes the country’s exports cheaper for foreign buyers and imports more expensive for domestic buyers [1] [1], which can improve the balance of payments by increasing export competitiveness and reducing import demand — though it may also raise cost-push inflation through more expensive imported goods [1].

7. Demand-side policy aims to influence the level of aggregate demand in the economy, for example through fiscal policy such as changing government spending or taxation [1] [1]. Supply-side policy aims instead to increase the economy’s long-run productive capacity by shifting aggregate supply, for example through investment in education and training to improve labour productivity [1] [1]. The key distinction is that demand-side policy manages the level of spending in the economy in the short run, while supply-side policy targets the economy’s underlying capacity to produce over the longer term [1].

8. For: 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: 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]. Judgement: the effectiveness of expansionary monetary policy depends on how much room interest rates have to fall, the cause of the downturn, 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, and works best when combined with fiscal or supply-side measures rather than relied on alone [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.

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 “evaluate” questions 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.