OCR A Level Economics: The Phillips curve and schools of macroeconomic thought (H460) – 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 cover the Phillips Curve topic and the Keynesian, neo-classical and Austrian schools bullet in Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Teaching is in the study guide and the revision notes. Course pages: the OCR Economics hub, the checklist and the free diagnostics. All countries and figures are invented.

Questions

1. Define the natural rate of unemployment. [2]

2. Country C has a labour force of 40 million, of whom 37.6 million are employed. Its natural rate of unemployment is 5.5%. Calculate the unemployment rate, and the number of workers whose unemployment is cyclical. [3]

3. In Country C, wage growth = 3 + 0.5 × (5.5 − U), where U is the unemployment rate in %.

(a) Calculate wage growth when U = 4.5% and when U = 6.5%. [2] (b) Explain why the short-run Phillips Curve slopes downward. [2]

4. Wage growth is 4.5% and productivity growth is 2.5%. Calculate the growth of unit labour costs, and state what this implies for price inflation. [3]

5. Inflation = expected inflation + 0.6 × (5 − U), with expected inflation equal to last year’s actual inflation. Inflation is 2% and U = 5% in year 0. The government holds U at 3% in years 1 to 3, then returns it to 5% in year 4. Calculate inflation in years 1, 2, 3 and 4. [4]

6. Explain why the long-run Phillips Curve may be vertical, using the adaptive-expectations hypothesis. [5]

7. Explain why the natural rate of unemployment can be called the non-accelerating inflation rate of unemployment (NAIRU). [3]

8. Country D (illustrative): the table shows unemployment U (%) and wage growth (%).

Year	1	2	3	4	5	6
U	7	6	5	5	6	7
Wage growth	1.5	2.0	2.5	5.0	5.5	6.0

Assume wage growth = expected inflation + 0.5 × (6 − U). Evaluate whether the Phillips Curve accurately explains the relationship between wage growth and changes in unemployment. [8]

9. Expected inflation is 3%, the slope of the curve is 0.5, and the policymaker believes the natural rate is 5.5%.

(a) Calculate the unemployment rate needed for wage growth of 3.5%. [2] (b) Calculate wage growth at that rate if the true natural rate is 4.5%, and explain what this shows about the curve’s usefulness to policymakers. [3]

10. Explain how Keynesian and neo-classical economists differ on whether the economy returns to full employment after a fall in aggregate demand. [6]

11. Over six years, bank credit in Country E grows by 10% a year and real income by 2.5% a year.

(a) Calculate the cumulative growth of credit and of income, and how many times larger the first is than the second (to one decimal place). [3] (b) Evaluate the Austrian explanation of a recession that follows such a period. [6]

Answers

1. The rate of unemployment when the labour market is in equilibrium [1], consisting of frictional and structural unemployment with no cyclical (demand-deficient) unemployment [1]. [2] Examiner insight: A definition that says only “the normal level of unemployment” is thin; the answer gains credit by saying what it includes and what it leaves out.

2. Unemployed = 40 − 37.6 = 2.4 million [1]. Rate = 2.4 ÷ 40 = 6.0% [1]. Cyclical = 6.0 − 5.5 = 0.5 points = 0.005 × 40 = 0.2 million [1]. [3] Examiner insight: Show the unemployed count before the percentage, and keep units (million, percentage points) with each result.

3. (a) U = 4.5: 3 + 0.5 × 1 = 3.5% [1]. U = 6.5: 3 + 0.5 × (−1) = 2.5% [1]. (b) Low unemployment means labour shortages, so firms bid up pay [1]; high unemployment weakens workers’ bargaining power, so wage growth falls [1]. [4] Examiner insight: Explanations earn credit when they run as a chain from the labour market to wages, not just restate that the curve slopes down.

4. Unit labour cost growth = 1.045 ÷ 1.025 − 1 [1] = 1.95% (about 2.0%) [1]. Wage growth overstates cost pressure because productivity rises, so price inflation is likely to be well below wage growth [1]. [3] Examiner insight: A subtraction (4.5 − 2.5 = 2.0) is a close approximation; showing which method you use avoids confusion.

5. Each year at U = 3%, inflation rises by 0.6 × 2 = 1.2 [1]. Year 1 = 3.2%, year 2 = 4.4%, year 3 = 5.6% [2]. Year 4 at U = 5%: the gap is zero, so inflation stays at 5.6% [1]. [4] Examiner insight: Show that expected inflation is last year’s actual figure each time; it makes errors in later years easier to trace.

6. Expected inflation depends on past inflation [1]. If unemployment is held below the natural rate, wages and prices rise faster than expected [1]. People raise their expectations, so the short-run curve shifts up [1]. Only at the natural rate does actual equal expected inflation, so inflation is stable [1]. Joining those points gives a vertical line, so no lasting trade-off exists [1]. [5] Examiner insight: Strong answers say that the vertical line is at the natural rate and say why, not merely that expectations “change”.

7. At the natural rate actual inflation equals expected inflation [1]. Below it, labour shortages push wages above expectations, expectations rise and inflation accelerates [1]. So the natural rate is the lowest unemployment consistent with non-accelerating inflation [1]. [3] Examiner insight: “Non-accelerating” is not “zero”: inflation can be stable at any level there, which is what the answer should make clear.

8. Years 1 to 3: unemployment falls as wage growth rises, which fits an inverse relationship [1]. Years 4 to 6: unemployment rises while wage growth also rises, which a single curve cannot explain [1]. With U* = 6 and slope 0.5, implied expected inflation is 2.0% throughout years 1 to 3 but 4.5%, 5.5% and 6.5% in years 4 to 6 [1]. So the short-run curve shifted up as expectations rose, consistent with the expectations-augmented curve [1]. A supply shock (for example higher import costs) could also raise wage claims [1]. Other limits are mismeasured unemployment and the gap between wage growth and price inflation caused by productivity [1]. The curve still explains demand-driven movements when expectations are stable [1]. Overall it is a good short-run description but incomplete: accuracy depends on the period and the type of shock, and it cannot say what causes shifts [1]. [8] Examiner insight: Answers that use the table figures (here, the implied expectations) and then reach a supported judgement tend to do better than lists of generic criticisms.

9. (a) 3.5 = 3 + 0.5 × (5.5 − U) [1], so U = 4.5% [1]. (b) If U* = 4.5%, wage growth = 3 + 0.5 × (4.5 − 4.5) = 3.0% [1], which undershoots the target by 0.5 points [1]. The natural rate is unobservable, so targeting it risks policy errors, limiting the curve’s usefulness [1]. [5] Examiner insight: Linking a calculation to a stated implication, rather than leaving the number alone, is what turns it into analysis.

10. Keynesians: wages and prices are sticky downward [1], so after a fall in AD output and employment can stay below full employment for a long time [1]; government demand management is justified [1]. Neo-classical: wages and prices are flexible [1], so falling prices and wages restore equilibrium at full-employment output (vertical long-run AS) [1], so intervention is unnecessary and supply-side policy matters more [1]. [6] Examiner insight: Comparing the two schools point by point (wages, time, policy) usually reads better than two separate summaries.

11. (a) Credit: 1.1⁶ − 1 = 77.2% [1]. Income: 1.025⁶ − 1 = 16.0% [1]. Ratio = 77.2 ÷ 16.0 = 4.8 times [1]. (b) Austrians say low interest rates and credit expansion misdirect investment into unsustainable projects (malinvestment) [1]. Credit growing about 4.8 times faster than income fits that imbalance [1]. The recession is then a necessary correction that liquidates bad investment [1]. However, causes other than credit, such as supply shocks, may explain slumps [1]. Keynesians argue stimulus can limit long-lasting output and job losses, so letting failures run has costs [1]. The judgement depends on whether evidence shows credit drove the boom and how severe the bust is [1]. [9] Examiner insight: Use the figures from part (a) in part (b); evaluating a school using only general knowledge ignores the data given.

Where marks are usually lost

• Not stating the natural rate excludes cyclical unemployment.
• Mixing wage growth with price inflation, and ignoring productivity.
• Calling the vertical curve “inflation is constant” instead of explaining expectations catching up.
• Forgetting that expected inflation is last year’s actual inflation in the adaptive model.
• Quoting calculation results without units or percentage points.
• Listing criticisms of the Phillips Curve without a judgement or a time frame.
• Treating NAIRU as a target of zero inflation.
• Describing three schools separately and never comparing them.
• Judging a school without using the data in the question.

Next steps

• Revisit the revision notes and the study guide.
• Browse the OCR Economics hub and tick off topics on the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Topics: The Phillips Curve; Macroeconomic equilibrium (final bullet).