Economic Problems
Inflation is rising rapidly because consumer spending is increasing too quickly. Which policy could reduce aggregate demand?
increase interest rates increase taxes or reduce government spending
Unemployment is high and consumer spending is falling. Which policy could the government use to stimulate the economy?
increase government spending or reduce taxes.
The central bank wants to reduce borrowing and spending. Which policy should it consider?
Increase Interest Rate
The government reduces income taxes. What is the likely effect on consumer spending?
Disposable income and consumption are likely to increase, increasing AD.
Workers lack skills and productivity is low. Which policy could address this problem?
Supply-side policy, such as education and training.
The economy is in recession. The government wants to increase aggregate demand. Give one policy action.
increase government spending or reduce taxes. reduce interest rates.
Inflation is high. The central bank wants to reduce inflation. What action could it take?
Increase interest rates to reduce borrowing, spending and aggregate demand.
Businesses are reluctant to invest in new technology. Suggest a policy that could encourage investment.
Supply-side policy, such as investment incentives, subsidies or tax incentives.
Interest rates increase. Explain what is likely to happen to borrowing and consumption.
Borrowing becomes more expensive; borrowing and consumption are likely to decrease.
A country has high unemployment and weak growth. Suggest one policy and explain how it could increase aggregate demand.
Fiscal: increase spending or cut taxes; monetary: reduce interest rates. Explain how it increases consumption, investment or government spending.
A country has low productivity and weak long-term growth. Which policy would target the underlying problem most directly?
Supply-side policy, such as investment in education, training, technology or infrastructure.
Inflation is high, but the government wants to avoid increasing unemployment. Which policy could improve productive capacity over time?
Supply-side policy to increase productivity and LRAS. It may help long-run growth but will not necessarily solve immediate inflation.
The government increases spending during a recession. Explain one benefit and one possible trade-off.
Benefit: higher AD, output and employment. Trade-off: inflationary pressure, budget deficits or higher public debt.
The central bank increases interest rates to reduce inflation. Explain how this could also increase unemployment.
Higher rates reduce borrowing, consumption and investment, lowering AD and output and potentially increasing cyclical unemployment.
A country has high inflation and low growth. Suggest two different policies that could address these problems through different channels.
For example, monetary tightening to reduce AD and inflation, alongside supply-side investment to improve productive capacity and long-run growth.
Inflation and unemployment are both high. Choose a policy and explain how it could help one problem while making the other worse.
pressure by reducing AD, but could worsen growth and unemployment
Government debt is already high, but the economy is in recession. Which policy could stimulate growth without relying primarily on increased government spending? Explain one limitation.
Monetary policy, such as lowering interest rates, could stimulate borrowing and AD. It may be less effective if confidence is low or rates are already very low.
A country has high inflation, high unemployment and low productivity. Recommend one policy, explain its likely effect, and identify a trade-off.
Any policy to boost the economy
The government invests in education and infrastructure. Explain why this could increase long-run growth and identify one limitation.
It can improve skills, productivity and productive capacity/LRAS. Limitations include cost, opportunity cost and time lags.
Inflation is 8%, unemployment 9%, growth 0.5%, productivity is low and government debt is high. Choose one policy to implement first. Explain the action, expected effect and one trade-off.
Accept any defensible policy. Full credit requires policy, specific action, economic mechanism, and a realistic trade-off. Consider the causes and urgency of the problems.