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Form 5 Economics Practice Paper: Macroeconomic Indicators, Money and Stabilisation Policy (12 questions, 100 marks, 75 minutes)
Form 5 Economics – 12 questions – 100 marks – 75 minutes
Form 5 economics practice paper: 12 questions, 100 marks, 75 minutes on GDP, inflation, unemployment, real interest rates, money and banking, multipliers and the linked exchange rate.
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Paper details Form 5 economics practice paper with 12 original questions on GDP, inflation, money and banking, and monetary policy, each with full worked answers and marking points.
Section A: Output, prices and employment (Q1-Q4)
Calculations need the formula, substitution and units, consistent with the data given.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | In a certain economy, for one year (in billions of dollars): private consumption 1,200, investment 400, government spending 300, exports 900, imports 800. (a) Calculate GDP using the expenditure approach. (3 marks) (b) Wages are 1,100, rent 200, interest 150 and profits 550; verify the answer in (a) using the income approach. (3 marks) (c) Explain why second-hand flat transactions and share trading are not counted in GDP. (2 marks) | (a) 1,200 + 400 + 300 + (900 – 800) = 2,000 billion dollars. (3 marks) (b) 1,100 + 200 + 150 + 550 = 2,000, matching the expenditure figure. (3 marks) (c) Both only transfer ownership of an existing asset, so no new final good or service is produced; the estate agent commission on a second-hand flat is a service and is counted. (2 marks) |
| 2 | In a certain economy nominal GDP was 200 billion dollars in year 1 and 231 billion in year 2; at year 1 prices, real GDP in year 2 was 210 billion. (a) Calculate the GDP deflator for year 2. (3 marks) (b) Calculate the inflation rate in year 2. (2 marks) (c) Calculate the real growth rate in year 2 and explain how it differs from the nominal growth rate. (3 marks) | (a) 231 divided by 210 times 100 = 110. (3 marks) (b) The deflator rises from 100 to 110, so inflation is 10%. (2 marks) (c) 210 divided by 200 minus 1 = 5%. Of the 15.5% nominal growth, 10 points come from higher prices and only 5 points from more real output. (3 marks) |
| 3 | An economy has 5,000,000 adults, 3,600,000 employed and 240,000 unemployed, with the rest outside the labour force. (a) Calculate the labour force. (2 marks) (b) Calculate the unemployment rate. (3 marks) (c) Explain why long-term unemployed people who stop looking for work cause the unemployment rate to understate the problem. (3 marks) | (a) Labour force = 3,600,000 + 240,000 = 3,840,000. (2 marks) (b) 240,000 divided by 3,840,000 times 100% = 6.25%. (3 marks) (c) People who stop job search are classified outside the labour force and no longer counted as unemployed, so the rate falls although the job situation has not improved. (3 marks) |
| 4 | The consumer price index basket of an economy uses 2019 as the base year, when the basket cost 8,000 dollars; it cost 8,400 dollars in 2020 and 8,610 dollars in 2021. (a) Calculate the CPI for 2020 and 2021. (3 marks) (b) Calculate the inflation rate for 2020 and 2021. (3 marks) (c) State one main difference between the CPI and the GDP deflator. (2 marks) | (a) 2020: 8,400 divided by 8,000 times 100 = 105; 2021: 8,610 divided by 8,000 times 100 = 107.6 (107.625). (3 marks) (b) 2020: 5%; 2021: (107.625 – 105) divided by 105 times 100% = 2.5%. (3 marks) (c) The CPI covers only a fixed basket of household consumption and includes imports, while the deflator covers all domestic output and excludes imports. (2 marks) |
Section B: Money and banking (Q5-Q8)
Explanations must give cause and effect supported by the figures, not mere description.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | The nominal interest rate is 6% and the consumer price index rises from 105 to 109.2. (a) Calculate the inflation rate. (2 marks) (b) Calculate the real interest rate and explain your method. (4 marks) (c) Explain the effect of this inflation on savers and on borrowers. (3 marks) | (a) (109.2 – 105) divided by 105 times 100% = 4%. (2 marks) (b) Real rate = (1.06 divided by 1.04 minus 1) times 100% which is about 1.92%, roughly 2%; the simple method is 6% minus 4%. (4 marks) (c) Savers lose purchasing power because prices rise, while borrowers gain by repaying in money that is worth less. (3 marks) |
| 6 | (a) State three functions of money. (3 marks) (b) Explain why paper notes, which have no intrinsic value, can still serve as a medium of exchange. (3 marks) (c) State one way a central bank maintains public confidence in money. (2 marks) | (a) Medium of exchange, unit of account and store of value (also standard of deferred payment). (3 marks) (b) Notes are legal tender by law, the government accepts them for taxes and the public believes others will accept them, so they work as a medium of exchange. (3 marks) (c) The central bank controls the money supply and avoids excessive note issue that would cause hyperinflation. (2 marks) |
| 7 | A banking system receives 50 million dollars of new deposits; the required reserve ratio is 20% and banks hold no excess reserves. (a) Calculate the deposit multiplier. (2 marks) (b) Calculate the maximum total deposits the system can create. (3 marks) (c) Calculate the increase in the money supply. (4 marks) | (a) 1 divided by 0.2 = 5. (2 marks) (b) 50 million times 5 = 250 million dollars. (3 marks) (c) Money supply increase = 250 million – 50 million = 200 million dollars. (4 marks) |
| 8 | A central bank sells 500 million dollars of bonds in the open market; the required reserve ratio is 20%. (a) Explain how this operation affects bank reserves. (2 marks) (b) Calculate the maximum possible fall in the money supply. (4 marks) (c) Give two reasons why the actual fall may be smaller. (3 marks) | (a) Buyers pay by cheque drawn on their banks, so banks lose 500 million dollars of reserves at the central bank. (2 marks) (b) 500 million times 5 = 2,500 million dollars, so deposits and the money supply can fall by up to 2,500 million. (4 marks) (c) Banks hold excess reserves, the public raises its cash ratio, or borrowers do not use all their loans, so the multiplier effect is weaker. (3 marks) |
Section C: Policy and the open economy (Q9-Q12)
Policy answers must cover both benefits and limits, and effects on output, prices and jobs.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | The marginal propensity to consume is 0.8 and the government raises spending by 20 billion dollars. (a) Calculate the expenditure multiplier. (2 marks) (b) Calculate the maximum rise in equilibrium income. (4 marks) (c) Explain why the actual rise may be smaller. (3 marks) | (a) 1 divided by (1 – 0.8) = 5. (2 marks) (b) 20 billion times 5 = 100 billion dollars. (4 marks) (c) Near full employment there are supply bottlenecks and import leakage, so part of the demand raises prices or imports and the multiplier is weaker. (3 marks) |
| 10 | The tax rate is 20% and the marginal propensity to consume is 0.8. A recession cuts GDP by 50 billion dollars. (a) Calculate the fall in tax revenue. (2 marks) (b) Calculate the fall in disposable income and in consumption. (4 marks) (c) Name this mechanism. (2 marks) | (a) 50 billion times 20% = 10 billion dollars. (2 marks) (b) Disposable income falls by 50 – 10 = 40 billion and consumption falls by 40 times 0.8 = 32 billion dollars. (4 marks) (c) An automatic (built-in) stabiliser. (2 marks) |
| 11 | The short-run Phillips curve of an economy shows 2% inflation at 7% unemployment and 6% inflation at 4% unemployment. (a) Describe the short-run relationship. (3 marks) (b) Explain why the long-run Phillips curve is vertical. (3 marks) (c) State what stagflation means. (2 marks) | (a) In the short run the two conflict: inflation rises from 2% to 6% as unemployment falls from 7% to 4%. (3 marks) (b) In the long run workers adjust inflation expectations and wages follow prices, so real wages are unchanged and unemployment returns to its natural rate; expansionary policy only raises prices. (3 marks) (c) Stagflation means high unemployment and high inflation at the same time. (2 marks) |
| 12 | A place operates a linked exchange rate with a convertibility band of 7.75 to 7.85. (a) Explain the roles of the strong-side and weak-side convertibility undertakings. (3 marks) (b) Explain how interest rates rise to stabilise the rate when capital flows out. (3 marks) (c) State the cost of this system. (2 marks) | (a) When the rate reaches 7.75 the monetary authority buys US dollars and sells local currency; at 7.85 it sells US dollars and buys local currency, keeping the rate inside the band. (3 marks) (b) Capital outflow reduces the aggregate balance of the banking system, the money supply contracts and interest rates rise, attracting funds back and steadying the rate. (3 marks) (c) The place gives up an independent monetary policy, since interest rates must follow US rates and may not fit the local cycle. (2 marks) |
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A TutorZone practice paper; original questions and passages, not publisher material.