A country’s government wants to achieve its macroeconomic objectives of economic growth, low inflation and low unemployment. In 2024, real GDP was $480 bill...
Question 1 Report
A country’s government wants to achieve its macroeconomic objectives of economic growth, low inflation and low unemployment. In 2024, real GDP was $480 billion. In 2025, real GDP rose to $494.4 billion. During the same period, the inflation rate increased from 2% to 5%, while the unemployment rate fell from 6.5% to 5.8%. Some economists argue that the stronger economic growth has increased aggregate demand and caused demand-pull inflation. Others argue that growth is beneficial because more firms expand output and employ more workers. The diagram shows demand and supply in a market for final goods and services. The original equilibrium is at E1. An increase in demand shifts the demand curve to the right. Assume that the country has spare productive capacity at the beginning of 2025, but that capacity becomes more limited as output rises.
(a) Which macroeconomic objective is measured by an increase in real GDP? [2]
(b) What is meant by an inflation rate of 5%? [2]
(c) Calculate the percentage economic growth rate between 2024 and 2025. [2]
(d) Which curve shifts from D1 to D2 when aggregate demand rises? [2]
(e) Draw an arrow on the diagram to show the movement from E1 to the new equilibrium after demand increases. [3]
(f) Which type of inflation is most likely when rising aggregate demand exceeds the economy’s spare capacity? [2]
(g) What is meant by unemployment? [2]
(h) Which effect on unemployment is likely when firms increase output during economic growth? [3]
(i) Which government policy could reduce demand-pull inflation? [2]
Answer Details
(a) An increase in real GDP measures economic growth. [2]
(b) Inflation of 5% means the average or general price level is 5% higher than one year earlier. [2]
(c) \[\frac{\$494.4\text{ bn}-\$480\text{ bn}}{\$480\text{ bn}}\times100=3\%\] [2]
(d) The demand curve shifts right from D1 to D2. [2]
(e) The movement is up and right from E1 to the intersection of D2 and S: price level and real output both rise.
[3]
(f) This is demand-pull inflation, because aggregate demand rises beyond spare productive capacity. [2]
(g) Unemployment is when people are able and willing to work, are actively seeking work, but cannot find jobs. [2]
(h) Unemployment is likely to fall. Higher output usually requires more labour, so firms recruit, provided workers have suitable skills and output is not raised only through productivity improvements. [3]
(i) Contractionary fiscal or monetary policy, such as higher interest rates, higher taxes or lower government spending, reduces aggregate demand and demand-pull inflation. [2]
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