CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.
Coursebook answers
Chapter 21
Economics in context
Learners’ discussion might include:
• Economic growth increases tax revenue as incomes and spending will be higher.
• A country can increase its output even if unemployment rises, if productivity increases.
• More airports may improve the quality of people’s lives as they can create employment and incomes.
They may also reduce the cost of travelling abroad and may provide direct links to more countries.
However, it may reduce the quality of some people’s lives, particularly those living close to the
airports, because of pollution. Those providing other forms of transport may experience a fall in
demand and incomes.
Activities
Activity 21.1
Suggested possible answer for New Zealand and South Africa:
Year New Zealand’s New Zealand’s South Africa’s South Africa’s
inflation target inflation rate (%) inflation target inflation rate (%)
range (%) range (%)
2019 1–3 1.5 3–6 4.5
2018 1–3 1.6 3–6 4.6
2017 1–3 1.9 3–6 5.3
2016 1–3 −0.6 3–6 6.3
2015 1–3 −0.3 3–6 4.6
New Zealand’s inflation rate was in the target range from 2017–2019. In the two years before that it was
below the target rate. The deflation was the result of higher aggregate supply occurring because of lower oil
prices and advances in technology.
South Africa came close to meeting its target range over the five years. It was just slightly above the target
range in 2016. The higher inflation rate was due to higher food prices, caused by a drought, and a fall in the
exchange rate which pushed up import prices.
Activity 21.2
Learners’ answers might include:
1 It would appear that Peru had the best macroeconomic performance. The country had a reasonable
economic growth rate, the lowest unemployment rate and a low, but not too low, inflation rate. On this
information, Argentina had the worst macroeconomic performance. It had negative economic growth,
hyperinflation and a high rate of unemployment.
1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
2 There is a range of other information that would be useful. This includes the countries’ balance of
payments position, trends in their economic growth rates, inflation rates and unemployment rates
and if the countries have any targets for these. For instance, it is possible that Peru may have had
an economic growth rate that was on a downward trend and an inflation rate that had fluctuated
the most.
It would also be useful to know how long, on average, people have been unemployed in the four
countries. In addition, it would be useful to know the causes of economic growth, inflation and
unemployment in the different countries. For instance, Peru’s performance would have been more
impressive if the inflation was caused by demand-pull.
Think like an economist
Learners’ reasons might include:
1 Unemployment may be at a low level.
2 It may be considered that the unemployment is temporary.
3 It may be thought that lowering unemployment will conflict with price stability.
Exam-style questions: Multiple choice
1 B An increase in aggregate demand will mean more spending. This could encourage firms to increase
their output and take on more workers. The higher demand may result in demand-pull inflation.
If it results in a shortage of resources, it may also push up costs of production.
2 A I n the short run, if people save more, they will spend less. This would reduce demand-pull
inflation. If people place their savings in financial institutions, there will be more funds available
for firms to borrow to buy capital goods. The increase in demand for capital goods would first
increase aggregate demand and then, when the capital goods are put to use, productive capacity
will increase. An increase in saving may increase exports as firms seek to sell abroad products they
can no longer sell on the home market. Higher exports and the resulting higher demand may,
however, increase inflation. More saving may reduce imports of capital goods but a decrease in
aggregate supply will increase inflation.
3 A ow unemployment should mean that workers can keep their skills up to date. Governments
L
usually want output to increase. Price stability is another government macroeconomic policy
objective but one that low unemployment does not ensure will occur. Indeed, there is a risk that
low unemployment may put upward pressure on prices. It is also likely to increase wages as firms
will find it more difficult to recruit additional workers.
4 D he economy is operating with considerable spare capacity. There is no upward pressure on prices.
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However, the lack of aggregate demand will mean there is cyclical unemployment and output
will be below what the economy is capable of producing. Higher national income will mean the
economy is growing.
5 B rice stability makes it easier for firms to estimate future costs, prices and profits. If this increases
P
investment, aggregate demand and aggregate supply will rise, resulting in economic growth.
A and D would cause aggregate demand to fall and would be likely to reduce the economic
growth rate. Price stability would not mean deflation and deflation is more likely to discourage
consumer expenditure.
6 C more skilled labour force could raise productivity and lower costs of production. This could
A
enable an economy to grow without creating inflationary pressure. A more productive labour force
is likely to be in higher demand and a more skilful labour force will find it easier to move from
declining to expanding industries.
7 D and B are reasons why Country Y should have experienced a more rapid economic growth rate
A
than Country Z. Fluctuations in the economic growth rate, C, are not desirable. D is a reason
why Country Z would be expected to have a higher economic growth rate than Country Y even if
Country Y is performing well.
2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
8 C I n a recession, prices are likely to fall. If people get out of the habit of expecting prices to rise, they
will stop acting in a way that will cause inflation. For instance, consumers will not increase their
spending now to avoid paying higher prices in the future. A could lead to demand-pull inflation.
B and D may also mean that aggregate supply does not keep pace with aggregate demand in the
future. They might also result in cost-push inflation as the productivity of labour and capital may
fall in the future.
9 D hether Country Y has fewer unemployed and more employed people than Country Z will
W
depend on the relative sizes of the two countries’ labour forces. If Country Y has a larger labour
force than Country Z, it may have more unemployed people. For instance, 3% of a labour force of
100 million is more than 10% of a labour force of 15 million. If Country Y has a smaller labour
force than Country Z, it will have fewer people employed. For example, if 97% of a labour force
of 10 million are employed, there will be fewer people in work than if 90% of a labour force of 20
million are employed. The unemployment rate does not indicate what proportion of a country’s
population are economically inactive. However, the unemployment rate is based on the proportion
of the labour force who are unemployed.
10 D I f an economy is operating at full capacity, it will not be possible to increase output and so achieve
economic growth without increasing productive capacity. There is also a risk that at full capacity,
inflationary pressure will be increasing. If aggregate demand is decreasing, greater productive
capacity will not be used. Consumer expenditure is often the largest component of aggregate
demand but this does not indicate how an increase in productive capacity will influence economic
growth and price stability. If productivity is increasing, productive capacity will be rising and if
productivity is increasing more rapidly than wages, inflation is less likely to be a problem.
3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
