Macroeconomics — Free Economics HL Practice Questions

The central bank of Recessionia has purchased government bonds from commercial banks to address falling real GDP and rising unemployment.

In Country X, commercial banks currently hold reserves of USD 50 billion at the central bank, while total deposits are USD 500 billion. The central bank increases the reserve requirement from $10\%$ to $12\%$.

The economy of Valoria has a GDP of USD 900 billion. Its GNP is USD 870 billion, and its NNP is USD 820 billion.

The table below shows selected national income data for the economy of Brazil in 2023, measured in billions of US dollars. Component — Value (USD billions) Gross Domestic Product (GDP) — $2{,}200$ Net property income from abroad — $-60$ Depreciation (Capital Consumption) — $180$

The government of Vietnam is considering two policies to boost national income: - Policy X: A large increase in government spending on new infrastructure, financed by borrowing - Policy Y: A reduction in corporate income taxes to attract foreign direct investment The following data apply to Vietnam in a given year: - GDP: USD 450 billion - Net factor income from abroad (NFIA): $-15$ billion dollars - Depreciation: USD 30 billion

In Country A, the top $10\%$ of earners hold $50\%$ of total income, while the bottom $40\%$ hold only $10\%$. A government report identifies inheritance of wealth as a major factor in this disparity.

In Country X, the Gini coefficient has risen from $0.32$ to $0.48$ over the past 20 years. During this period, the government reduced the top marginal income tax rate from $50\%$ to $30\%$, and trade liberalisation led to a rapid expansion of the financial services sector. Simultaneously, the minimum wage has remained unchanged in nominal terms, while the average years of schooling for the top $20\%$ of earners increased from $14$ to $17$ years, compared to an increase from $10$ to $11$ years for the bottom $20\%$.

Country B has experienced rapid technological change, leading to high demand for workers with advanced digital skills. Meanwhile, workers in traditional manufacturing have seen their wages stagnate. The Gini coefficient for Country B rose from $0.31$ to $0.44$ over a decade of rapid automation.

A government report states that the Gini coefficient for Country Z decreased from $0.55$ in 2010 to $0.45$ in 2020.

Country A has abundant natural resources (oil and minerals) but low levels of human capital. Country B has limited natural resources but a highly educated workforce and strong institutions. Both countries have similar population sizes.

The nominal GDP of Country X was USD 500 billion in 2023 and USD 525 billion in 2024. The GDP deflator was $125$ in 2023 and $130$ in 2024. $$\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100$$

An economy is experiencing high unemployment and low economic growth. The government decides to introduce supply-side policies to address these issues.

The government of Country Delta is concerned about its persistently high inflation rate. Some advisors recommend demand-side policies, while others recommend supply-side policies to reduce inflationary pressure.

After a period of low productivity growth, the government of India announces a new set of supply-side policies aimed at boosting the economy's long-run performance.

The below shows the Aggregate Demand ($AD$) curve for a hypothetical economy.

During the COVID-19 pandemic, consumer confidence in the United Kingdom fell sharply.

In 2023, Vietnam experienced a significant increase in foreign direct investment (FDI) into its manufacturing sector, leading to the construction of new factories and the adoption of more efficient production technologies.

In 2023, the government of Ghana increased the Value Added Tax (VAT) rate from $12.5\%$ to $15\%$ to raise revenue for public infrastructure.

In 2023, the Brazilian government implemented an expansionary fiscal policy to combat a recession, increasing spending on public works and cutting personal income taxes. To finance this spending, the government increased its borrowing in domestic financial markets.

The government of Japan decides to increase spending on early childhood education and healthcare as part of its fiscal policy strategy.

A central bank in a developing economy faces annual inflation rate of $5.8\%$, above its target of $3.5\%$, while GDP growth is a moderate $2.1\%$ following a recent recession. The central bank raises its benchmark policy interest rate by $0.50$ percentage points. The reserve requirement ratio on demand deposits remains unchanged at $21\%$.

The Reserve Bank of India (RBI) faced a policy dilemma in 2022. Inflation reached $6.7\%$, above the $4\%$ target, driven by rising food and fuel prices. Bank credit to the private sector was growing at only $8\%$ per year, considered insufficient to support post-COVID recovery. Between May and August 2022, the RBI raised the repo rate from $4.00\%$ to $5.40\%$ and simultaneously reduced the cash reserve ratio (CRR) from $4.5\%$ to $4.0\%$ of net demand time liabilities. $$m = \frac{1}{\text{reserve requirement ratio}} \qquad \text{Money supply} = \text{monetary base} \times m$$

Country X and Country Y are two neighbouring economies. In 2022, Country X reported a Gross Domestic Product (GDP) of USD 500 billion and a Gross National Product (GNP) of USD 480 billion. Country Y reported a GDP of USD 300 billion and a GNP of USD 320 billion. Both countries have significant foreign direct investment (FDI) flows and migrant worker remittances. Economists are also debating whether Net National Product (NNP) is a more useful welfare measure than GDP, given that Country X has a high rate of capital depreciation due to its manufacturing-intensive economy. $$\text{GNP} = \text{GDP} + \text{net property income from abroad}$$ $$\text{NNP} = \text{GNP} - \text{depreciation}$$

Vietnam reported a Gross Domestic Product (GDP) of approximately USD 430 billion in 2023. A significant portion of Vietnam's national output is generated by foreign-owned factories (e.g., Samsung and LG electronics assembly plants) that repatriate profits to their home countries. Meanwhile, many Vietnamese citizens work abroad (e.g., in South Korea and Japan) and send remittances home. Vietnam's Gross National Product (GNP) was estimated at USD 400 billion in the same year. The depreciation of Vietnam's capital stock (machinery and infrastructure) was valued at USD 30 billion.

The Gini coefficient for Country X increased from $0.32$ in 2010 to $0.45$ in 2022. During the same period, the country experienced rapid economic growth driven by a boom in its technology sector, while government spending on social welfare programmes decreased from $8\%$ to $5\%$ of GDP. The top $10\%$ of earners now control $55\%$ of national income, up from $40\%$ in 2010.

In Country Y, a developing nation in Sub-Saharan Africa, income inequality is measured by a Gini coefficient of $0.58$. The country has a dual economy: a modern, capital-intensive mining sector (employing $5\%$ of the labour force but generating $40\%$ of GDP) and a traditional, labour-intensive agricultural sector (employing $70\%$ of the labour force but generating only $15\%$ of GDP). The government has recently introduced a national minimum wage, but enforcement is weak in rural areas.

Country X is a lower-middle-income economy in Southeast Asia. In 2015, its government launched a major infrastructure investment programme, building new ports, highways, and a national high-speed rail network. Between 2015 and 2019, Country X's real GDP grew at an average annual rate of $6.2\%$, and its gross fixed capital formation increased from $22\%$ to $30\%$ of GDP. However, construction of the rail network involved clearing large areas of tropical forest, and the new highways led to a significant increase in carbon dioxide emissions. Environmental groups argue that the country's "green GDP" — GDP adjusted for environmental damage — grew much more slowly than reported real GDP over the same period.

Country Y is a high-income member of the European Union. In 2023, its real GDP per capita was USD 45,000. The country has an ageing population and a declining labour force participation rate. The government is considering two policies to stimulate economic growth: - Policy A: A reduction in corporate income tax from $25\%$ to $15\%$ - Policy B: Increased government spending on retraining programmes for unemployed and older workers An economist argues that while Policy A might boost actual growth in the short run, only Policy B can increase potential growth in the long run.

In 2023, the government of Vietnam introduced a series of supply-side policies to boost long-term economic growth: - a $50\%$ reduction in corporate income tax for new technology start-ups - significant government investment in vocational training centres in rural areas - deregulation of the energy sector to allow private companies to build and operate solar farms

In 2022, the government of Ghana implemented supply-side reforms to address a persistent current account deficit and high structural unemployment. The policies included:
(1) a reduction import tariffs on capital machinery used in manufacturing;
(2) a state-funded programme to retrain 50,000 workers from declining cocoa farming into the solar panel installation industry; and
(3) the privatisation of the state-owned telecommunications company.

The following data relates to the economy of Thailand in 2023. > Thailand's Ministry of Finance reported that household consumption expenditure, which accounts for approximately $50\%$ of GDP, fell by $2.5\%$ compared to the previous year. This decline was attributed to high levels of household debt and a drop in consumer confidence. Exports, which account for approximately $60\%$ of GDP, grew by only $1\%$ due to weaker demand from major trading partners. In response, the government reduced the corporate tax rate from $20\%$ to $15\%$, aiming to stimulate private investment.

The government of Kenya implemented an expansionary fiscal policy in 2022, increasing spending on infrastructure (roads and ports) by $15\%$. The policy aimed to raise Aggregate Demand (AD) and achieve real GDP growth of $4\%$. However, the Kenyan shilling depreciated sharply against the US dollar that year, raising the cost of imported oil and machinery. The actual outcome was inflation of $6.5\%$ and real GDP growth of only $2\%$. Economists also noted that private investment did not rise as anticipated.

In 2023, Zambia's GDP growth fell to $2.5\%$, down from $4.7\%$ in 2022. The government is considering a fiscal stimulus package comprising two tools: (i) a temporary reduction in the corporate income tax rate for manufacturing firms from $35\%$ to $25\%$, and (ii) a direct increase in government spending on infrastructure (roads, bridges, and schools) financed by borrowing.

Country X is experiencing unemployment of $9\%$ of the labour force alongside a sustained decline in aggregate demand (AD). The finance minister proposes two fiscal policy options: - Option A: A reduction in personal income tax rates - Option B: An increase in government spending on infrastructure projects

The Central Bank of Vietnam (SBV) is concerned about rising inflation, currently at $4.8\%$ per annum, above its target range of $2\text{–}4\%$. The SBV is considering two policy tools: raising the policy interest rate from $4.5\%$ to $5.5\%$, or raising the reserve requirement from $8\%$ to $10\%$. Commercial banks currently hold $120$ trillion dong in reserves. The reserve requirement is $8\%$ of total deposits. The money multiplier is defined as $\dfrac{1}{\text{reserve requirement}}$. Assume banks are fully loaned up.