Economic Growth, Unemployment and Inflation: Economics 9708 (Cambridge International AS & A Level)

A country's Ministry of Labour is reviewing the cases of four workers who have recently become unemployed, in order to decide which policy might best help each of them find work again.

Which of these workers is unemployed for structural reasons?

The economy of Velmora publishes annual figures for nominal GDP and a GDP price index (Year 1 = 100), shown in the table below.

(a) Using the formula $\text{Real GDP} = \dfrac{\text{Nominal GDP}}{\text{Price index}} \times 100$, calculate Velmora's real GDP in each of Year 1, Year 2 and Year 3. [3]

(b) Calculate the percentage change in real GDP (the real GDP growth rate) from Year 1 to Year 2, and from Year 2 to Year 3. [2]

(c) State and explain one possible cause of the increase in Velmora's real GDP between Year 1 and Year 2. [2]

(d) Explain one benefit and one cost that this growth in real GDP might bring to Velmora's economy. [2]

The statistics agency of Astrella calculates a simplified consumer price index (CPI) each year from a basket of three categories of household spending. The table below shows the weight (importance) given to each category, and each category's own price index, in Year 1 (the base year) and Year 2.

A sharp rise in the world price of imported crude oil during Year 2 pushed up firms' fuel and transport costs across Astrella. Government statisticians report no significant change in consumer spending or household borrowing over the same period.

(a) Calculate Astrella's overall CPI for Year 2 (Year 1 = 100), and hence calculate the rate of inflation between Year 1 and Year 2. [4]

(b) A worker's nominal monthly wage rose from $3,000 in Year 1 to $3,100 in Year 2. Calculate the real value of this wage in Year 2, measured in Year 1 prices, and state whether the worker is better or worse off in real terms. [2]

(c) State and explain, using the information given, whether Astrella's inflation between Year 1 and Year 2 is better described as demand-pull or cost-push inflation. [3]

(d) A neighbouring economy's overall CPI was 108 last year and has fallen to 105 this year. Calculate this economy's rate of inflation and state whether it is better described as experiencing inflation, disinflation or deflation, explaining the meaning of the term you choose. [2]

The table below summarises labour-market data for the country of Kelvara for a given year, using two different ways of measuring unemployment.

(a) Calculate Kelvara's unemployment rate using the Labour Force Survey figures. [2]

(b) Calculate Kelvara's unemployment rate using the claimant count figure, expressed as a percentage of the same labour force, and explain one reason why the claimant count measure gives a lower unemployment rate than the Labour Force Survey measure. [3]

(c) Explain one economic consequence of unemployment for the government's public finances, and one economic consequence for an unemployed individual. [3]

In Year 1, the government of Meridia introduces a package of measures: increased public investment in transport infrastructure, tax incentives for firms that invest in new machinery, and expanded technical-training programmes for school leavers. Over the following three years, Meridia records positive and rising rates of real GDP growth.

(a) Explain how ONE of these measures could cause economic growth on the demand side of the economy, and how a DIFFERENT one of these measures could cause economic growth on the supply side of the economy. [4]

(b) Discuss the extent to which this sustained period of economic growth is likely to benefit the citizens of Meridia. [6]

A large online-retail warehouse has recently seen four of its former employees leave their jobs, for different reasons.

Which of these workers is unemployed for technological reasons?

In the economy of Doverland, a saver holds money in a bank account paying a fixed nominal (money) interest rate of $5\%$ per year. Over the same year, the CPI rises from $100$ to $103$.

Separately, a borrower takes out a personal loan at the start of the year at a fixed nominal interest rate of $4\%$ per year. At the time the loan rate was agreed, both the bank and the borrower expected inflation of around $3\%$ for the year, but the actual rate of inflation over the year, once measured, turns out to be $7\%$.

(a) Using the approximation real interest rate $=$ nominal interest rate $-$ inflation rate, calculate the real interest rate earned by the saver, given the CPI figures above. [2]

(b) Calculate the real interest rate paid on the loan, using the actual rate of inflation of $7\%$ rather than the $3\%$ that had originally been expected. [2]

(c) Using your answer to part (b), explain whether the borrower or the lender gains from inflation turning out to be higher than expected. [3]

(d) State and explain one other consequence, apart from its effect on borrowers and lenders, that a period of high inflation is likely to have for an economy. [2]

The table below shows Solavia's actual real GDP index and its estimated potential (trend) real GDP index for three years (Year 1 $=100$ for both series). Potential output is the level of real output Solavia's economy could sustainably produce if all its factors of production were normally employed.

(a) Calculate the actual real GDP growth rate from Year 1 to Year 2, and from Year 2 to Year 3. [2]

(b) Calculate the size of the output gap (actual index minus potential index, in index points) in Year 2 and in Year 3, and state whether each is a positive or a negative output gap. [3]

(c) Explain what the negative output gap you found in Year 3 indicates about the state of Solavia's economy, and outline one likely consequence it would have for the level of unemployment. [3]

(d) Explain why the positive output gap seen in Year 2 is generally regarded as unsustainable in the long run. [2]

Government statisticians in a country calculate the consumer price index (CPI) each month, using a basket of goods and services and expenditure weights taken from a national household expenditure survey.

Which of the following best describes a genuine limitation of using this CPI to measure the change in the cost of living faced by any one particular household?

Over the course of a year, Nordvale's central bank cut interest rates sharply, which led to a large rise in consumer borrowing and a surge in consumer confidence. At the same time, and ahead of a national election, Nordvale's government significantly increased its own spending. Nordvale's overall CPI rose from $100$ at the start of the year to $105$ by the end of the year.

Over the same year, Nordvale's main trading partner, Ravenna, recorded inflation of only $1\%$.

(a) Calculate Nordvale's rate of inflation over the year. [2]

(b) Using the information given, explain why Nordvale's inflation is better described as demand-pull rather than cost-push inflation. [3]

(c) Explain one likely consequence of Nordvale's higher inflation, relative to Ravenna's, for Nordvale's international price competitiveness. [3]

(d) State and explain one policy the government of Nordvale could use to reduce demand-pull inflation. [2]