Practise selecting, applying and evaluating macroeconomic policy tools while judging trade-offs between growth, inflation, employment and other objectives.
Sources for use with Section C
The economy of India
Figure 1 Budget balance as a percentage of real GDP, 2020 to 2024; Figure 2 Food price inflation and the rate of inflation as measured by the CPI, January 2022 to January 2025
Extract A Economic growth
India’s rate of economic growth was 5.9% in 2024. This was the slowest rate since 2022 and lower than 6.5% in 2023. Food price inflation, stagnant wages and high unemployment have caused this slowdown in the rate of economic growth.
The most recent government budget attempted to boost domestic consumption by reducing taxes for middle-income households. However, the majority of workers are employed in the informal sector and are therefore unlikely to benefit from these tax changes. These tax changes may also prevent the achievement of a balanced government budget.
Extract B Monetary policy and inflation
In February 2025 India’s central bank cut its base interest rate for the first time in almost five years by 0.25 percentage points to 6.25%. The aim of this policy change was to stimulate the rate of economic growth.
The Governor of India’s central bank said: “We felt the time has come to be more supportive of growth because inflation is coming down.” He said that the rate of inflation was expected to continue to fall from 5.2% in December 2024. India’s inflation target is 4% with a tolerance of 2 percentage points on either side of this target.
However, the Indian currency, the rupee, fell by around 2% against the US dollar in 2024. This raised concerns that the price of imports would increase, especially as India has a balance of trade deficit. In addition, some economists believe that uncertainties in the global economy may cause a rise in oil prices. For example, a $10 increase in the price of a barrel of oil could reduce India’s nominal GDP by 0.4% a year.
The Government provides subsidies on fuel for consumers. Consequently, a rise in the price of oil is likely to increase government spending on these subsidies. This would reduce the impact of the higher cost of fuel.
Rising import prices could reduce investment by firms and cause consumers to delay spending on higher-priced goods, such as cars.
Define the term 'inflation target'. (Extract B, line 7)
With reference to Figure 1 and Extract A, explain what is meant by the term 'a balanced government budget'.
With reference to Figure 2, Extract B and your own knowledge, discuss the likely effects of the reduction in the base interest rate on the rate of inflation in India.
Which one of the following illustrates the conflict between the macroeconomic objectives of a low rate of inflation and a low rate of unemployment?
A long-run classical AS curve
An AD curve
A short-run Phillips curve
A SRAS curve
In 2022 the Government of India introduced new legislation with the aim of reducing pollution. It is predicted that this will cause India's real GDP to increase at a slower rate. Evaluate the view that there will always be conflicts between macroeconomic objectives. Refer to a country of your choice in your answer.
Sources for use with Section C
The economy of India
Figure 1 Budget balance as a percentage of real GDP, 2020 to 2024; Figure 2 Food price inflation and the rate of inflation as measured by the CPI, January 2022 to January 2025
Extract A Economic growth
India’s rate of economic growth was 5.9% in 2024. This was the slowest rate since 2022 and lower than 6.5% in 2023. Food price inflation, stagnant wages and high unemployment have caused this slowdown in the rate of economic growth.
The most recent government budget attempted to boost domestic consumption by reducing taxes for middle-income households. However, the majority of workers are employed in the informal sector and are therefore unlikely to benefit from these tax changes. These tax changes may also prevent the achievement of a balanced government budget.
Extract B Monetary policy and inflation
In February 2025 India’s central bank cut its base interest rate for the first time in almost five years by 0.25 percentage points to 6.25%. The aim of this policy change was to stimulate the rate of economic growth.
The Governor of India’s central bank said: “We felt the time has come to be more supportive of growth because inflation is coming down.” He said that the rate of inflation was expected to continue to fall from 5.2% in December 2024. India’s inflation target is 4% with a tolerance of 2 percentage points on either side of this target.
However, the Indian currency, the rupee, fell by around 2% against the US dollar in 2024. This raised concerns that the price of imports would increase, especially as India has a balance of trade deficit. In addition, some economists believe that uncertainties in the global economy may cause a rise in oil prices. For example, a $10 increase in the price of a barrel of oil could reduce India’s nominal GDP by 0.4% a year.
The Government provides subsidies on fuel for consumers. Consequently, a rise in the price of oil is likely to increase government spending on these subsidies. This would reduce the impact of the higher cost of fuel.
Rising import prices could reduce investment by firms and cause consumers to delay spending on higher-priced goods, such as cars.
With reference to Figure 1 and Extract A, explain what is meant by the term 'a balanced government budget'.
Sources for use with Section C
The economy of Kenya
Figure 1 Annual rate of inflation as measured by CPI, June 2023 to June 2024
Extract A Economic challenges
Kenya is one of the strongest economies in East Africa. In 2023, the rate of economic growth was 5.3%. This was mainly caused by increased output in agriculture, services and construction. Nevertheless, the economy still faces challenges.
Agriculture is very important to Kenya. It contributes 30% to the country’s GDP and employs nearly 60% of Kenya’s workforce. Climate change is a big problem. Droughts, floods, landslides and locust infestations have made it harder to grow crops such as tea and coffee that are important exports for the country. However, Kenya is making progress in developing clean energy. Over 75% of its electricity is generated from geothermal, wind and solar power. This makes Kenya one of Africa’s leaders in renewable energy and supports its goal of a green economy by 2030.
The Government is investing in irrigation and drought-resistant crops to help farmers. The Government is also investing in infrastructure to promote the development of manufacturing industries and to encourage urbanisation. However, many workers lack the skills needed for factory or technology jobs, which makes it more difficult for farmers to switch careers.
In 2023, the unemployment rate in Kenya was 5.6%. The World Bank has predicted that this rate will increase to 7.2% in 2025. Many people, especially in rural areas, are either unemployed or experience underemployment. Some jobs are disappearing because of structural unemployment. The Government is trying to help young people by investing in training programmes such as the Youth Development Fund. This fund aims to create job opportunities in areas such as technology and renewable energy.
Extract B Inflation
Another major issue for Kenya has been a relatively high rate of inflation. To control this, the Central Bank of Kenya (CBK) raised the base rate of interest from 9.5% to 10.5% in July 2023. As a result, the rate of inflation fell in 2024. This higher interest rate also contributed to an increase in the value of the Kenyan currency, the Shilling, which rose by approximately 11% from the end of June 2023 to the beginning of June 2024.
With reference to the information provided and your own knowledge, discuss supply-side policies that could be used to reduce structural unemployment in Kenya.
Japan's productivity is significantly lower than the productivity of France and Italy. The Government of Japan aims to increase the country's productivity.
Which one of the following is a free market supply-side policy?
Investment in education and training
Privatisation of state-owned industries
Investment in infrastructure projects
Providing finance for business start-ups
Sources for use with Section C.
East African economies
Countries include Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Seychelles, Somalia, South Sudan, Tanzania and Uganda.
Figure 1 Annual real GDP growth, 2014–2018
Figure 2 Current account on the balance of payments as a percentage of GDP, 2016–2018
Extract A Rapid growth in East Africa
East Africa was the fastest growing region of Africa in 2018. Increasing commodity prices helped the agricultural and mining sectors contribute most to this growth. Higher foreign direct investment (FDI) in the region also contributed to economic growth. Growth in FDI in 2018 was 67% in Uganda, 27% in Kenya and 18% in Tanzania. Governments in East Africa have been investing in infrastructure, such as roads, seaports and airports.
As a result of rapid economic growth, the rate of inflation increased to 13.1% in 2016 and 14.4% in 2017. Appropriate monetary policy in the region helped the rate of inflation to fall to 8.9% in 2019.
Despite rapid economic growth rates, unemployment remains high. Many consumers struggle to meet their basic needs. The governments of the region have been advised to focus on interventionist supply-side policies. These should include continued investment in infrastructure, improving the health and skills of the labour force and increasing the supply of housing.
Extract B East African infrastructure investment needed
East African economies have under-invested in infrastructure. The roads in East Africa are in a poor condition. The combination of low speeds and long distances causes high transport costs. Rail transport is poor, which means most goods have to be transported on a congested road system. Funds from China are being used to build two rail routes in the region.
Inadequate energy supply is the biggest infrastructure problem. East Africa has the lowest energy generating capacity per capita on the continent. Poor energy supply causes blackouts. However, the region has the potential to develop hydro, wind and fossil fuel resources that could increase energy supply.
The region has the smallest proportion of its population with telephone lines and access to mobile phone networks in Africa. However, recently there has been a high level of investment in telecommunications infrastructure. This will result in significant improvements in communications.
With reference to Extract A and Extract B, discuss the likely effects of interventionist supply-side policies on East African economies.
In 2022 many countries experienced low rates of economic growth and high rates of inflation.
Evaluate supply-side policies that a government could use to increase the rate of economic growth and to decrease the rate of inflation. Refer to a country of your choice in your answer.
Sources for use with Section C.
East African economies
Countries include Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Seychelles, Somalia, South Sudan, Tanzania and Uganda.
Figure 1 Annual real GDP growth, 2014–2018
Figure 2 Current account on the balance of payments as a percentage of GDP, 2016–2018
Extract A Rapid growth in East Africa
East Africa was the fastest growing region of Africa in 2018. Increasing commodity prices helped the agricultural and mining sectors contribute most to this growth. Higher foreign direct investment (FDI) in the region also contributed to economic growth. Growth in FDI in 2018 was 67% in Uganda, 27% in Kenya and 18% in Tanzania. Governments in East Africa have been investing in infrastructure, such as roads, seaports and airports.
As a result of rapid economic growth, the rate of inflation increased to 13.1% in 2016 and 14.4% in 2017. Appropriate monetary policy in the region helped the rate of inflation to fall to 8.9% in 2019.
Despite rapid economic growth rates, unemployment remains high. Many consumers struggle to meet their basic needs. The governments of the region have been advised to focus on interventionist supply-side policies. These should include continued investment in infrastructure, improving the health and skills of the labour force and increasing the supply of housing.
Extract B East African infrastructure investment needed
East African economies have under-invested in infrastructure. The roads in East Africa are in a poor condition. The combination of low speeds and long distances causes high transport costs. Rail transport is poor, which means most goods have to be transported on a congested road system. Funds from China are being used to build two rail routes in the region.
Inadequate energy supply is the biggest infrastructure problem. East Africa has the lowest energy generating capacity per capita on the continent. Poor energy supply causes blackouts. However, the region has the potential to develop hydro, wind and fossil fuel resources that could increase energy supply.
The region has the smallest proportion of its population with telephone lines and access to mobile phone networks in Africa. However, recently there has been a high level of investment in telecommunications infrastructure. This will result in significant improvements in communications.
Define the term 'monetary policy'. (Extract A, line 8)
In 2019 the new President of the European Central Bank asked governments of eurozone countries to cut taxation and increase government expenditure to stimulate the rate of economic growth.
Evaluate fiscal policy instruments as a means of increasing the rate of economic growth.
In September 2024, The Central Bank of China (The People's Bank of China) reduced the reserve asset (liquidity) requirement by 0.5 percentage points from 6.6\%.
With reference to the data, explain what is meant by the reserve asset (liquidity) requirement.
Sources for use with Section C
The German economy
Figure 1 Index of business confidence (January 2015=100), seasonally adjusted, January 2020 to December 2021
Figure 2 Inflation rate*, as measured by the consumer price index (CPI), January 2020 to November 2021
Extract A Economic outlook
In 2021 production in Germany’s large manufacturing sector suffered from delays and shortages of materials caused by supply chain constraints. Its larger services sector, including retail, tourism and hospitality, was also negatively affected by the global health crisis. These factors led to a decline in business confidence in both the manufacturing and services sectors from June 2021 onwards.
Consequently, the country’s central bank, the Bundesbank, estimated that Germany’s real output was likely to fall in the last quarter of 2021. Many economists predicted that the German economy could enter a recession in 2022. However, industrial production, especially vehicle manufacturing, had started to increase in the third quarter of 2021. Therefore, it was likely that net exports would increase in the first six months of 2022.
According to the Bundesbank, households had built up extra savings worth 10% of their disposable income during the global health crisis. The Bundesbank predicted that “this will strongly boost consumption” once consumer confidence increased.
The Bundesbank also warned of inflation risks. It raised its forecast for Germany’s annual rate of inflation to 3.6% for 2022. This is above the European Central Bank’s (ECB) inflation-target rate of 2% for the eurozone area. The Bundesbank has therefore indicated that the ECB will need to increase the base rate of interest to control the rising rate of inflation in the eurozone.
There was evidence that the supply chain constraints caused an increase in inflationary pressures. In November 2021, Germany’s producer (wholesale) price index increased by 19.2% from the previous year. This was primarily as a result of rising prices for energy, metal and wood. The Bundesbank predicted that the supply chain constraints would not be resolved until the end of 2022.
With reference to Extract A, analyse two roles of a central bank.
Sources for use with Section C
The economy of China
Figure 1 Year on year real GDP growth rate by quarter, Q1 2020 to Q2 2022
Figure 2 Youth unemployment rate (16 to 24 year olds), as measured by the International Labour Organization (ILO), January 2022 to June 2022
Extract A Economic growth In the second quarter of 2022 China experienced a low rate of economic growth. This was as a result of domestic demand for goods and services, and exports rising more slowly compared with the previous quarter. Economists estimated that China’s economy would continue to experience a low rate of economic growth until the end 5 of the year. Therefore, the country’s economic growth forecast for 2022 was reduced from 5.5% to 4.3%. This low economic growth rate resulted in a further increase in the already high rate of youth unemployment. China has too many college and university graduates for the economy to employ. In 2022 there was also a mismatch between the jobs that are 10 available and students’ qualifications. For example, at the start of the third quarter of 2022, only 0.70 jobs were available for each graduate. To increase the rate of economic growth the Government implemented a reflationary fiscal policy. It increased spending on infrastructure by over $75 billion and reduced taxes for businesses. It planned to increase science and technology‑related 15 investments by providing 100% tax breaks on research and development spending. The country’s central bank, the People’s Bank of China (PBoC), implemented a reflationary monetary policy to increase the country’s economic growth rate. For example, the PBoC decreased the base rate of interest from 3.7% to 3.65% in August 2022. There was also a reduction in the reserve asset (liquidity) requirements 20 in November 2022. This was in contrast to the policy of central banks in several advanced economies which implemented deflationary monetary policy. One economist stated that “the room for manoeuvre” for a reflationary monetary policy by the PBoC was limited because of rising US interest rates. He also emphasised the risks associated with a fall in the external value of the Chinese 25 currency, the Renminbi.
With reference to the information provided and your own knowledge, discuss the likely effects of a reflationary monetary policy on the economy of China.