Edexcel A-Level Past Paper Questions on Trade-offs between Macroeconomic Objectives

This article contains a list of all the questions on trade-offs in macroeconomic objectives in Edexcel’s past papers. We put these questions together to make it easy to brush up on your macroeconomic objectives knowledge without having to go through all the Edexcel past papers yourself.

What is the Edexcel A-Level Economics course?

The Edexcel A-Level Economics course is a subject taken by some students in the last two years of secondary school study that prepares them to take Economics as a university course. Pearson Edexcel offers this particular board and is the largest provider of examinations in the UK. You can also take the A-Level Economics course from other providers like AQA, Eduqas, WJEC, CIE, and OCR.

Where did we get these Edexcel Economics A-Level Trade-Offs Between Macroeconomic Objectives Questions?

We went through all of the Edexcel A-Level Economics past papers to find as many questions on trade-offs between macroeconomic objectives as we could. The questions assembled in this article are intended as a study aid to help you test your understanding of macroeconomic objectives and the trade-offs that policymakers have to make. You’ll find the answer key at the end of the page as a downloadable pdf so you can check your answers.

What are the major Macroeconomic objectives?

The major macroeconomic objectives are economic growth, low inflation, low unemployment, development, low trade deficit, stable exchange rate, low fiscal deficit, and economic stability among others. Governments pursue economic growth as a means to increase the standard of living for their citizens and wish to avoid high inflation for the same reason. A low fiscal deficit ensures economic solvency for public finances and a stable exchange rate makes it easy for companies to build supply chains across borders. But, governments cannot choose to meet all of these objectives at once and must choose between them.

What are the major trade-offs between macroeconomic objectives?

The major trade-offs between macroeconomic objectives are as follows.

• Inflation vs unemployment: Governments generally want both low inflation and low unemployment. However, they face a trade-off in macroeconomic policy because low unemployment tends to lead to increases in inflation. As more workers are employed, wages and consumption increase and both increases in both factors lead to growing inflation.
• Low fiscal deficit vs economic growth: Governments often attempt to stimulate economic growth through spending, which can lead to increases in consumption and investment. However, spending-driven growth often comes at the cost of maintaining a low fiscal deficit as governments borrow in order to finance spending.
• Economic growth vs inequality: There is a trade-off between economic growth and inequality as the benefits of economic growth are often disproportionately enjoyed by those who own businesses or who are in skilled work.

Question 1: Edexcel A-Level Economics 9EC0 Paper 2 November 2021

It has been estimated that if climate change led to the world’s temperature rising 2.5 °C compared to the temperature in 2010, then global GDP per capita would be 15% lower by 2100. If temperatures rise by 4 °C compared to the temperature in 2010, then by 2100 global GDP per capita would decline by more than 30%. 

Evaluate the potential trade-offs between environmental protection and other macroeconomic objectives. (25 points)

Question 2: Edexcel A-LEvel Economics 9EC0 Paper 2 June 2018

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

Extract B

Bank of England seeking to prevent future bank bailouts

The Bank of England has ordered big lenders in the UK to find £116 billion of funding to ensure that taxpayers will never again have to bail out the banking sector. The Bank intends to publish details of how each of the big lenders would cope in the event they find themselves in a situation similar to Royal Bank of Scotland and Lloyds Banking Group, which needed £65 billion of taxpayer bailouts during the 2008 Global Financial Crisis. This had a significant negative impact on the UK government’s national debt and, many would argue, increased the need for contractionary fiscal policy. Having said that, the UK government sold all its shares in Lloyds Banking Group in 2017 and, according to the Chancellor of the Exchequer, “recovered every penny of its investment in Lloyds”. Sir Jon Cunliffe, the deputy governor at the Bank responsible for financial stability, said regulators needed to let banks fail in a similar way that traditional companies collapse. This has not been possible in the past because of the risk that savers lose their money and because a system did not exist to allow banks to be put into insolvency. “Just like when other businesses fail, losses arising from bank failure would be imposed on shareholders and investors. This protects the public from loss and incentivises banks to operate more prudently,” said Cunliffe.

Extract C

Bank of England tells lenders to increase capital reserves

The Bank of England has told lenders they will need to build a special reserve worth £11.4 billion by the end of 2018 as it tries to make banks more resilient to the risk posed by mounting consumer debt. This reserve of assets that can be readily turned into cash is a way of forcing banks to set aside capital reserves in good times in order to keep lending to the wider economy at a steady level, even during an economic downturn. In 2017 the Bank of England told UK banks it would raise the reserve ratio, relative to all assets, from zero to 0.5% and also forecast a further increase to 1% by the end of 2017. The move is not intended to directly reduce consumer demand for credit, which in 2017 grew by 10.3% on an annual basis, but it may well lead to banks becoming less willing to lend to consumers. Since the Bank of England has recently become increasingly concerned about consumer borrowing, including rising car loans and credit card debt, this may be no bad thing as far as the Bank of England is concerned, even if it does have a negative impact on the wider economy.

Analysts are concerned about the impact on consumer confidence of rising inflation, partly caused by a falling pound. With falling real incomes consumers could become more vulnerable to falling behind with their credit card and personal loan repayments. Despite these concerns, the UK economy recently recorded the lowest rate of unemployment since 1975.

(a) With reference to Extract A, explain the role of forward markets in currencies. (5 points)

(b) With reference to Extract A and Figure 1, examine the likely impact of the change in the sterling exchange rate on the UK economy. (8 points)

(c) With reference to the last paragraph in Extract C, assess the impact of a fall in real incomes on subjective happiness. (10 points)

(d) With reference to Extract C, discuss the potential conflicts between macroeconomic objectives when the central bank attempts to control inflation. (12 points)

(e) Discuss whether providing substantial government financial support to banks is the best policy response during a financial crisis. (15 points)