Low Unemployment: three questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 1
A government increases direct taxation to reduce its budget deficit.
How is this likely to affect the government’s ability to achieve its macroeconomic objectives?
Answer: C.
Higher direct taxation reduces households' disposable income and firms' post-tax profits, so consumption and investment fall and aggregate demand shifts inward. Work through the three objectives. Weaker demand means firms produce less and need fewer workers, so low unemployment becomes less likely. Less output means slower growth, so economic growth becomes less likely. But reduced demand relieves demand-pull pressure on prices, so low inflation becomes more likely. Contractionary fiscal policy buys price stability at the cost of jobs and output.
Why the other options are wrong:
- A claims low inflation becomes less likely, which reverses the effect of weaker demand on prices.
- B claims low unemployment becomes more likely and growth more likely, both of which contradict falling aggregate demand.
- D gets unemployment and inflation right but claims growth becomes more likely. That is inconsistent: if firms are hiring fewer workers because demand is weak, output cannot be expanding faster. Growth and employment move together here.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 2
An economy adopts an expansionary monetary policy to boost employment. A result of this policy is that the consumer price index rises at an accelerating rate.
Which curve could represent this?
Answer: D.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 3
A country with a constant population experiences a 5% increase in its nominal GDP during a year.
In which situation will average living standards be most likely to have increased during the year?
Answer: B.
Nominal GDP rose 5%, but part of any nominal increase is just higher prices rather than more goods. With inflation at 3%, real GDP has grown by roughly 5% – 3% = 2%. The population is constant, so real output per head has risen by about 2% too, and average living standards have most likely improved. Real growth per head is what living standards depend on.
Why the other options are wrong:
- A, no increase in unemployment, tells us nothing about whether output per head has risen in real terms. Employment could be steady while inflation absorbed the entire 5%.
- C, no increase in real national income, is decisive in the opposite direction. If real income is unchanged, the whole 5% was inflation, and living standards have not improved at all.
- D, no redistribution of income, concerns how income is shared, not how much there is. An unchanged distribution of an unchanged real income leaves living standards where they were.
What this practice covers
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on low unemployment, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Dividing by the working-age population instead of the labour force.
- Counting the economically inactive as unemployed.
- Recommending demand-side policy for structural unemployment.
- Treating any unemployment as bad, some frictional unemployment is efficient.
- Saying full employment means zero unemployment.
- Listing costs without distinguishing individual, economic and social effects.
- Ignoring that the headline rate can move for measurement reasons rather than real ones.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Low Unemployment revision notes.