About Government macroeconomic intervention (further) in A Level Economics
Government macroeconomic intervention (further) is one of the 11 main topics in our A Level Economics (Cambridge (CAIE) 9708) question bank, and about 6% of its real questions come from it. Tayyari Karo has 49 real questions on this topic from 2021 to 2026, from Paper 3, Paper 4; 30 are multiple choice and marked instantly, and the rest are structured questions with a model answer. By difficulty: 25 hard, 21 medium, 3 easy.
Work through the questions below, then open the explanation for each one. Redo the ones you missed a few days later.
Try 8 real questions
These are real past-paper questions. Think of your answer first, then open the explanation.
May/June 2026 · Paper 3 · Government macroeconomic intervention (further)
In the short run, which policy measure would tend to reduce a country's current account of the balance of payments deficit but increase its inflation rate?
- a decrease in the level of import tariffs
- an appreciation of the country's currency
- an increase in the level of import tariffs
- a reduction in government spending
Show answer and explanation
Answer: C. an increase in the level of import tariffs
Import tariffs reduce imports (improving the deficit) while raising import prices and domestic costs, increasing inflation.
May/June 2025 · Paper 3 · Government macroeconomic intervention (further)
A country's government decides to set artificially low interest rates. What describes a negative consequence to this country of this policy?
- a higher rate of consumer price inflation
- a rapid growth in gross domestic product
- an increase in investment by manufacturers and real estate developers
- a reduction in borrowing by consumers
Show answer and explanation
Answer: A. a higher rate of consumer price inflation
Artificially low interest rates stimulate borrowing and spending, raising aggregate demand and risking demand-pull inflation — a negative consequence; the other options describe generally positive/expected effects of low interest rates, not negative ones.
October/November 2025 · Paper 3 · Government macroeconomic intervention (further)
What is a likely consequence of an increase in government spending on education?
- increase in the supply of unskilled labour
- increase in occupational mobility
- increase in the rate of unemployment
- increase in trade union power
Show answer and explanation
Answer: B. increase in occupational mobility
More spending on education raises workers' skills and qualifications, making it easier for them to move between different types of jobs/occupations, i.e. increasing occupational mobility of labour.
October/November 2024 · Paper 3 · Government macroeconomic intervention (further)
What is most likely to influence subsequent increases in national income as a result of a government policy of reduced interest rates?
- marginal cost
- marginal efficiency of capital
- marginal product
- marginal utility
Show answer and explanation
Answer: B. marginal efficiency of capital
Lower interest rates make more investment projects profitable (their expected rate of return, the marginal efficiency of capital, now exceeds the lower cost of borrowing), raising investment and, via the multiplier, national income.
May/June 2022 · Paper 3 · Government macroeconomic intervention (further)
There has been a switch in demand from goods produced by labour-intensive methods of production to similar goods produced using high-technology methods of production. This has led to an overall increase in unemployment. What is the best policy to reduce this type of unemployment?
- reduce the rate of income tax
- increase the rate of interest on borrowing for investment
- subsidise products produced by labour-intensive methods
- subsidise exports produced by high-technology industries
Show answer and explanation
Answer: C. subsidise products produced by labour-intensive methods
This is structural unemployment caused by a shift in demand away from labour-intensive production; subsidising labour-intensive products directly supports demand for, and jobs in, that sector, targeting the specific cause of the unemployment.
May/June 2021 · Paper 3 · Government macroeconomic intervention (further)
Which policy does a central bank undertake to pursue quantitative easing?
- purchase long-term government debt from the public
- purchase short-term government debt from the public
- sell long-term government debt to the public
- sell short-term government debt to the public
Show answer and explanation
Answer: A. purchase long-term government debt from the public
Quantitative easing involves the central bank creating new money to purchase (typically longer-term) government bonds/debt from the public/financial institutions, injecting money into the economy and lowering long-term interest rates.
May/June 2026 · Paper 4 · Government macroeconomic intervention (further)
Japan interest rates extract (BOJ inflation target 2%; core inflation 2.6% in March 2024; commercial banks raised rates in early 2024). (b) Explain how Japan's commercial banks could have helped the BOJ achieve its target inflation rate of 2%. [4]
Show model answer
Each point needs a brief explanation (1 + 1). Commercial banks provide deposit accounts, lend money (overdrafts, loans) and hold cash, securities, loans and equity (1); as sources of credit they could reduce the money supply (1); less lending leads to less investment and consumption (1); higher interest rates encourage saving (1) and discourage borrowing (1), decreasing consumption and aggregate demand (1); higher rates encourage hot money inflows (1), raising the value of the yen (1) and reducing imported inflation (1). Summary: banks help by making borrowing more expensive, encouraging saving and restricting credit growth, reducing spending and inflationary pressure.
By raising rates and restricting credit, commercial banks reduce borrowing, consumption and aggregate demand, and higher rates attract hot money, strengthening the yen and cutting imported inflation.
May/June 2022 · Paper 4 · Government macroeconomic intervention (further)
(a) Explain what is meant by a transmissions mechanism of monetary policy and consider why it might not work in practice. [12]
(b) Discuss the role and importance of the commercial banks in a developed economy. [13]
Show model answer
(a) A monetary transmission mechanism explains how a change in monetary policy affects key macroeconomic goals (national income, output, employment, inflation). Candidates may explain the Keynesian model (an increase in the money supply lowers interest rates, raising investment/aggregate demand and so raising GDP/employment) or a central-bank base-rate model. Reasons the mechanism may not work in practice: the liquidity trap; interest-inelastic investment; a relatively low multiplier effect; a rise in income feeding back to raise interest rates; similar links/weaknesses apply to using interest rate changes to control inflation. …
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