IB Economics Macroeconomics Exam
Questions and answers 2025
Five .major .objectives .of .macroeconomic .policies. .- .ANS✓✓-•Economic .growth:
.A .steady .rate .of .increase .of .national .output
•Full .Employment: .A .low .level .of .unemployment
•Price .stability: .A .low .and .stable .rate .of .inflation
•Satisfactory .balance .of .payments
•Equal .Income .distribution .: .An .equitable .distribution .of .income
Describe, .using .a .diagram,
the .circular .flow .of .income
between .households .and
firms .in .a .closed .economy
with .no .government. .- .ANS✓✓-See .notes
Identify .the .four .factors
of .production .and .their
respective .payments .and
explain .that .these .constitute
the .income .flow .in .the .model. .- .ANS✓✓-•factors .of .production .households
.provide .to .firms:
→land
→labour
→capital .
→enterprise. .
•The .firms, .in .return .pay .the .factors .of .production:
→wages
→rent
→interest .
→profit
Relationship .between .income .flow, .expenditure .flow .and .output .flow. .- .ANS✓✓
-Income .flow=expenditure .flow .+ .output .flow
Describe, .using .a .diagram,
the .circular .flow .of .income
in .an .open .economy .with
government .and .financial
markets, .referring .to .leakages/
withdrawals .(savings, .taxes
,and .import .expenditure)
and .injections .(investment,
government .expenditure .and
export .revenue). .- .ANS✓✓-See .notes
Define .national .income. .- .ANS✓✓-Measures .the .monetary .value .of .the .flow .of
.output .of .goods .and .services .produced .in .an .economy .over .a .period .of .time.
3 .measures .of .national .income. .- .ANS✓✓-Most .commonly .used .measure .of
.countries .national .income .is .GDP. .3 .different .methods .to .calculate .this:
1. .The .output .method .(measures .actual .value .of .goods .and .services .produced)
2. .The .income .method .(value .of .all .incomes .earned .in .economy)
3. .Expenditure .method .(measures .value .of .all .spending .on .goods .and .services)
Distinguish .between .GDP .and .GNP/GNI .as .measures .of .economic .activity. .-
.ANS✓✓-GROSS .DOMESTIC .PRODUCT .(GDP): .
•value .of .final .goods .and .services .produced .within .a .country .in .a .given .period
•It .is .the .total .of .all .activities .in .a .country, .regardless .of .who .owns .the
.productive .asset.
GROSS .NATIONAL .PRODUCT .(GNP/GNI): .
•market .value .of .all .products .and .services .produced .in .one .year .by .labour .and
.property .supplied .by .the .residents .of .a .country.
Define .and .distinguish .between .gross .national .product .(GNP) .and .gross
.domestic .product .(GDP). .- .ANS✓✓-GNP=GDP+net .property .income .from
.abroad .(income .earned .from .assets .overseas)
GDP= .C+I+G+(X-M)
Unlike .Gross .Domestic .Product .(GDP), .which .defines .production .based .on .the
.geographical .location .of .production, .GNP .allocates .production .based .on
.ownership. .It .is .the .total .income .that .is .earned .by .a .country's .factors .of
.production .regardless .of .where .the .assets .are .located.
Define .and .distinguish .between .gross .national .product(GNP) .and .net .national
.product .(NNP). .- .ANS✓✓-NNP=GNP-Depreciation .(capital .consumption)
Define .and .distinguish .between .nominal .GDP .and .real .GDP. .- .ANS✓✓-Real
.GDP=Nominal .GDP .adjusted .for .inflation.
Explain .the .uses .of .national .income .statistics. .- .ANS✓✓-Shows:
•economic .growth .(is .an .increase .in .national .income .over .time)
•develop .policies
•develop .models .of .economy .to .make .forecasts
•performance
•identifying .changes .in .consumption, .investment
•evaluate .living .standards
•basis .for .comparing .different .countries
, Explain .the .limitations .of .using .national .income .statistics. .- .ANS✓✓-
•Inaccuracies .unrecorded .or .under-recorded .economic .activity
•external .costs .(resource .depletion, .pollution)
•other .quality .of .life .concerns .(people .may .be .earning .higher .incomes .but .not
.enjoy .higher .standards .of .living, .not .account .free .activities .such .as .volunteer
.work)
•composition .of .outputs .(large .part .of .countries .output .is .in .goods .that .do .not
.benefit .consumers .such .as .defence .or .capital .goods)
Evaluating .National .income .statistics. .- .ANS✓✓-•GDP .is .a .measure .of .the .value
.of .production .in .terms .of .market .prices .
•indicator .of .economic .activity, .not .a .measure .of .a .nations .overall .welfare .
•unreliable .show .of .an .economies .health .as .it: .
→excludes .nonmarket .production .(household .services .of .homemakers)
→legal .versus .illegal .activities
→not .necessarily .a .good .measure .of .well .being .of .nation
→says .little .about .environmental .quality .of .life
→not .necessarily .reflect .purchasing .power
→different .countries .have .different .conventions
Explain .the .meaning .and .significance .of ."green .GDP". .- .ANS✓✓-Green .GDP=
.GDP-environmental .costs .of .production.
Measure .of .GDP .that .takes .into .account .any .environmental .costs .from .the
.production .of .goods .and .services.
Explain .and .illustrate .the .business .cycle .and .its .phases. .- .ANS✓✓-•In
.developed .country .economies .generally .see .a .pattern .where .there .are .periods
.of .rising .growth, .followed .by .periods .of .slowing .growth .and .even .falling
.growth. .
•Cycle .periodic .fluctuations .in .economic .activity .measured .by .changes .in .real
.GDP. .
•The .long .term .growth .trend .is .the .potential .output .of .the .economy.
•Phases: .boom, .trough, .recovery, .recession
•RECOVERY .PHASE: .
→economic .expansion .with .GDP .increasing .at .a .rising .rate
→mainly .driven .by .increase .in .AD
•BOOMS:
→increase .in .demand .can .result .in .increase .price, .can .lead .to .increase .in .AD
.hence .increase .in .average .prices
→inflationary .pressure .will .build .up .and .rate .of .growth .of .GDP .will .fall .as
.economy .nears .its .potential .output
•RECESSION:
→defined .as .two .consecutive .quarters .of .negative .GDP .growth .that .is .falling
.GDP
→Fall .in .AD, .fall .in .employment, .low .demand .leads .to .lower .inflation .rates
.(even .deflation)
•TROUGH:
→output .cannot .continue .to .fall .for .ever .as .always .be .some .people .with .jobs .to
.maintain .a .given .level .of .consumption
Questions and answers 2025
Five .major .objectives .of .macroeconomic .policies. .- .ANS✓✓-•Economic .growth:
.A .steady .rate .of .increase .of .national .output
•Full .Employment: .A .low .level .of .unemployment
•Price .stability: .A .low .and .stable .rate .of .inflation
•Satisfactory .balance .of .payments
•Equal .Income .distribution .: .An .equitable .distribution .of .income
Describe, .using .a .diagram,
the .circular .flow .of .income
between .households .and
firms .in .a .closed .economy
with .no .government. .- .ANS✓✓-See .notes
Identify .the .four .factors
of .production .and .their
respective .payments .and
explain .that .these .constitute
the .income .flow .in .the .model. .- .ANS✓✓-•factors .of .production .households
.provide .to .firms:
→land
→labour
→capital .
→enterprise. .
•The .firms, .in .return .pay .the .factors .of .production:
→wages
→rent
→interest .
→profit
Relationship .between .income .flow, .expenditure .flow .and .output .flow. .- .ANS✓✓
-Income .flow=expenditure .flow .+ .output .flow
Describe, .using .a .diagram,
the .circular .flow .of .income
in .an .open .economy .with
government .and .financial
markets, .referring .to .leakages/
withdrawals .(savings, .taxes
,and .import .expenditure)
and .injections .(investment,
government .expenditure .and
export .revenue). .- .ANS✓✓-See .notes
Define .national .income. .- .ANS✓✓-Measures .the .monetary .value .of .the .flow .of
.output .of .goods .and .services .produced .in .an .economy .over .a .period .of .time.
3 .measures .of .national .income. .- .ANS✓✓-Most .commonly .used .measure .of
.countries .national .income .is .GDP. .3 .different .methods .to .calculate .this:
1. .The .output .method .(measures .actual .value .of .goods .and .services .produced)
2. .The .income .method .(value .of .all .incomes .earned .in .economy)
3. .Expenditure .method .(measures .value .of .all .spending .on .goods .and .services)
Distinguish .between .GDP .and .GNP/GNI .as .measures .of .economic .activity. .-
.ANS✓✓-GROSS .DOMESTIC .PRODUCT .(GDP): .
•value .of .final .goods .and .services .produced .within .a .country .in .a .given .period
•It .is .the .total .of .all .activities .in .a .country, .regardless .of .who .owns .the
.productive .asset.
GROSS .NATIONAL .PRODUCT .(GNP/GNI): .
•market .value .of .all .products .and .services .produced .in .one .year .by .labour .and
.property .supplied .by .the .residents .of .a .country.
Define .and .distinguish .between .gross .national .product .(GNP) .and .gross
.domestic .product .(GDP). .- .ANS✓✓-GNP=GDP+net .property .income .from
.abroad .(income .earned .from .assets .overseas)
GDP= .C+I+G+(X-M)
Unlike .Gross .Domestic .Product .(GDP), .which .defines .production .based .on .the
.geographical .location .of .production, .GNP .allocates .production .based .on
.ownership. .It .is .the .total .income .that .is .earned .by .a .country's .factors .of
.production .regardless .of .where .the .assets .are .located.
Define .and .distinguish .between .gross .national .product(GNP) .and .net .national
.product .(NNP). .- .ANS✓✓-NNP=GNP-Depreciation .(capital .consumption)
Define .and .distinguish .between .nominal .GDP .and .real .GDP. .- .ANS✓✓-Real
.GDP=Nominal .GDP .adjusted .for .inflation.
Explain .the .uses .of .national .income .statistics. .- .ANS✓✓-Shows:
•economic .growth .(is .an .increase .in .national .income .over .time)
•develop .policies
•develop .models .of .economy .to .make .forecasts
•performance
•identifying .changes .in .consumption, .investment
•evaluate .living .standards
•basis .for .comparing .different .countries
, Explain .the .limitations .of .using .national .income .statistics. .- .ANS✓✓-
•Inaccuracies .unrecorded .or .under-recorded .economic .activity
•external .costs .(resource .depletion, .pollution)
•other .quality .of .life .concerns .(people .may .be .earning .higher .incomes .but .not
.enjoy .higher .standards .of .living, .not .account .free .activities .such .as .volunteer
.work)
•composition .of .outputs .(large .part .of .countries .output .is .in .goods .that .do .not
.benefit .consumers .such .as .defence .or .capital .goods)
Evaluating .National .income .statistics. .- .ANS✓✓-•GDP .is .a .measure .of .the .value
.of .production .in .terms .of .market .prices .
•indicator .of .economic .activity, .not .a .measure .of .a .nations .overall .welfare .
•unreliable .show .of .an .economies .health .as .it: .
→excludes .nonmarket .production .(household .services .of .homemakers)
→legal .versus .illegal .activities
→not .necessarily .a .good .measure .of .well .being .of .nation
→says .little .about .environmental .quality .of .life
→not .necessarily .reflect .purchasing .power
→different .countries .have .different .conventions
Explain .the .meaning .and .significance .of ."green .GDP". .- .ANS✓✓-Green .GDP=
.GDP-environmental .costs .of .production.
Measure .of .GDP .that .takes .into .account .any .environmental .costs .from .the
.production .of .goods .and .services.
Explain .and .illustrate .the .business .cycle .and .its .phases. .- .ANS✓✓-•In
.developed .country .economies .generally .see .a .pattern .where .there .are .periods
.of .rising .growth, .followed .by .periods .of .slowing .growth .and .even .falling
.growth. .
•Cycle .periodic .fluctuations .in .economic .activity .measured .by .changes .in .real
.GDP. .
•The .long .term .growth .trend .is .the .potential .output .of .the .economy.
•Phases: .boom, .trough, .recovery, .recession
•RECOVERY .PHASE: .
→economic .expansion .with .GDP .increasing .at .a .rising .rate
→mainly .driven .by .increase .in .AD
•BOOMS:
→increase .in .demand .can .result .in .increase .price, .can .lead .to .increase .in .AD
.hence .increase .in .average .prices
→inflationary .pressure .will .build .up .and .rate .of .growth .of .GDP .will .fall .as
.economy .nears .its .potential .output
•RECESSION:
→defined .as .two .consecutive .quarters .of .negative .GDP .growth .that .is .falling
.GDP
→Fall .in .AD, .fall .in .employment, .low .demand .leads .to .lower .inflation .rates
.(even .deflation)
•TROUGH:
→output .cannot .continue .to .fall .for .ever .as .always .be .some .people .with .jobs .to
.maintain .a .given .level .of .consumption
