Practice

Free response question

Macroeconomics · Hard · 40 marks

EO past paper: 2025 International Final, Part A

Section II (40 points). Remember to fully label your graphs. All four questions are about the country of Asabia.

(a)The producers of the country of Asabia are faced with a sudden significant rise in the cost of energy. Using an aggregate demand-aggregate supply model (AD/AS) show the impact of the rise of energy on the economy. Show any potential changes in national income and any inflationary or deflationary pressures caused by the rise in the cost of energy. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.)[10](b)Let's assume that Asabia has fallen into recession and that this has led to a rise in income inequality. Using a Lorenz curve, show the rise in income inequality. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.)[10](c)Due to this recession there has been a sudden increase in unemployment in Asabia. Using a labor diagram (supply and demand for labor) show how the recession has led to this increase in unemployment. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.)[10](d)What type of unemployment is described in question C? Propose two policies through which Asabia can reduce this unemployment. Critically evaluate the positives and negatives of each one. Explain your answer in detail.[10]

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