2(a) Explain why a sustainable level of government (national) debt is an important
macroeconomic objective. [10]
Answers may include:
Terminology: Government (national) debt, sustainable government (national) debt.
Diagrams: Candidates might use an AD/AS diagram to illustrate changes in government spending, but the question can be answered without the use of a diagram.
Theory: An explanation of how government debt might be measured as a percentage of GDP. Candidates may also explain how a budget deficit is related to government (national) debt. Candidates might explain sustainable debt in terms of servicing costs, credit ratings and how future taxation and government spending might be impacted by debt and whether these are sustainable.
2(b) Using real-world examples, discuss the potential trade-off between
unemployment and inflation. [15]
Answers may include:
Terminology: Unemployment, inflation.
Diagrams: AD/AS diagrams, Phillips curve diagram.
Theory: An explanation of the potential trade-off between unemployment and inflation in the long run and in the short run.
Synthesis (discuss): Discussion of the relationship between inflation and unemployment in the short run and in the long run. A consideration of the trade-off revealed by the short-run Phillips curve and the lack of a trade-off indicated by the long run Phillips curve in which the economy is assumed to be operating at the natural rate of unemployment.
Example(s): A relevant real-world example(s) in which a potential trade-off between unemployment and inflation is claimed to exist.