Tutorial Problem Set 2
Question 1 (WB pg 8):
Distinguish between inflationary and deflationary gaps. (10 marks)

Question 2: This problem set aims to consolidate the lessons learnt in economics since
the beginning of the term. To successfully complete the problem set, students will have to
utilize the full range of knowledge and skills acquired. Knowledge include the
macroeconomic models and indicators; whereas skills involve answer planning and stepby-
step explanation of macroeconomic processes as discussed in class.

Refer to the case study on the Colombian economy (WB pg 1).
a) How did the performance of the Colombian economy in the second half of the
1990s compare with that in the first half? (2 marks)

b) “Sharp decline in economic growth has caused a rise in the governments’ budget
deficit”. Explain why this may be so. (3 marks)

c) Using AD – AS model, analyse the possible effects on economic growth rates and
inflation due to the change in unemployment between 1994 and 1999. (6 marks)

d) Using the AD – AS model, analyse the possible effects on output and price levels
due to a change in government expenditure on investment projects in Columbia.
(6 marks)

e) How far would you recommend the increase of government expenditure as a
measure to improve Columbia’s economic performance in the late 1990s? (8
marks)

Think1:
(i) How would a devaluation of the peso affect the balance of trade,
unemployment rate and inflation in Columbia? (6 marks)

(ii) Imagine you are an economic advisor to the Columbian government. Discuss
the policy(s) that the government may exercise to improve Columbia’s
economic performance. (Hint: How may we make use of the multiplier?) (10
marks)



1 These are higher-order level thinking questions. I will not go through in class, but will be extremely happy to discuss them if there is time or receive answer schemes through emails. It will be wrong however to dismiss these questions as being irrelevant to the syllabus – they are not! On the contrary, such questions have become frequent guests of A-levels economics exams.