A Level Economics Short Paper B
Covers Measuring Economic Performance, Aggregate Demand and Aggregate Supply, Fiscal and Monetary Policy and 3 more.
Questions
Question 1 [2 marks]
Fiscal and Monetary Policy
Define "expansionary fiscal policy" and give one example of a specific action a government could take to implement it.
Question 2 [2 marks]
Money, Banking and the Financial Sector
State one key function of a central bank, such as the Bank of England, that a commercial bank, such as a high street bank, does not perform.
Question 3 [2 marks]
International Trade and the Balance of Payments
Distinguish between absolute advantage and comparative advantage in the production of a good.
Question 4 [3 marks]
Measuring Economic Performance
A country's nominal GDP is 660 billion pounds and its GDP deflator, using a base year of 100, is 110.
Calculate the country's real GDP.
Question 5 [4 marks]
International Trade and the Balance of Payments
Explain the difference between a free trade area and a customs union, using an example of what a customs union requires that a free trade area does not.
Question 6 [5 marks]
Aggregate Demand and Aggregate Supply
A country's aggregate demand is made up of consumption of 1200 billion pounds, investment of 300 billion pounds, government spending of 350 billion pounds, exports of 280 billion pounds and imports of 310 billion pounds. Investment then falls by 15% due to a rise in interest rates, with all other components unchanged.
Calculate the original level of aggregate demand and the new level of aggregate demand after the fall in investment.
Question 7 [5 marks]
Supply-Side Policy and Economic Growth
Analyse two potential drawbacks of relying on interventionist supply-side policies, such as large-scale government spending on infrastructure and education, to raise long-run growth.
Question 8 [5 marks]
Aggregate Demand and Aggregate Supply
Explain two ways in which a fall in consumer confidence could affect aggregate demand, even before any change in household income.
Question 9 [6 marks]
Supply-Side Policy and Economic Growth
An economy's actual real GDP is 2350 billion pounds while its estimated potential output is 2450 billion pounds.
Calculate the size of the output gap as a percentage of potential output, and analyse what this suggests about the likely direction of demand-side policy relative to supply-side policy in the short run.
Question 10 [6 marks]
Aggregate Demand and Aggregate Supply
A country's currency depreciates by 10%, making its exports more price competitive abroad and imports more expensive at home. As a result, exports rise from 280 billion pounds to 310 billion pounds, and imports fall from 260 billion pounds to 245 billion pounds, with other AD components unchanged. The economy's multiplier is 1.5.
Calculate the change in net exports caused by the depreciation, and calculate the resulting total change in aggregate demand once the multiplier effect is included.
Model solutions
| Question 1[2 marks] | |
|---|---|
| Answer or working | Marks |
| a correct definition, e.g. a deliberate increase in government spending and/or cut in taxation designed to raise aggregate demand | 1 |
| a valid example, e.g. increasing spending on infrastructure projects, or cutting income tax rates | 1 |
| Final answer: Expansionary fiscal policy raises AD through higher government spending and/or lower taxes, e.g. cutting income tax rates. | |
| Question 2[2 marks] | |
|---|---|
| Answer or working | Marks |
| identifying a valid central bank function, e.g. setting the base interest rate for the whole economy, or acting as lender of last resort to the banking system | 1 |
| explaining why a commercial bank does not perform this role, e.g. a commercial bank is a profit-seeking business that takes deposits and makes loans to individual customers, rather than setting monetary policy or supporting the whole banking system | 1 |
| Final answer: A central bank, unlike a commercial bank, sets the economy's base interest rate and can act as lender of last resort to the whole banking system, rather than simply taking deposits and making loans to individual customers for profit. | |
| Question 3[2 marks] | |
|---|---|
| Answer or working | Marks |
| explaining that a country has an absolute advantage in a good if it can produce more of that good than another country using the same quantity of resources | 1 |
| explaining that a country has a comparative advantage in a good if it can produce it at a lower opportunity cost, in terms of another good given up, than another country, even without an absolute advantage | 1 |
| Final answer: A country has an absolute advantage if it can produce more of a good with the same resources than another country; it has a comparative advantage if it can produce a good at a lower opportunity cost, even without an absolute advantage. | |
| Question 4[3 marks] | |
|---|---|
| Answer or working | Marks |
| using real GDP = (nominal GDP / GDP deflator) x 100 | M1 |
| substituting real GDP = (660 / 110) x 100 | M1 |
| real GDP = 600 billion pounds | A1 |
| Final answer: Real GDP = 600 billion pounds. | |
| Question 5[4 marks] | |
|---|---|
| Answer or working | Marks |
| explaining that a free trade area is a group of countries that remove tariffs and other trade barriers between themselves | 1 |
| explaining that each member of a free trade area can still set its own independent tariffs on imports from countries outside the area | 1 |
| explaining that a customs union goes further than a free trade area by also requiring all members to apply a common external tariff on imports from non-member countries | 1 |
| a valid example or consequence, e.g. this means a customs union member cannot independently negotiate its own separate trade deal with a country outside the union, unlike a free trade area member | 1 |
| Final answer: A free trade area removes barriers between members but lets each set its own tariffs on non-members; a customs union goes further by requiring a common external tariff, meaning members cannot independently negotiate their own trade deals with non-members. | |
| Question 6[5 marks] | |
|---|---|
| Answer or working | Marks |
| using AD = C + I + G + (X - M) | M1 |
| original AD = 1200 + 300 + 350 + (280 - 310) = 1820 billion pounds | A1 |
| new investment = 300 x 0.85 = 255 billion pounds | M1 |
| new AD = 1200 + 255 + 350 + (280 - 310) = 1775 billion pounds | A1 |
| correctly stating aggregate demand falls by 45 billion pounds (1820 to 1775) as a result of the fall in investment | 1 |
| Final answer: Original AD = 1820 billion pounds; after investment falls to 255 billion pounds, new AD = 1775 billion pounds, a fall of 45 billion pounds. | |
| Question 7[5 marks] | |
|---|---|
| Answer or working | Marks |
| identifying a drawback relating to cost, e.g. interventionist policies are often expensive and must be financed by higher taxation or borrowing | 1 |
| explaining a consequence of this, e.g. higher borrowing may increase national debt, or higher taxation could reduce incentives elsewhere in the economy, partly offsetting the supply-side benefit | 1 |
| identifying a second drawback relating to time, e.g. many interventionist policies, such as building infrastructure or educating a workforce, take a long time to feed through into higher productive capacity | 1 |
| explaining a consequence of this, e.g. the policy will not address a current, short-term problem such as a demand-side downturn, and the long time lag makes its effects hard to evaluate | 1 |
| a further valid point, e.g. government may lack the information to identify which projects will most effectively raise productive capacity, risking inefficient spending | 1 |
| Final answer: Interventionist supply-side policies can be costly (requiring higher tax or borrowing) and slow to take effect, so they may not solve short-term problems and could involve inefficient spending. | |
| Question 8[5 marks] | |
|---|---|
| Answer or working | Marks |
| identifying that lower consumer confidence can directly reduce planned consumption, as households become more cautious and save more out of current income | 1 |
| explaining this shifts the consumption component of AD down even without a change in income, a shift in the consumption function rather than a movement along it | 1 |
| identifying that lower confidence can reduce demand for durable, credit-financed goods such as cars or furniture, which are more sensitive to expectations about the future | 1 |
| explaining that households delay or cancel major purchases when uncertain about future income or job security, reducing AD further | 1 |
| a developed point, e.g. falling confidence can also depress business investment via lower expected future sales, compounding the fall in AD through a second component | 1 |
| Final answer: Lower consumer confidence directly reduces planned consumption as households save more out of caution, and reduces spending on durable, credit-financed goods most sensitive to expectations, both of which lower AD even before any fall in income. | |
| Question 9[6 marks] | |
|---|---|
| Answer or working | Marks |
| output gap = actual output - potential output = 2350 - 2450 | M1 |
| output gap = -100 billion pounds | A1 |
| expressing this as a percentage of potential output, -100 / 2450 x 100 | M1 |
| output gap = approximately -4.1% (a negative output gap) | A1 |
| identifying that a negative output gap means the economy is producing below its potential, due to insufficient aggregate demand rather than insufficient capacity | 1 |
| explaining that in this situation, demand-side policy (e.g. expansionary fiscal or monetary policy) is likely to be more immediately relevant than further supply-side measures, since the constraint is currently demand rather than capacity | 1 |
| Final answer: Output gap = (2350 - 2450) / 2450 = approximately -4.1% (a negative output gap); this suggests the economy is short of aggregate demand rather than productive capacity, so demand-side policy is likely to be more immediately relevant than further supply-side measures in the short run. | |
| Question 10[6 marks] | |
|---|---|
| Answer or working | Marks |
| calculating the change in exports, 310 - 280 = 30 billion pounds | M1 |
| calculating the change in imports, 245 - 260 = -15 billion pounds | M1 |
| explaining that a fall in imports itself raises net exports, since less spending leaks abroad | 1 |
| the total change in net exports of 30 - (-15) = 45 billion pounds | A1 |
| multiplying by the multiplier, 45 x 1.5 | M1 |
| a total change in aggregate demand of 67.5 billion pounds once the multiplier effect is included | A1 |
| Final answer: Net exports rise by 45 billion pounds, a 30 billion pound rise in exports plus a 15 billion pound fall in imports; once the multiplier of 1.5 is applied, the total increase in aggregate demand is 67.5 billion pounds. | |