2018 AS paper

Question 1

define GDP

Answer 1

the total value of goods and services produced in an economy

Question 2

define recession

Answer 2

negative economic growth/falling GDP for two successive/consecutive quarters

Question 3

characteristics of a recession

Answer 3

• Falling inflation (1) due to reduction in consumer expenditure (1)
• Rising unemployment (1) due to less demand for workers caused by falling real output (1)
• Falling profits/investment of firms (1) possibly leading to high level of business failures (1)
• Increase in budget deficit/worsening of the fiscal position (1) due to a rise in government spending on benefits/a fall in tax revenues (1)

Question 4

factors considered by MPC of BofE when reducing base interest rate

Answer 4

Knowledge/understanding
• Expected inflation rate (1)
• Confidence (1)
• Growth rate (1)
• House prices (1)

Application
1 mark for reference to the chart, for e.g.
• Global Financial Crisis of 2008 (1)
• Interest rate has decreased from 5.5% in 2008 to 0.5% in 2009 or has decreased by 5 percentage
points (1)
• Brexit decision 2016 (1)

Analysis
1 mark, e.g.
• Consumer and business confidence: can indicate
turning points in the business cycle (1)
• GDP growth rate and spare capacity: ensure that AD grows in line with productive potential (1)
• House prices and share prices: that help decide household wealth, which translates through to borrowing and spending (1)

Question 5

define aggregate demand

Answer 5

• AD = C+I+G+(X-M)
• Total amount of planned spending on goods and
services at any price level in an economy

Question 6

decrease in investment

Answer 6

will reduce capital stock of the economy, reducing LRAS

Question 7

increase in level of unemployment benefits

Answer 7

will reduce the incentive to work, reducing LRAS

Question 8

increase in relative productivity

Answer 8

increase in LRAS

Question 9

reduced access to credit for consumers and businesses

Answer 9

would decrease investment as banks would be unwilling to lend

Question 10

Macroeconomic effects of an increase in house prices (KAA)

Answer 10

• Rise in value of houses will lead to wealth effect
• An increase in householder’s confidence
• Encourage households to consume more (and/or save less)
• Aggregate demand (AD) will increase
• Lead to an increase in real output or a faster rate of economic growth
• Credit for discussion of other effects besides wealth effect, e.g. impact on:
• Balance of Payments
• Unemployment
• Budget deficit
• Price level

• Increase in investment from the construction
industry
• Diagram

Question 11

Macroeconomic effects of an increase in house prices (Ev)

Answer 11

• Houses are a significant component of consumers’ wealth and effect large proportion of households (65% owner occupied) in the UK, which will have a major effect on AD
• SR vs LR – “house prices will fall 1% across the UK in 2017“ / wealth effects take time to trigger spending changes
• Regional differences in impact – “House price growth was strongest in London“
• “home ownership has risen to 78.6% among those aged 65-to-74” – it may not raise AD / consumption
• Discussion of the significance of falling real wages
• Significance of the elasticity of the AS curve
• Consumption is approximately 2/3 of aggregate demand which implies a strong inter-relationship
• Lower confidence for areas where it will be harder to move to find jobs, because of price differentials
• Effect on first-time buyers – may lead to their consumption falling (discussion of real wages and home ownership)

Question 12

Factors (other than house prices) influencing level of saving of UK households

Answer 12

Knowledge/understanding
• Income (1)
• Interest rates (1)
• Unemployment (1)
• Consumer confidence (1)

Application
• real incomes in the UK have fallen (1) by 10.4% (1)
• unemployment fell (1) according to ILO and CC (1)
• savings ratio has fallen (1) between 2010 and 2015 (1)
• Britain’s vote to leave the EU – Extract A Line 6 (1)

Analysis
• Fall in income is likely to reduce savings leading to a fall in the marginal propensity to save
• Lower unemployment is likely to cause a rise in consumer spending due to greater disposable incomes, leading to fall in savings ratio

Question 13

factors that might cause a rise in the value of the multiplier

Answer 13

Knowledge/understanding
• Definition/understanding of the multiplier (1)
• Identification of factors which can cause the multiplier to rise

Application
• savings ratio decreased from 11.5% in Q1 of 2010 (1)
• to approximately 5.7% in Q1 of 2016 (1)
• Use of multiplier formula (2)
• application by means of simple numerical example (up to 2 marks)

Analysis
• A fall in withdrawals from circular flow of income will lead to a rise in the value of the multiplier (1)
• An increase in mpc will cause the value of the multiplier to rise (1)

Question 14

define multiplier

Answer 14

the number of times a rise in national income exceeds the rise in injections of demand that caused it

Question 15

multiplier effect will be larger when

Answer 15

• The propensity to spend extra income on domestic goods and services is high
• The marginal rate of tax on extra income is low
• The propensity to spend extra income rather than save is high
• Consumer confidence is high (this affects willingness to spend gains in income)
• Businesses in the economy have the capacity to expand production to meet increases in demand

Question 16

multiplier formula

Answer 16

Multiplier = 1 / (sum of the propensity to save + tax + import =mpw)
multiplier = 1/1-mpc

Question 17

value of multiplier depends on

Answer 17

-Propensity to import
-Propensity to save
-Propensity to tax
-Amount of spare capacity (If short-run aggregate supply is inelastic, the full multiplier effect is unlikely to occur, because increases in AD will lead to higher prices rather than a full increase in real national output. In contrast, when SRAS is perfectly elastic a rise in aggregate demand causes a large increase in national output.)
-Avoiding crowding out
(Crowding out – this is where (for example) increased government spending or lower taxes can lead to a rise in government borrowing and/or inflation which causes interest rates to rise and has the effect of slowing down economic activity.)

Question 18

mpc

Answer 18

• The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.
• mpc=change in consumption/change in income

Question 19

factors determining mpc

Answer 19

• Income levels. At low-income levels, an increase in income is likely to see a high marginal propensity to consume; this is because people on low incomes have many goods/services they need to buy. However, at higher income levels, people tend to have a greater preference to save because they have most goods they need already.
• Temporary/permanent. If people receive a bonus, then they may be more inclined to save this temporary rise in income. However, if they gain a permanent increase in income, they may have greater confidence to spend it.
• Interest rates. A higher interest rate may encourage saving rather than consumption; however, the effect is fairly limited because higher interest rates also increase income from saving, reducing the need to save.
• Consumer confidence. If confidence is high, this will encourage people to spend. If people are pessimistic (e.g. expect unemployment/recession) then they will tend to delay spending decisions and there will be a low MPC.

Question 20

likely impact of migration on employment in the UK

Answer 20

• “Work remains the most common reason for long-
term migration (312 000)” – this is most likely to lead to an increase in employment
• “182 000 of these coming with a definite job” –
these migrants could fill those vacancies that cannot be filled by indigenous workers
• Increased size of population means that there is increase in supply of labour, thus reducing wage rate and increasing demand for labour
• Increased consumer spending from an increased
population means more jobs are created
• Increased demand for public services creating an
increased demand for public sector workers

Question 21

likely impact of migration on unemployment in the UK

Answer 21

• “130 000 looking for work” – these migrants could displace the current indigenous workers
• “10 547 people granted asylum” / 80 000 family members – surplus labour in the market as they might attempt to join the labour market but with inappropriate skills

Question 22

likely impact of migration on un/employment in the UK EVALUATION

Answer 22

• Magnitude and the significance of net migration –
the figures on emigration have not been provided
• “Long-term migration to the UK for study was estimated to be 163 000” – so may only be short- term migrants; also it is not sure they will remain in the UK after study
• If the UK economy starts to grow, it can take on more labour without increasing unemployment
• Evidence might be inaccurate, e.g. reason for migration is a very loaded question/inadequate data – it does not indicate if there has been an increase or decrease in the figures shown
• Depends on the skills of migrants
• “Dependents” may or may not have an effect
• Depends on the percentage of asylum seekers granted leave to remain (Extract B)
• Different industries may be affected differently

Question 23

evaluate gov policies (other than migration) that could be used to increase employment rate in UK (KAA)

Answer 23

• Understanding / identification of government policies as fiscal policy or supply-side policy
• Relevant diagram, e.g. AD/AS diagram showing rightward shift in AD and/or AS curve
• Investment in education and training to provide a more skilled workforce through increases in the level of human capital
• Changes in minimum wage to incentivise employment
• Reduction in unemployment and associated benefits to increase incentive to find work
• Grants/subsidies/tax breaks to firms
• Reduction in tax rates to encourage firms to expand or set up in UK, therefore increasing employment
• Reduction in income tax creating a much larger
incentive to work, increasing consumption and therefore, employment
• Policies to increase real wage flexibility e.g. helping to reduce real wage unemployment
• Tax breaks to firms who set up in depressed areas / giving some financial assistance to unemployed workers who move to areas with high employment
• Government improving the labour market flexibility by making it easier to hire and fire workers may encourage more job creation
• Increase in the provision of free childcare and other measures to increase the activity rate
Answer must be linked to government policies to access Level 3 or above.

Question 24

evaluate gov policies (other than migration) that could be used to increase employment rate in UK (Ev)

Answer 24

• Magnitude of the policy change
• Conflicts between the policies
• Depends if there is spare capacity
• Creditworthiness of the UK government
• Conflicts with other UK economic objectives
• Discussion of effectiveness of individual policies
• External factors beyond UK government’s control,
e.g. slowdown in global economy
• Time lags (for e.g. education takes a long time to have impact on productivity)/implementation lags
Government’s budget deficit makes it difficult to pay for large investments or offer significant grants/tax breaks

Question 25

evaluate likely impact of high inflation on UK gov’s macroeconomic objectives (KAA)

Answer 25

• Implicit or explicit identification of the various UK’s macroeconomic objectives
• Understanding of inflation
• May reduce growth owing to costs of inflation
• Reduction in purchasing power and real incomes
• Equality e.g. effect on those who have fixed incomes (are not protected by inflation) who are often the poorest
• May make the national debt smaller in real terms
making it cheaper to finance and pay back
• Reduction in competitiveness of British goods which worsens the current account of the balance of payments deficit and reduces international competitiveness
• Unemployment may rise through increased levels of inefficiency and stagflation / using a Phillips curve
• Higher inflation associated with increasing AD may have detrimental impact on environment
• Possible beneficial effect on the environment as economic growth slows
• Loss of both business and consumer confidence
• The self-reinforcing effect on inflation through expectations: higher inflation as consumers get used to higher levels of inflation, they demand high wages to protect buying power of incomes

Question 26

UK macroeconomic objectives

Answer 26

1) Economic growth - high and sustainable
2) Low inflation - UK target 2% +/- 1
3) Low unemployment - less than 3% often considered ‘full employment’
4) Satisfactory balance of payments - avoid large deficit on the current account balance of payments
5) Low gov borrowing - low public sector debt
6) Stable exchange rate - avoid destabilising devaluations/appreciations
7) Minimise inequality
8) Protect environment - important for long run economic growth

Question 27

main policy instruments to meet macroeconomic objectives

Answer 27

• Monetary policy –changes to interest rates, the supply of money and credit and also changes to the value of the exchange rate
• Fiscal policy – changes to government taxation, government spending and borrowing
• Supply-side policies designed to make markets work more efficiently

Question 28

conflicts of macroeconomic objectives

Answer 28

1) economic growth vs inflation
2) unemployment vs inflation
3) economic growth vs current account balance of payments
4) budget deficit vs economic growth
5) economic growth vs environment
https: //www.economicshelp.org/blog/419/economics/conflicts-between-policy-objectives/

Question 29

evaluate likely impact of high inflation on UK gov’s macroeconomic objectives (Ev)

Answer 29

• Depends on the cause, (e.g. cost push or demand pull) duration and magnitude of inflation – may be discussed in recent context of the UK / using AD AS diagram
• Inflation might not translate through to higher wages and unemployment if the workforce has little power
• If growth is low, slightly higher inflation is worth the risk to avoid deflation or depression
• Impact depends on the relative inflation rates
• Impact of high inflation might depend on policy response - interest rates may have to be raised
• Other factors may have a larger effect: exchange rates or other macro objectives (ceteris paribus)
• Possible beneficial effect on the environment