2018 paper 2

Question 1

1a Define the term ‘Gross Domestic Product’. (1)

Answer 1

GDP is the total value of goods and services
produced in an economy

Question 2

1 (b) Calculate the UK’s GDP per capita in 2015. You are advised to show your working. (2)

Answer 2

1 872 714 / 65.1 = = 28 766.73

Question 3

1c Which one of the following is the most likely effect of an increase in real GDP
per capita?
(1)
A Increase in living standards
B Increase in unemployment
C Lower consumer confidence
D Lower purchasing power

Answer 3

A Increase in living standards

Question 4

2a Define the term ‘recession’. (1)

Answer 4

A recession means a fall in the level of real national output (GDP), technically defined as two consecutive quarters of negative GDP growth

Question 5

2b Explain one characteristic of a recession (2)

Answer 5

Rising empolyment due to less demand for workers. caused by falling real output

Question 6

2c Which point on the trade cycle diagram illustrates a negative output gap? (1)

Answer 6

B

Question 7

3a explain one factor that the Monetary Policy
Committee (MPC) of the Bank of England may have considered when reducing the base interest rate (3)

Answer 7

Expected inflation rate
Interest rate has decreased from 5.5% in 2008 to
0.5% in 2009 or has decreased by 5 percentage
points
GDP growth rate and spare capacity ensure that AD grows in line with productive potential

Question 8

3b In August 2016 the Bank of England extended its existing asset purchases (quantitative easing) programme, from a total of £375 billion to £435 billion. (b) Which one of the following is the most likely effect of the Bank of England’s
quantitative easing? (1)
A A fall in economic growth
B A fall in the money supply
C An increase in the rate of inflation
D An increase in unemployment

Answer 8

C An increase in the rate of inflation

Question 9

4a Define the term ‘aggregate demand’. (1)

Answer 9

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

Question 10

4b Annotate the diagram above to show the likely impact of a rise in the cost of raw materials on the UK’s equilibrium level of real output and price level. (2)

Answer 10

• leftward shift of SRAS
• new equilibrium point showing higher
  price level and lower real output

Question 11

4c Which one of the following factors is most likely to cause an increase in the long-run aggregate supply? (1)
A Decrease in investment
B Increase in relative productivity
C Increase in the level of unemployment benefits
D Reduced access to credit for consumers and businesses

Answer 11

B Increase in relative productivity

Question 12

5a Which one of the following can be inferred from the chart? In 2016/17: (1)
A the change in forecast UK government spending is highest on education
B the forecast UK government spending in all areas has fallen from 2015/16
C the forecast UK government spending on defence is twice as much as the forecast spending on housing
D the percentage change in forecast UK government spending on health, from 2015/16, is 2.84%

Answer 12

D the percentage change in forecast UK government spending on health, from 2015/16, is 2.84%

Question 13

5b In 2016/17 total forecast UK government spending amounted to £772 billion and
total forecast tax receipts amounted to £716 billion.
Calculate forecast UK government spending on social protection as a percentage of total forecast UK government spending in 2016/17. You are advised to show your working. (2)

Answer 13

(240 / 772) x 100 = 31.1

Question 14

5c Define the term ‘budget deficit’. (1)

Answer 14

Budget deficit is when government spending
exceeds (tax) revenue/receipts

Question 15

With reference to Figure 1, explain one reason why the claimant count and the ILO measure of unemployment differ. (4)

Answer 15

LO measure of unemployment uses the labour force survey/defines someone as unemployed if they are without a job, want a job and actively seek one whereas claimant count records people claiming benefits. The Claimant Count is normally the lower measure because some unemployed people are not entitled to claim unemployment-related benefits or choose not to do so.

• Increase in frictional unemployment. which would. increase ILO but may show no change in unemployment-related benefits.
• unemployment-related benefits e.g. changes in
  the level of savings making it difficult to claim
  unemployment related benefits

The claimant count fell by around 48% whereas ILO unemployment fell by around 35%.

Question 16

6b With reference to Extract A, assess the likely macroeconomic effects of an increase in house prices. Use an aggregate demand and aggregate supply diagram in your answer. (10)

Answer 16

The rise in the value of houses will lead to a wealth effect. The wealth effect is defined by how assets appreciate with an increase in prices. Extract A mentions that house prices have risen after the financial crisis almost making it “unaffordable” for first-time buyers whilst “65-year-olds increased”. The increase in house prices, therefore, increases the asset value of the individual who owns the house, increasing their wealth. The increase in income and consumer confidence will increase consumption. Consumption is a part of AD; on the graph below this will increase AD1 to AD2, with output from Y1 to Y2. This is also seen in figure 1 with the decrease in unemployment during this period; house prices appreciating increase the income of the homeowner and reduces their chances for unemployment.

A rise in the value of houses will make prices in the UK more unaffordable for foreigners, and this decreases exports. A rise in the value of houses appreciates the value of the pound with goods in the UK, and will lead to a positive balance of payments this way. The balance of payments is export minus imports. This may lead to stagnation or a fall in AD, from AD2 to AD3. Extract mentions that house prices now are “24,000” pounds more than it was at the peak before the pandemic.

However, it is dependent on the elasticity of the supply of houses in the UK which is known to be inelastic due to planning restrictions and area. Therefore the PES of the ability to increase supply with attractiveness/increased demand for houses is difficult to maintain. Also first time buyers will find it hard to buy, as only “65-100” year olds wealth increased and ownership increased

Question 17

6c With reference to the information provided, explain one likely factor, other than changes in house prices, that could influence the level of savings of UK households. (5)

Answer 17

Income is a factor that can change the level of savings of UK households. With an increase in income, consumers save more. With decreases in income, it makes consumers save less. This is because their Marginal Propensity to Save will either fall or rise, but in the case of extract a “real incomes have fallen by 10.4%” means their MPS will fall. MPS calculates how much one saves with a given amount of money - due to poor economic conditions, consumers will not be satisfied with wealth and have less savings to spend more.

Question 18

6d Explain two factors that might cause a rise in the value of the multiplier. (6)

Answer 18

The multiplier is calculated by marginal propensities to save or consume in the UK; it is calculated by 1/1-MPC or 1/1-MPWithdrawal. A rise in the value of the multiplier is therefore caused by increases in MPC - and a rise in the value of the multiplier is also caused by falls in withdrawals like savings or imports. Extract mentions savings decreased from “10.5%” which therefore means the multiplier increase.

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

Question 19

6e With reference to Extract B and Figure 1, discuss the likely impact of migration on
employment and unemployment in the UK.

Answer 19

One likely impact on employment in the UK of migration will be a rise in employment. Employment is defined by those part of the workforce who are able and willing to work with a job. Extract mentions “work remains the most common reason for long-term migration” and many come in with a definite job and this increases, by definition, employment. It will also increase employment by the LRAS. The LRAS shows resources like labour and capital at full capacity; with increases in migration, it increases the number of people able to work in the UK, increasing its LRAS and economic growth. This is seen from a shift in LRAS 1 to LRAS 2 on the graph below exceeding output from y1 to y2. It will increase the demand for labour and reduce the wage rate because supply increases, from p1 to p2.

Migration can have a positive impact on the Uk economy, particularly on employment. As stated in extract B “130 000 looking for work” – these migrants could displace the current indigenous workers. Unemployment is calculated by dividing the unemployment level by the total number of economically active - in which the increase in migrants, will surge the measure of unemployment. Immigrants contribute to the economy by filling labour market gaps and creating new jobs. They bring with them skills, knowledge and expertise that are in demand in the Uk’s labour market. This can lead to increased productivity and competitiveness, which in turn can lead to job creation. A large population may increase consumer confidence as businesses may need to hire more workers to keep up with demand. Moreover, immigrants can also create jobs indirectly by starting their businesses. These businesses contribute significantly to the economy and create job opportunities for UK citizens.

However, it may be that both of these measures will decrease as migrants arriving in the UK may be unable to work. Extract A mentions that “80,000 people are seeking asylum - who legally cannot work”, which decreases those who are able to work - meaning employment and unemployment measures. With such migrants or asylum seekers, there may be a skill mismatch, de-incentivising their employment. And the extract also mentions that long-term migration is only “163,000” much less than the total “312,000” as the extract mentions - which indicates that short-term migration may be the case.

Question 20

6 (g) Evaluate the likely impact of high inflation on the UK government’s macroeconomic objectives. (20)

Answer 20

Inflation is the increase in the general price level of goods and services. Ultimately, the UK’s macroeconomic objectives being low unemployment/high employment, maintained and low inflation, and economic growth will all be impacted. As prices rise, consumers will be able to purchase fewer goods and services with their income, leading to a decrease in consumer spending. This decrease in consumer spending can have a negative impact on the government’s objective of achieving economic growth. If businesses experience a decline in demand for their goods and services, they may be forced to reduce production and cut jobs, leading to higher unemployment. Inflation increases the costs of production and makes it more difficult for firms to maintain wage rates, there it will increase unemployment this idea is enforced by the Phillips curve with cost-push inflation. Although, high prices are indicative of economic growth, which may indicate rising AD and more revenue for firms to maintain their workers, not reducing employment levels - especially when there is demand-pull inflation.

Secondly, inflation will have an adverse effect on economic growth as it will appreciate the value of the pound as well; this makes imports more attractive and make UK goods non-competitive. As prices rise, UK goods and services will become more expensive relative to those of other countries. This can lead to a decrease in exports and an increase in imports, leading to a negative impact on the government’s objective of achieving a favourable balance of trade. The fall in consumption, investment and net trade will cause AD1 to fall to AD2, causing prices to fall from P1 to P2, helping to achieve stable inflation. On the other hand, real national income falls from Y1 to Y2 and so therefore it doesn’t achieve high employment or economic growth. If the economy was producing on the inelastic section of the curve, then an increase in interest rates would not affect output, just prices

Inflation will compromise a balance of payments surplus, as because our prices are higher due to inflation, they become less attractive to foreign countries, therefore the demand for our exports will decrease. However, this will mean our own goods are cheaper to the domestic market, thus more will be demanded, perhaps negating some of the negative impact of the inflation regarding the BOP surplus. On the other hand, inflation can also lead to higher interest rates, which can attract foreign capital into the country in search of higher returns. While this may initially increase the balance of payments surplus, it can also lead to an appreciation of the currency, which can make exports more expensive and reduce the surplus in the long run.

In conclusion, high inflation can have a significant impact on the UK government’s macroeconomic objectives. It can lead to a decrease in consumer spending, a decrease in investment, and a decrease in international competitiveness. Therefore, the government must take measures to control inflation, such as adjusting interest rates or implementing fiscal policies, to achieve its macroeconomic objectives.