2019 paper 2

Question 1

1a (a) Define the term ‘injection’ in this context (1)

Answer 1

Injection is money flowing into the circular flow
of income/economy
Injection in this context is government spending / investment

Question 2

1(b) Calculate the value of the multiplier based on the data given. You are advised to show your working. (2)

Answer 2

£44.1bn : £9.3bn
44.1bn. /9.3bn = 4.7

Question 3

1c Which one of the following is a likely cause of a decrease in the value of the UK’s multiplier? (1)
A A decrease in the marginal propensity to save
B A decrease in the marginal propensity to tax
C An increase in the marginal propensity to consume
D An increase in the marginal propensity to import

Answer 3

D An increase in the marginal propensity to import

Question 4

2a Illustrate the shape of the Keynesian long-run AS curve on the diagram below.

Answer 4

curve to the right up labelled LRAS

Question 5

2b Explain what is meant by spare capacity in an economy. (2)

Answer 5

• the resources are not being used to their full potential so there is room to increase supply/output
• there is a negative output gap in the economy
• the economy is operating inside the PPF.

Question 6

2c Which one of the following is most likely to cause a movement along the AS
curve? Changes in: (1)
A competition policy
B relative productivity
C the cost of raw materials
D the level of aggregate demand

Answer 6

D the level of aggregate demand

Question 7

3a With reference to the chart above, explain one likely economic effect of the change in the UK unemployment rate between 2012 and 2018. (3)

Answer 7

increase in disposable income
unempolyment rate has fallen from 8.3% in 2012 to 4.3% in 2018 .
this causes consumer confidence to increase as they have more disposable income.
consumption increases

Question 8

3b Which one of the following policies is most likely to reduce the unemployment rate in the UK? (1)
A A decrease in direct taxes on company profits
B A decrease in quantitative easing
C An increase in government payments to the unemployed
D An increase in the UK base interest rate

Answer 8

A A decrease in direct taxes on company profits

Question 9

4(a) Define the term ‘price level’. (1)

Answer 9

Price level is the average of the current prices of
goods and services in the economy
CPI or RPI

Question 10

4b Annotate the diagram above to show the likely impact of government policy to
promote a business competition on the equilibrium level of real output and price
level. (2)

Answer 10

rightward shift of LRAS
equilibrium point showing lower price
level and higher real output

Question 11

4c Which one of the following is an interventionist supply-side policy? (1)
A An improvement in infrastructure
B An increase in indirect taxation
C An increase in interest rates
D An increase in the regulation of markets

Answer 11

A An improvement in infrastructure

Question 12

5a Which one of the following is the most likely impact of an increase in average UK
house prices on existing homeowners?
(1)
A Greater confidence
B Higher income
C Lower consumption
D Negative wealth effect

Answer 12

A Greater confidence

Question 13

(b) Using 2014 as the base year, calculate the index number for
(2)
(i) 2015
ii 2016

Answer 13

2015: (200 141/189 709) x 100 = 105.5 or 106
2016: (215 127/189 709) x 100 = 113.4 or 113

Question 14

5(c) Define the term ‘index number’. (1)

Answer 14

An economic data figure that reflects price/quantity compared with the base year

Question 15

6 (a) With reference to the first paragraph of Extract A and Figure 1, explain how the
change in the exchange rate of the pound has ‘contributed to rising inflation (Extract A, line 4).
(4)

Answer 15

= Decreasing the exchange rate causes imports to be more expensive leading to cost-push inflation and exports to be cheaper leading to demand-pull inflation.
- Inflation has increased by 1 percentage point since the start of 2017
- UK is a net importer of food that has a relatively inelastic demand

Question 16

6b With reference to Extract A, explain two likely economic effects of the higher rate of UK inflation. (6)

Answer 16

MPC raises the base rate of interest. Base rate of interest increased by 0.25 percentage points to 0.5% in November 2017 In order to combat inflation, central banks may raise interest rates to reduce the money supply and cool down economic activity. Higher interest rates can lead to increased borrowing costs for consumers and businesses, which can reduce investment and spending. This can also lead to a reduction in the demand for credit, which can impact the growth of the economy.

An increase in income inequality causes low fixed-income households to be left with very little money to spend on luxuries. As people on low fixed incomes spend a large proportion of income on necessities

Question 17

6c (c) With reference to the last paragraph of Extract A and Figure 2, explain one reason
why it is necessary to regularly update the CPI basket of goods and services.
(5)

Answer 17

CPI is an aggregate price of goods and services in an economy - averaging 700 most commonly used goods that are weighted in their popularity. To adjust the weightings of the CPI, it should be regularly updated to reflect livings costs on this which we buy most. application, move towards non-dairy products. application, move towards gluten free. Consumer tastes change frequently, so the CPI must be weighted annually - if not even more frequently for a better number. Inflation is crossed the target, better make it representative.

Question 18

(d) With reference to Figure 3, assess the likely impact of the change in the value of
exports, since mid-2016, on the economic growth of the UK. Use an aggregate
demand and aggregate supply diagram in your answer.
(10)

Answer 18

Firstly, the increase in the value of exports since mid-2016 will increase economic growth. AD increases from AD1 to AD2 because AD takes into account the positive current account - when exports exceed imports. This will coincide with an increase from y1 to y2. In Figure 3, exports increase from 45% in mid-2016 to 50% at the beginning of 2018. Therefore, economic growth indicative of AD increasing real GDP output will result from an increase in exports.

Secondly, an increase in exports will increase the value of the multiplier. Exports are injections into the circular flow. Define the circular flow. And the increase in injections increases the value of the multiplier; the multiplier is calculated by the initial injection/change in GDP. GDP increased from 1.8 to 2 from 2016 to 2017 along with exports - meaning the increase in exports had an effect on increasing the multiplier.

However, it could be argued that exports are a low portion of GDP and will not heavily influence it. Investments and consumption make up 60% of GDP and exports are barely 5% of its amount and calculation. The extract mentions economic growth is expected to rise with investment. This is why after 2017, there as not been a severe increase in exports, but mainly before hands. Also, the extract does not have five numerical data on imports which ultimately impacts GDP.

Question 19

(e) With reference to Figure 4, Extract B and your own knowledge, discuss the
limitations of using GDP data to compare living standards between the UK and
developing countries.
(15)

Answer 19

igure 4 mentions that economic growth in a developed country like the UK is lower than developing countries in recent years. This affirmed as the extract mentions the “quality of life is not measured”. This is a basket of goods approach to measuring comparisons in living standards and GDP. Goods that have better quality in the UK may be priced higher than that of a developing country.

However, dividing GDP by the population gives GDP per capita. This gives an idea of the average quality of life in all countries - saying how much, on average a person has. Also, quality is subjective to consumer’s wants, and resources to satiate them is the economic problem - which is equivalent in both countries. Seen through GDP per capita.

Question 20

Evaluate the use of interest rate changes as a means of controlling UK inflation.
(20)

Answer 20

interest rates are an effective way of controlling inflation because they influence the rate of borrowing and investment. Investment and consumption will increase as a result of interest rates because consumers and firms are incentivised by the lower rates of return.

Thirdly, interest rates determine the housing mortgages - high and low - with respect to income. However it is only suggested by Bank of England as a base-rate and many mortgages are on fixed rates.

In a situation of high inflation, monetary policy can have a key role to play. The standard response of a central bank would be to raise official interest rates. This is an example of a contractionary or deflationary policy. Higher interest rates reduce aggregate demand, leading to a slower rate of economic growth and (eventually) lower demand-pull inflation. For example, higher interest rates might makes mortgages on property more expensive to service which has the effect of dampening down the rate of growth of house prices via a fall in housing demand.

Higher interest rates squeeze aggregate demand and can help reduce the size of a positive output gap. As part of monetary policy, the central bank might also Introduce a lower inflation target: Many countries have an inflation target (e.g. UK CPI inflation target of 2%). One argument in support of this is that if consumer and businesses believe the inflation target is credible, then it will help to lower inflation expectations. And if inflation expectations are reduced, it becomes easier to control inflation because fewer people will be asking for hefty wage increases

Supply-side policies are measures designed to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs and therefore helping to control inflation. These policies might include government tax relief for business investment and also state funding to fast-forward major infrastructure projects in sectors such as transport, energy and power supply, telecoms and health care. Ultimately, if supply-side policies provide successful, then more new firms will enter markets (increasing industry supply and driving down prices) and labour productivity will increase helping to control the unit costs of businesses so that fewer of them are under pressure to raise prices. Effective supply-side policies lead to an outward shift of the long-run aggregate supply curve and help provide the conditions for a period of non-inflationary growth. However, they are unlikely to have much effect on the rate of inflation in the short term. In this sense, monetary policy has a more important role to play in controlling price increases.