Macroeconomics Section A Flashcards
Which one of the following is the most likely impact of an increase in the base
interest rate?
A decrease in the:
A. level of demand pull inflation
B. marginal propensity to save
C. rate of cyclical unemployment
D. value of the pound against the dollar
A. level of demand pull inflation
Explain one likely reason for the fall in the UK’s rate of unemployment from Dec 2020 to June 2020. [4 marks]
Kn (2)
* Increase in AD (1) leading to an increase in actual growth (1)
* Increase in consumption (1) increasing demand for goods and services in the UK (1)
* Increase in government spending (1) creating more demand in the UK (1)
* Depreciation of the pound (1) increasing demand for UK exports (1)
An (1)
Linked development, e.g.
* Firms will need to hire more staff to meet higher demand (1) // Derived demand for labour (1)
* Firms that previously struggled to recruit staff are now available to fill those job vacancies (1)
* Fall in the output gap (1)
Ap (1)
[Refer to the extract / data given]
Explain one likely cost of UK real GDP falling by 9.9% in 2020. [2 marks]
Kn (1)
* Increase in unemployment (1)
* Reduction in government tax revenue (1)
* Reduction in investment from firms (1)
* Fall in living standards (1)
An (1)
Linked development, e.g.
* As there is less demand so firms will look to reduce their costs (1)
* From consumers working less/firms making less profits (1)
* Due to a drop in demand for goods and services (1)
Which one of the following is most likely to lead to an increase in potential
economic growth?
An increase in:
A. consumption
B. costs of raw materials and energy
C. income tax
D. technological advances
D. technological advances
Which one of the following is an example of consumption?
A. Construction of a new cycle lane
B. Expansion of Heathrow Airport
C. New school buildings
D. Purchase of new clothes
D. Purchase of new clothes
Explain the likely effect of a fall in the marginal propensity to consume on the level of real GDP. Refer to the multiplier in your answer. [4 marks]
Ap (3)
* GDP is likely to fall (1)
* [Refer to the data given] (1)
* [Diagram of multiplier] (1)
* Multiplier is where the initial money spent can lead to a larger change in AD levels (1)
An (1)
Linked development, e.g.
* Development of multiplier formula/explanation e.g. second round effects (1)
* Reduction in the value of the multiplier (1)
* An increase in withdrawals from the circular flow of income (1)
* Other factors may change e.g. savings, government spending (1)
Explain the relationship between a fiscal deficit and the national debt. [2 marks]
Kn (2)
* There is a positive relationship (1)
* Fiscal deficit is where government spending is greater than tax revenue (1)
* National debt is the total accumulated debt of the government (1)
* A fiscal deficit means that a country’s national debt will be increasing (1)
* A fiscal deficit will be adding to the total value of a country’s national debt (1)
* Higher debt means increased government spending on interest payments (1)
Which one of the following is the most likely consequence of an increase in the US national debt?
An increase in:
A. crowding out
B. inequality
C. poverty
D. unemployment
A. crowding out
What are the three injections into the circular flow of income?
Investment
Government Spending
Exports
What are the three withdrawals from the circular flow of income?
Saving
Taxation
Imports
Define circular flow of income
A model that illustrates the movement of income and expenditure between households, businesses and other entities within the economy
Explain the likely impact of an increase in average house prices on UK consumption. [4 marks]
Kn (2)
* Wealth effect: homeowners are wealthier (1)
* Increase in UK consumption (1)
* Mortgage equity withdrawal (1)
OR
* Reduced consumption (1) as consumers spend more (1) in order to be able to afford a deposit for a house (1)
An (1)
Linked development, e.g.
* Increased consumer confidence (1)
* Consumers are less likely to save (1)
Ap (1)
[Refer to figures or extract]
Explain the likely impact of a reduction in the base interest rate on UK investment. [4 marks]
Kn (2)
* Investment will increase (1)
* Lower costs of borrowing (1)
An (1)
Linked development, e.g.
* Firms are more incentivised to borrow money (1)
* Investments financed by borrowing are more profitable (1)
* Costs of production fall for firms (1)
Ap (1)
[Refer to figures or extract]
Which one of the following would be most likely to result from lower base interest rates?
A fall in:
A. the average price of houses
B. the external value of the pound
C. the level of employment
D. the rate of economic growth
B. the external value of the pound
(Foreign investment returns on UK assets fall, increased supply of pounds)
At a positive output gap on a trade cycle graph, what is most likely to occur?
An increase in:
A. absolute poverty
B. budget deficit
C. cyclical unemployment
D. inflation
D. inflation
Explain the difference between automatic stabilisers and discretionary fiscal policy with reference to the trade cycle diagram. [4 marks]
Kn (3)
* Automatic stabilisers means government spending/taxation vary without direct government decision-making (1) over the course of the economic cycle (1) through variables built into the welfare support (1)
* Discretionary fiscal policy – deliberate alteration of government expenditure/taxation (1) designed to achieve its economic objectives (1)
Ap (1)
* In a positive output gap you would expect less government spending/more tax revenues as part of automatic stabilisers (1)
* In a negative output gap you would expect more government spending/less tax revenues as part of automatic stabilisers (1)
* Discretionary fiscal policy could occur at any point on the trade cycle (1)
Explain one role of financial markets. [4 marks]
Kn (2)
* To lend to businesses and individuals (1) to help them consume/invest (1)
* To facilitate the exchange of goods and services (1) increasing consumption/investment (1)
* To facilitate saving (1) so consumers can build up money to purchase expensive items (1)
* To provide forward markets (1) so firms can reduce the risk of fluctuating prices (1)
* To provide a market for equities (1) so firms can seek investment from shareholders (1)
An (1)
Linked development, e.g.
* Helps to boost AD/increase economic growth (1)
* Loans allow firms to grow/expand more quickly (1)
* Firms can invest in innovation (1)
* Increase in productivity (1)
* Businesses will already have accounts, loans, etc. with banks so the banks were in a position to quickly issue these loans to their customers (1)
* Loans provided finance for firms suffering a drop in demand (1)
* Impact on housing market (1)
* Importance of saving to help development (1)
* Bonds to finance government spending (1)
Ap (1)
[Refer to figures or extract]
Which one of the following would be a risk if ‘only minimal checks were made on borrowers’ in a loan scheme where small businesses are given money to survive economic downturns?
A. Asymmetric information
B. Crowding out
C. Market rigging
D. Speculation
A. Asymmetric information
Explain the likely impact on aggregate demand of a fall in average house prices. [2 marks]
Kn (1)
* Aggregate demand will fall / decrease (1)
An (1)
Linked development, e.g.
* Negative wealth effect (1)
* Reduction in consumer confidence and consumption (1)
Explain the likely impact of a depreciation in the exchange rate of the pound on the UK current account
of the balance of payments. [4 marks]
Kn (2)
* UK current account would improve/reduction in deficit (1)
* Increase in exports (1)
* Decrease in imports (1)
An (1)
Linked development, e.g.
* UK exports become more competitive (1)
* UK exports appear cheaper to US consumers (1)
Ap (1)
[Refer to figures or extract]
Explain one likely impact of the HS2 project on aggregate supply in the UK. [4 marks]
Kn (2)
* Aggregate supply will increase (1)
* Improvement in UK’s infrastructure (1)
* Increase in productivity/efficiency of UK economy (1)
An (1)
Linked development, e.g.
* Faster journey times means people can get to work quicker, increasing their productivity (1)
* Moving freight more quickly will increase efficiency for firms (1)
Ap (1)
[Refer to figures or extract]
Government spending on the High Speed 2 rail link is an example of which of the
following?
A. Automatic stabilisers
B. Capital expenditure
C. Current expenditure
D. Transfer payments
B. Capital expenditure
Explain one reason why Purchasing Power Parities are used. [2 marks]
Kn (1)
* To improve accuracy when comparing data between countries (1)
An (1)
Linked development, e.g.
* PPP compares cost of living / buying power between different countries (1)
* PPP is calculated by comparing the price of a basket of comparable goods and services in different countries (1)
Explain the term ‘real gross domestic product’. [2 marks]
Kn (2)
1 mark for explaining ‘real’, e.g.
* Taking inflation into account (1)
* Adjusted for inflation (1)
* Removing the effects of inflation from the data (1)
1 mark for explaining GDP, e.g.
* Total output of the economy (1)
* Total income of the country (1)
* Total expenditure of the country (1)
Explain how the multiplier process leads to an increase in aggregate demand. [4 marks]
Kn (2)
* Multiplier effect is where an initial change in aggregate demand leads to a greater final impact on equilibrium national income (1)
* Injection of money goes round the circular flow multiple times and creates knock-on effects in the economy (1)
* Understanding of a multiplier formula: Multiplier = 1 / (1 - MPC) (1) // 1 / MPW (sum of MPT, MPS and MPM)
An (1)
Linked development, e.g.
* One person’s spending is another person’s income (1)
* Eventually all money is withdrawn/leaked out of the circular flow of income (1)
Ap (1)
[Refer to figures or extract]
Explain the marginal propensity to consume (MPC). [2 marks]
Kn (2)
* A measure of the increase in income a person or household spends on goods and services (consumption) rather than saving it (1)
* The formula for MPC is MPC = Change in consumption / Change in income (1)
What factors affect the MPC?
Income level
Consumer confidence
Interest rates
Availability of credit
Explain the role of the IMF in providing financial assistance to countries. [4 marks]
Kn (2)
* Enabling growth/prevent recession (1)
* Providing temporary loans/credit (1)
* Promoting economic stability (1)
* Promoting international monetary cooperation (1)
* Promoting exchange rate stability (1)
An (1)
* Countries un need relied on IMF as it would be too risky for financial markets to lend to them (1)
* IMF will insist on reforms to economy as part of financial assistance (1)
Ap (1)
[Refer to figures or extract]
Which one of the following is most likely to happen to a country’s currency value as a result of capital flight, assuming it is operating with a floating exchange rate system?
A. Appreciation
B. Depreciation
C. Devaluation
D. Revaluation
B. Depreciation
Explain one likely reason for the increase in the number of people unemployed in the UK from 2017 to 2018. [2 marks]
Kn (1)
* Uncertainty over the process of leaving the EU (1)
* Closure of high street shops (1)
* Falling incomes (1)
* Increased automation (1)
* Slower economic growth (1)
* Business expectations (1)
An (1)
Linked development, e.g.
* Uncertainty discourages firms from expanding/investing into their businesses (1)
* High street shops employ large numbers of people in the UK and with sales moving online jobs tend to be lost permanently (1)
* Lower incomes lead to lower consumption so less demand for labour (1)
Which one of the following types of unemployment is most likely to be caused by a technological change in an industry?
A. Cyclical
B. Real wage
C. Seasonal
D. Structural
D. Structural
Which one of the following would be most likely to solve a negative output gap problem in a domestic economy?
An increase in
A. government funding to the World Bank
B. government spending on foreign aid
C. government spending on public transport
D. income tax
C. government spending on public transport
Which one of the following would be most likely to cause an increase in credit card lending?
A. A fall in interest rates
B. A fall in investment
C. An increase in the deficit on the current account of the balance of payments
D. An increase in savings
A. A fall in interest rates
Explain one possible link between an increase in credit card lending and the rate of inflation. [2 marks]
Kn (1)
* Rise in inflation
An (1)
Linked development, e.g.
* due to a rise in AD (1)
Which one of the following would be an example of government spending on infrastructure?
An increase in
A. construction work on new railway lines
B. interest payments on the national debt
C. salaries for teachers
D. unemployment benefit payments
A. construction work on new railway lines
Explain one likely reason for Estonia’s unit labour costs rising faster than in other European countries in 2017. [2 marks]
Kn (1)
* Increase in the national minimum wage (1)
* Power of trade unions (1)
* Shortage of labour (1)
* Faster economic growth in Estonia (1)
* Lower labour productivity in Estonia (1)
* Lower unemployment in Estonia (1)
An (1)
Linked development, e.g.
* Workers able to negotiate higher pay due to low unemployment (1)
Explain how Estonia’s competitiveness could be affected by rising unit labour costs. [2 marks]
Kn (1)
* Reduced competitiveness for Estonia (1)
An (1)
Linked development, e.g.
* Rising labour costs leads to Estonia’s exports becoming more expensive than those of other countries such as France (1)
The UK Government is planning to cut the rate of corporation tax on all pre-tax profits of companies to 17% by 2020.
This would be an example of:
A. a contractionary monetary policy
B. an exchange rate policy
C. an expansionary monetary policy
D. a supply-side policy
D. a supply-side policy
Explain one possible reason why the revenue from corporation tax could increase if the government cuts the rate of corporation tax. [2 marks]
Kn (1)
* Increase in firms choosing to base themselves in the UK (1)
* Increase in investment by UK firms, leading to increased profits (1)
* Reduced tax evasion / avoidance (1)
An (1)
Linked development, e.g.
* With more firms locating in the UK, there will be more firms paying UK corporation tax (1)
* A labelled Laffer curve (1)
Explain the distinction between income and wealth. [2 marks]
Kn (1)
Definition of income (1) and/or wealth (1)
* Income comes from salary/wages/dividends/profit/interest (1) whereas wealth is a value of assets (1)
* Income is a flow (1) whereas wealth is a stock (1)
* Income can create wealth (1) and/or wealth can create income (1)
Explain one likely reason why global wealth inequality has increased. [2 marks]
Kn (1)
* Lack of government intervention to reduce inequality (1)
* Government policy e.g. regressive taxes, corruption (1)
* Wars in developing countries (1)
* Inheritance entrenches inequality (1)
* Rise in asset prices (1)
* Lack of education (1)
* Lack of healthcare (1)
* Rise of MNCs (1)
* External shocks (1)
An (1)
Linked development, e.g.
* Poor education means people lack the skills to take on higher-paying jobs which could lead to wealth creation (1)
* Wars in developing countries destroys wealth stocks of the poorest in the world, increasing inequality (1)
Which one of the following would be most likely to reduce a country’s Gini coefficient?
An increase in:
A. import tariffs
B. progressive taxes
C. regressive taxes
D. value added tax
B. progressive taxes
What does a higher Gini coefficient indicate?
Greater income disparity, increased concentration of wealth
With reference to the theory of comparative advantage, explain how CETA (Comprehensive Economic and Trade Agreement, reducing trade barriers between the EU and Canada) may increase the GDP of both the EU and Canada. [4 marks]
Kn (2)
* Countries specialise in the goods in which they have a comparative advantage (1) lower opportunity cost (1)
* Through trade each country can now consume more in total as they focus on what they can produce more efficiently (1)
* Movement to freer trade thanks to CETA agreement (1)
* Identification of concept with numerical or diagrammatic example (1)
An (1)
Linked development, e.g.
* Countries are now producing/consuming more so this means an increase in GDP (1)
* Explanation of numerical or diagrammatic example (1)
Ap (1)
* Related to Europe/Canada, e.g. Canadian timber exports, EU car exports, or other relevant examples (1)
Which one of the following is most likely to decrease as a result of CETA (Comprehensive Economic and Trade Agreement, reducing trade barriers between the EU and Canada)?
A. Economic growth in EU countries
B. Exports from EU countries to Canada
C. Imports from Canada to EU countries
D. Tariffs on European exports to Canada
D. Tariffs on European exports to Canada
Which one of the following would be most likely to cause aggregate demand to
increase?
A fall in:
A. government spending
B. net trade (X–M)
C. the marginal propensity to consume
D. the marginal propensity to save
D. the marginal propensity to save
Explain the term ‘current account of the balance of payments’. [2 marks]
Kn (2)
* Measures total value of exports – total value of imports (1)
* Inflows minus outflows in money terms (1)
* Reference to four parts of the current account: trade in goods, trade in services, primary income, secondary income (1)
Explain one likely reason why the UK’s 2019 budget surplus target was abandoned in 2016.
Kn (1)
* Fall in UK economic growth (1)
* Reduction in UK business confidence (1)
An (1)
Linked development, e.g.
* Fall in growth means economy may need more government support for longer to ensure stable growth (1)
* Less business confidence likely to lead to less private sector investment and so government may need to counteract this (1)
Explain the likely impact of abandoning the budget surplus target on the UK national debt. [2 marks]
Kn (1)
* National debt will continue to increase (1)
An (1)
Linked development, e.g.
* Running a budget deficit means expenditure is greater than tax revenue (1)
* Government will have to finance a budget deficit by borrowing money (1)
If a government takes decisions to target a budget surplus, this is an example of:
A. contractionary monetary policy
B. discretionary fiscal policy
C. expansionary fiscal policy
D. expansionary monetary policy
B. discretionary fiscal policy
Explain one likely reason why consumer demand for bank loans increased from 2014 - 2016. [2 marks]
Kn (1)
* Lower interest rates (1)
* Increase in consumer confidence (1)
An (1)
Linked development, e.g.
* Lower interest rates makes loans more affordable (1)
* High consumer confidence encourages consumers to borrow believing they can repay in the future (1)
Which one of the following is most likely to result from an increase in bank lending to individuals?
A. An improvement in net trade (X–M)
B. An increase in consumption
C. An increase in unemployment
D. Deflation
B. An increase in consumption
Which one of the following types of unemployment best explains the rise in the percentage of those economically active from 2008 to 2010?
A. Cyclical
B. Frictional
C. Seasonal
D. Voluntary
A. Cyclical
Explain one possible reason for the fall in the marginal propensity to save from 2010 to 2015. [2 marks]
Kn (2)
* The decrease in the mps reflects a rise in the marginal propensity to consume (1) due to rising consumer confidence (1)
* Decrease in mps due to rise in marginal propensity to tax (1) to reduce the budget deficit (1)
* Low interest rates (1) reduces the incentive to save as there is a lower rate of return (1)
Explain the likely effect of a fall in the marginal propensity to save on the value of the multiplier if other things remain equal. [2 marks]
Kn (2)
* The value of the multiplier is likely to increase (1), due to a decrease in withdrawals (1).
An economy has marginal propensity to save of 0.1, marginal propensity to tax of 0.2 and marginal propensity to import of 0.1. What is the size of the multiplier?
A. 0.4
B. 0.6
C. 1.7
D. 2.5
D. 2.5
Explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index. Refer to the concept of weights in your answer. [4 marks]
Kn (2)
* Inflation rate measures change in average prices in an economy over a year (1)
* A representative basket of goods and services used by average households is recorded (1)
* A survey of average prices is recorded (1)
* Reference to a base year (1)
* Reference to Family/Household/Consumer Expenditure Survey (1)
An (1)
Linked development, e.g.
* Items are weighted according to the proportion of spending on each product (1)
Ap (1)
[Refer to extract or figures]
Explain one likely reason for the fall in UK income inequality since 2007. [4 marks]
Ap (3)
[Refer to extract or figures]
* Global Financial Crisis in 2008 (1)
* Changes in taxation and / or government policies (1)
An (1)
Linked development, e.g.
* Inequality fell due to falling incomes at top of the distribution (1)
* Inequality fell due to increases in benefits at very bottom of the distribution. (1)
* Inequality constant due to wage/benefit freezes (1).
Which one of the following values for the Gini coefficient is correct if there is perfect income equality?
A. 0
B. 0.5
C. 1
D. 50:50
A. 0
What would be the value of the Gini coefficient if there was a maximum amount of income inequality in a country?
1
Explain two limitations of using the HDI to compare levels of development between countries and over time. [4 marks]
Kn (2)
* ignores qualitative factors, such democracy, quality of education or human rights for example (1)
* ignores other measures ranging from gender equity, proportion of workforce in agriculture to environmental
biodiversity (1)
* ignores income distribution (1)
* PPP values change very quickly and are likely to be inaccurate or misleading (1)
An (1)
Linked development
Ap (1)
[Refer to extract or figures]
