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]
