A-level Economics Tutor

The circular flow, national income and the multiplier Theme 2

Where it is examined
A-level Paper 2 (and Paper 3); AS Paper 2
Level
AS and A level
Specification
Section 2.4, 4 statements
Since 2016
51 question parts: 5 essays, 9 levels-marked responses, 9 multiple-choice items

Notes and key-term cards for this topic are being written by our tutors. The past-paper questions below are ready now.

Specification statements

Every essay set on this topic

SeriesPaperQMarksTitle
June 2022Paper 31(e)25Evaluate the microeconomic and macroeconomic effects of significant increases in the minimum wage. Refer to restaurants or other food delivery services in your answer.
June 2018Paper 2725In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years. Evaluate the likely economic effects of this planned increase in government expenditure.
June 2018Paper 31(e)25With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops.
June 2017Paper 2825Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016. Evaluate the likely macroeconomic consequences of a significant fall in global oil prices.
June 2017Paper 31(e)25With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment.

Past-paper questions

Print this topic as a pack

Tap a question to zoom it. The data and extracts fold out above each question; the mark scheme and examiner's comment open underneath.
June 2025 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 In 2023 the UK government reduced indirect tax on certain goods and services.
(b) Annotate the aggregate demand (AD) and short-run aggregate supply (SRAS) diagram below to show the likely impact of a reduction in indirect tax on the equilibrium level of real output and the price level. (2) Price level SRAS P1 AD Y1 Real output
June 2025 · Paper 2 · Q6(d) 12 marks AO1=2, AO2=2, AO3=4, AO4=4 12-mark response
Data and extracts for question 6Sources for use with SECTION B Read the following figures (1–2) and extracts (A and B) before answering Question 6. Question 6 The German economy Figure 1: German government tax revenue, % of total revenue, 2022 2%2% 4% Income taxes 6% Value added tax Petrol duty 9% Corporation tax 41% Tobacco duty Motor vehicle tax Other 36% (Source adapted from: https://www.bundesfinanzministerium.de) Figure 2: German government budget, % of GDP, 2014–2022 1.9 2 1.5 1.2 1.3 % of 1 0.6 GDP 0 –2 –2.6 –4 –3.7 –4.3 –6 2014 2016 2018 2020 2022 (Source adapted from: https://tradingeconomics.com/germany/government‑budget) Extract A The opportunities and challenges facing the German economy The German economy entered a recession in 2023, and business confidence in the country fell at the fastest pace since 2021. German growth was the lowest among major economies in 2023. The future, however, is a greater concern owing to external factors such as global conflicts and restrictions on free trade. 5 The German government has been trying to improve its economic performance, with an aim to have renewables account for 80% of its energy supply. However, this would be a major shift for Germany where fossil fuels such as coal and gas still provide 75% of the energy needs and exposes it to volatile global energy prices. The rapid building of liquid natural gas terminals has helped to secure energy supplies in the short term. 10 The German government needs to remove a number of problems that have long held back its economy. Infrastructure projects in renewable energy production, such as wind farms, have been delayed by lengthy planning procedures. Business leaders complain of excessive bureaucracy and lack of technological advances. Labour shortages are another issue. Germany is expected to be short of up to 7 million workers by 2035, partly due to 15 an ageing population. There is a lack of skilled workers in the building trade, electrical engineering and professional services, which are important for the country’s economic ambitions. The German government needs to introduce effective policies such as planning reforms to speed up construction projects or reforms to increase the flexibility of the labour market. 20 The German economy has long been one of the biggest exporters in the world. It has trade surpluses with all its major trading partners except China and in 2021 its current account surplus was 7.7% of GDP. However, this has caused tensions with the governments of other countries, in particular the USA, which sees Germany’s surplus as partly a cause of the USA’s huge current account deficit. Having said that, a weakening 25 euro caused by higher interest rates in the USA compared to the Eurozone is beginning to have an effect in reducing Germany’s current account surplus – which dropped to 4.2% in 2022. (Source adapted from: https://www.ft.com/, https://www.cnb.cz/en/monetary‑policy/inflation‑reports/boxes-and-annexes-contained-in- inflation-reports/The-German-economy-and-the-dollar-euro-exchange-rate, and https://tradingeconomics.com/germany/current-account-to-gdp) Extract B US technology firm Intel invests in German semiconductor factories Intel is to double its investment in semiconductor factories in eastern Germany to €30 billion. This is the largest foreign direct investment in Germany’s history. Intel acquired the land for the factories in November 2022 and the first factory is expected to start production within four to five years. The site is expected to create 7 000 construction 5 jobs during the building phase, about 3 000 permanent high‑tech jobs and tens of thousands of additional jobs across the semiconductor industry. (Source adapted from: https://www.ft.com)
(d) With reference to Extract B, discuss the impact of the planned investment by Intel in a new semiconductor factory on Germany’s aggregate demand. Use an aggregate demand and aggregate supply diagram in your answer. (12)
June 2025 · AS Paper 2 · Q6(e) 15 marks 15-mark response
Data and extracts for question 6Sources for use with SECTION B Read Figures 1 and 2 and Extract A before answering Question 6. UK living standards and supply‑side policies Figure 1: UK rate of economic growth, 2010 to 2028 10.0 % 7.5 5.0 2.5 0 –2.5 –5.0 –7.5 –10.0 * Data from 2023 to 2028 are forecast figures (Source: adapted from https://www.statista.com/statistics/375195/gdp-growth-forecast-uk/) Figure 2: UK inflation rate* and base interest rate, January 2022 to October 2023 12 % 10 8 6 4 2 0 inflation rate base interest rate * Measured by Consumer Prices Index (CPI). This is the year-on-year inflation rate calculated monthly. (Source: adapted from www.statista.com and www.tradingeconomics.com) Extract A Economic reforms Economists forecast that the UK will experience a slower rate of economic growth between 2024 and 2028. They also expect a high rate of inflation due to rising import prices of food, fuel and energy, and a strong demand for consumer goods. As a result, real income per household is estimated to decrease by around 0.9% in 2024. 5 This decrease would be the largest reduction in living standards since the Office for National Statistics records began in the 1950s. However, the UK government argues that there are some limitations of using GDP to compare living standards over time. One main reason is the fact that GDP figures are in nominal terms. The government questions the reliability of inflation data as it 10 believes that the Monetary Policy Committee (MPC) of the Bank of England will keep a high base interest rate to control inflation. The government also claims that the forecast by economists fails to consider the market-based supply-side policies it introduced in November 2023 to improve living standards. The government’s £10.4 billion cut to National Insurance contributions for employees 15 is the most significant policy, expected to increase employment and living standards. It is forecast to bring additional people into work and encourage more people to work longer hours. This is likely to result in an extra 94 000 full-time workers. The government has also taken measures to encourage more out-of-work benefits claimants into jobs. It introduced stricter benefit rules for people who can work but 20 do not take a job offered to them. This includes stopping people’s benefits if they do not actively engage in seeking employment in six months. This is likely to result in a further increase in employment figures. But economists claim that its impact on GDP will be relatively insignificant. This is because most of those affected by this policy will take on work with limited hours and very low pay. 25 These market-based supply-side policies, combined with measures centred on childcare subsidies for working parents, are expected to increase total employment by 200 000 between 2024 and 2028. The government argues that the expected increase highlights that it is better to “unlock the potential we have at home”, rather than encouraging migration. However, several economists suggest that 30 a rise in net migration is contributing more to an increase in the UK’s potential economic growth. Furthermore, the UK government’s decision to offer 100% tax relief on investment in capital machinery will increase overall investment by 0.5% by 2028. The benefits of 35 this effective tax cut for firms are estimated to increase over time, as technology advances and productivity improves. However, this tax cut will not prevent business investment falling in the short term, as higher interest rates are making it more expensive for firms to borrow. Economists suggest that this tax cut can only be funded by decreasing government 40 expenditure on public services in the long run. Government expenditure will need to decrease by a third, as a proportion of GDP, between 2024 and 2028. (Source: adapted from https://www.ft.com/content/5ff3538b-aed2-4898-b423- f0c61da728ff)
(e) Discuss the likely macroeconomic effects of a decrease in government expenditure on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer. (15)
June 2024 · AS Paper 2 · Q2(a) 1 mark AO1=1 Definition Hard
Data and extracts for question 22 In 2019 the marginal propensity to consume in the UK was estimated to be 0.8.
(a) Define the term ‘marginal propensity to consume’. (1)
June 2024 · AS Paper 2 · Q2(c) 1 mark Multiple choice
Data and extracts for question 22 In 2019 the marginal propensity to consume in the UK was estimated to be 0.8.
(c) Using the above data, which one of the following represents the value of the multiplier? (1) A 0.2 B 0.8 C 1.3 D 5.0
June 2024 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 Business investment fell by 0.5% between Quarter 3 2019 and Quarter 4 2019. (Source: adapted from https://www.ons.gov.uk)
(b) Annotate the aggregate demand (AD) and short-run aggregate supply (SRAS) diagram below to show the likely impact of a fall in business investment on the equilibrium level of real output and the price level. (2)
June 2024 · Paper 2 · Q4(b) 4 marks AO1=2, AO2=2 Calculation
Data and extracts for question 44 Real GDP Trend GDP growth C Actual GDP growth D A B Time
(b) In July 2020 a survey estimated that the marginal propensity to consume in the UK was 0.1. (Source: adapted from https://ifs.org.uk/uploads/WP202035-MPCs-through- COVID-spending-saving-and-private-transfers.pdf) Calculate the total increase in aggregate demand from an increase in government spending of £60 million. (4)
June 2024 · AS Paper 2 · Q6(b) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response
Data and extracts for question 6UK monetary policy since the Global Financial Crisis of 2008 Figure 1: UK inflation rate (as measured by the Consumer Prices Index) and UK nominal wage growth, annual percentage change, 2008 to 2019 5 % 4 Nominal wage growth 3 Inflation rate 2 1 0 –1 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 (Source: adapted from ONS) Figure 2: UK real GDP, annual percentage change, Q4 2006 to Q4 2019 2 % 1 0 -1 -2 -3 -4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2006 2008 2010 2012 2014 2016 2018 (Source: adapted from https://www.ons.gov.uk/economy/ grossdomesticproductgdp/timeseries/ihyq/qna) Extract A Has monetary policy worked? Between 2008 and 2009, financial markets around the world were crashing and many UK banks were adversely affected by the collapse of the housing market. This reduced access to credit for UK households and businesses. Faced with these large risks, the Monetary Policy Committee (MPC) of the Bank of 5 England reduced the base interest rate from 5.25% in February 2008 to 0.5% in March 2009. The MPC had known that reducing the base interest rate was not enough alone. It drafted the use of a new idea: quantitative easing (QE). It had bought assets worth £200 billion by November 2009. This QE was later implemented by the USA’s Federal 10 Reserve, and was claimed to be a success. In July 2012 the total spent on QE in the UK amounted to £375 billion. This decision has been credited with preventing the recession, caused by the Global Financial Crisis of 2008, turning into another Great Depression. The UK’s unemployment rate peaked at 8.5% in 2009 but had fallen to 4% in 2019, the lowest since the mid-1970s. 15 In 2016 the MPC further expanded its QE programme by £60 billion and reduced the base interest rate to 0.25%. Households with mortgages benefitted from the low interest rate, enabling them to continue consumption and therefore helping economic recovery. Nevertheless, this has resulted in a rise in household debts. Borrowing on credit cards and personal loans has increased above the levels seen before 2008. 20 Inflation caused by the fall in the exchange rate of the British pound, higher employment levels and nominal wage growth has since directed the MPC to increase base interest rates. It increased the base interest rate to 0.5% in November 2017, and then to 0.75% in March 2018. However, the uncertainty around the UK’s future trade relationship with the EU has meant that increases in the base interest rate were only marginal. 25 Many economists believe that if the UK and the EU are unable to form a trade agreement, base interest rates would need to be decreased again and QE expanded. Conversely, a few economists have argued that QE is no longer effective as a monetary policy instrument. They indicated that the base interest rate was usually reduced by as much as 5% during previous recessions. This is more than the UK can currently manage. Therefore 30 it would also require the government to implement a fiscal policy to deal with any future economic downturn. The Bank of England is, nonetheless, preparing for the worst-case scenario of a recession deeper than the downturn after the Global Financial Crisis of 2008. (Source: adapted from ‘The verdict on 10 years of quantitative easing’, Richard Partington, The Guardian, https://www.theguardian.com/business/2019/ mar/08/the-verdict-on-10-years-of-quantitative-easing)
(b) Assess the likely impact of an increase in real wages on the UK economy. Use an aggregate demand and aggregate supply diagram in your answer. (10)
June 2024 · Paper 3 · Q2(c) 12 marks AO1=2, AO2=2, AO3=4, AO4=4 12-mark response
Data and extracts for question 2Ghana – cocoa and chocolate production Figure 3: World’s largest cocoa growers and chocolate producers Cocoa growers Chocolate producers Ivory Coast 46% Germany 17% Ghana 18% Belgium 11% Indonesia 14% Italy 7.4% Nigeria 7% US 7.2% (Source: adapted from International Cocoa Association www.icco.org December 2021 and The Telegraph.co.uk accessed 24/2/22) Extract D From a managed to a floating exchange rate Ghana’s currency, the cedi, has depreciated significantly against major currencies, especially the US dollar (US$), since the adoption of the floating exchange rate system in 1992. From 1983 to 1992 it operated a managed exchange rate. Since the liberalisation of the foreign exchange market there have substantial swings and on average the cedi has 5 depreciated 98% against the US dollar. The cedi to US dollar rate has been very volatile recently, causing macroeconomic instability and limiting economic growth. (Source adapted from: https://www.theigc.org/project/on-the-causes-and-effect-of- exchange-rate-volatility-on-economic-growth-evidence-from-ghana/ and https://www.scirp.org/journal/paperinformation.aspx?paperid=95492) Extract E There is a lot of money in chocolate but the growers of cocoa see very little of it. In 2020 the chocolate retail industry was worth £78 billion, but Ghana – the world’s second largest cocoa producer – earned just over £1 billion. Cocoa farmers in Ghana now make roughly $1 a day (this often includes being subsidised by the Ghanaian government). This is a familiar pattern for many African countries where the economy 5 is still shaped by a colonial relationship in which they export commodities to be processed elsewhere. Ghana currently processes about 30% of its cocoa crop into chocolate, meaning that the exports can earn high prices. Despite plans for expanding the domestic chocolate industry there are still many obstacles in the way. The equipment to make chocolate is 10 very expensive and there is neither a local sugar nor dairy industry. Imported milk and sugar would increase the cost of production significantly, with the added problem that foreign currency would be needed. Producing chocolate requires consistent refrigeration, and the high cost of the equipment to achieve that is a major obstacle for entrepreneurs without substantial funds. There is an inconsistent supply of energy in rural parts of 15 Ghana. An alternative, making teas and wines using cocoa, can make 20 times more revenue than the raw beans, but they do not have the mass market appeal and high profits of chocolate. Access to funds is a big problem and one farmer, Nana Aduna, says that high interest rates on bank loans are an issue for start-up businesses and at the moment he cannot 20 afford to borrow money. “You cannot grow a business when you have to service interest rates of 18%–20% or even more,” he says. But the government has pledged to address these structural issues, using supply side policies. The Trade and Industry Minister announced that industrialisation is the focus of government policy. “It only makes sense that the most important commodity in 25 our country, which is cocoa… should become the target for a major programme of industrialisation,” he says. The ‘One District One Factory’ programme aims to kickstart industrialisation by providing the infrastructure for Ghana’s farms, by establishing processing plants in some of the big cocoa-growing areas. It has become easier for the private sector to invest in food 30 processing, and there is a big tax rebate available to processing companies that set up in the country’s enterprise zones – designated areas to encourage economic activity – in a bid to help them export. (Source: adapted from https://www.newsbreak.com/news/2201853748349/ghana-s- farmers-eye-sweet-success-from-chocolate and https://www.indepthnews.net/ index.php/the-world/africa/4495-ghana-starts-with-cocoa-to-end-neocolonial- trading-ties and https://www.brookings.edu/blog/africa-in-focus/2020/09/03/ pathways-to-structural-transformation-of-the-ghanaian-economy-and- some-roadblocks/ and https://www.ghanaweb.com/GhanaHomePage/ business/Speculators-driving-interbank-retail-FX-rates-gap-1468375) Extract F A new trade bloc for Africa The African Continental Free Trade Agreement (AfCFTA) has been signed by all 55 member states of the African Union, including Ghana, Nigeria, and South Africa. This brings together 1.2 billion people with a combined gross domestic product (GDP) of more than $2 trillion as of 2023. 5 The agreement commits countries to removing tariffs on 90% of goods, with other goods to be phased in later. The agreement also liberalises services and aims to tackle non-tariff barriers which reduce trade between African countries, such as long delays at the borders. (Source adapted from: https://www.aljazeera.com/economy/2018/3/20/ african-continental-free-trade-area-what-you-need-to-know)
(c) Discuss factors influencing the level of aggregate demand in Ghana. Use an aggregate demand and aggregate supply diagram in your answer. (12)
June 2023 · Paper 2 · Q1(a) 4 marks AO1=2, AO2=2 Diagram
Data and extracts for question 11 In September 2022 the Bank of England increased the base interest rate from 1.75% to 2.25%. (Source: adapted from https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp)
(a) Draw an aggregate demand and aggregate supply diagram to illustrate the likely impact of an increase in the UK base interest rate on the average price level and real output. (4)
June 2023 · Paper 2 · Q4(b) 4 marks AO2=3, AO3=1 Short answer
Data and extracts for question 44 UK consumption, % of GDP, 2004–2021 87.0 86.5 86.0 85.5 85.0 % 84.5 84.0 83.5 83.0 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 (Source: adapted from https://data.worldbank.org/indicator/NE.CON.TOTL.ZS?end=2021& locations=GB&start=2002)
(b) With reference to the chart on the previous page, 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)
June 2023 · AS Paper 2 · Q4(c) 2 marks AO2=2 Diagram
Data and extracts for question 44 The table below shows the UK business investment, in £ billions, 2019 and 2020. Business Year investment (£ billions) 2019 226 2020 204
(c) Annotate the aggregate demand (AD) and aggregate supply (AS) diagram below to show the likely impact of a fall in business investment on the equilibrium level of real output and the price level. (2) Price AS level P1 AD Y1 Real output
June 2023 · AS Paper 2 · Q6(c) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response
Data and extracts for question 6UK balance of trade and inflation Figure 1: UK balance of trade in goods and services, January 2020 to October 2021 8 £ billion 6 4 2 0 -2 -4 -6 -8 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/balance-of-trade) Figure 2: UK inflation rate as measured by annual percentage changes in the Consumer Prices Index (CPI), January 2020 to October 2021 6 % 5 4.2 4 3.2 3.1 3 2.5 2.1 2.0 1.8 2 1.7 1.5 1.5 1.0 0.8 1 0.7 0.7 0.6 0.7 0.4 0.5 0.6 0.5 0.3 0.2 0 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Oct 2021 (Source adapted from: https://tradingeconomics.com/united-kingdom/inflation-cpi) Extract A Balance of trade in goods and services Rising imports from non-EU countries have increased the UK’s trade deficit in the third quarter of 2021. This was as a result of the UK strengthening its trading relationships with countries outside the EU. An 11.2% increase in imports from non-EU countries has increased the UK’s trade deficit to nearly £7 billion. 5 Moreover, exports to non-EU countries were £0.8 billion lower than exports to EU countries. Despite the overall trade balance being in deficit, the UK services trade balance is in surplus, reflecting the economy’s heavy reliance on services. The trade in 10 services surplus increased by £2.2 billion to £35.6 billion. This was mostly as a result of an increase in the export of financial services. (Source: adapted from https://www.cityam.com/swelling- non-eu-imports-widens-uk-trade-deficit) Extract B Inflation In December 2021 the rate of inflation in the UK rose to 5.4%, its highest rate in 30 years. The speed of increase has taken economists by surprise. The Bank of England expected inflation to peak at this rate, but not until April 2022. The rate was more than two-and-a-half times its 2% inflation target. 5 Transport costs were the biggest contributor to rising inflation, with petrol prices increasing by over 5%. Moreover, supply chain bottlenecks constrained access to raw materials and limited the number of new products being sold in the market. At the same time, economists warned that the demand for goods and services in the UK economy was quickly increasing. This was a result of the easing of the 10 restrictions associated with the global health crisis. The high rate of inflation would normally be enough to prompt a significant increase in the base rate of interest by the Bank of England’s Monetary Policy Committee (MPC). Despite the lower rates of economic growth, the MPC increased the base interest rate from 0.1% to 0.5% in February 2022. 15 (Source: adapted from ‘UK inflation hits highest level in a decade’, FT, https://www.ft.com/content/dd5edcd1-2e70-4910-b642- 269574b4bcdd; ‘What does the UK’s soaring inflation rate mean for you?’, The Guardian, https://www.theguardian.com/business/2021/ dec/15/what-does-uk-soaring-inflation-rate-mean)
(c) With reference to Extract A, assess the likely impact of a rise in the value of exports on the UK economy. (10)
June 2022 · Paper 2 · Q1(a) 4 marks AO2=3, AO3=1 Calculation
Data and extracts for question 11 According to the Bank of England, the UK’s marginal propensity to consume is estimated to be 0.64. (Source: adapted from https://www.bankofengland.co.uk/-/media/boe/files/working- paper/2017/the-consumption-response-to-positive-and-negative-income-changes.pdf?)
(a) Using the information above, calculate the total reduction in the UK’s GDP from a fall in government spending of £20 million. (4)
June 2022 · Paper 2 · Q1(b) 1 mark Multiple choice
Data and extracts for question 11 According to the Bank of England, the UK’s marginal propensity to consume is estimated to be 0.64. (Source: adapted from https://www.bankofengland.co.uk/-/media/boe/files/working- paper/2017/the-consumption-response-to-positive-and-negative-income-changes.pdf?)
(b) Which one of the following is an injection into the circular flow of income? (1) A Imports B Investment C Savings D Taxation
June 2022 · AS Paper 2 · Q4(c) 2 marks AO2=2 Diagram
Data and extracts for question 44 The UK exchange rate changed from £1 = $1.53 in January 2015 to £1 = $1.22 in October 2019.
(c) Annotate the aggregate demand (AD) and aggregate supply (AS) diagram below to show the likely impact of an improvement in net trade on the equilibrium level of real output and the price level. (2) Price level AS P1 AD Y1 Real output
June 2022 · Paper 2 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response
Data and extracts for question 6UK Government spending and inequality Figure 1: UK regional gross disposable household income per capita, 2018 £ per capita 19 000 to 21 000 17 000 to 18 999 16 000 to 16 999 15 000 to 15 999 14 500 to 14 999 14 000 to 14 499 13 000 to 13 999 North East South East (Source: adapted from University of Sheffield/Office for National Statistics: https://www.sheffield.ac.uk/news/nr/uk-higher-regional-inequality-large-wealthy-country-1.862262) Figure 2: UK subjective happiness by income, April 2021 Answer to the question: ‘On a scale of 1–10, how happy did you feel after yesterday?' (0 = not at all, 10 = completely) Less than £10 000 £10 000–£20 000 £20 000–£40 000 More than £40 000 7.31 7.02 7.13 7.29 (Source: adapted from https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/ datasets/incomegroupsplitestimatesonpersonalandeconomicwellbeingacrosstime) Extract A Regional inequality in the UK Geographically, the UK is highly unequal in incomes. According to research from the University of Sheffield, the estimate of the Gini coefficient is 0.34. There are a number of different reasons for this. First, labour in poor places tend to develop too few skills, with a lack of education holding people back. In Rotherham in the north of England, for 5 example, 21% of disadvantaged 18-year-olds from state schools and colleges go on to higher education compared to 41% in London. Secondly, there is a lack of infrastructure spending in northern cities compared to London. In 2017–18, 28% of public expenditure on transport – and 46% of capital expenditure on railways – was spent in London. The argument for this is that London gets a lot of public money because a lot of people take 10 public transport. This has angered many people in the North. These problems cannot be solved quickly. They compound each other. Just as people are rarely poor for one reason, regions do not fall behind only because they have poor transport, poor schools or poor policy making, but for all those reasons and more. Ideally, the UK would develop a bold plan for regional development that could be followed 15 by future governments, as Germany did for its eastern part. Tera Allas of McKinsey, a consultancy firm, argues that improving education is crucial, even if the returns are not immediately obvious. It is easier to improve schools than to persuade businesses to move to a poorer part of the country. (Source: adapted from https://www.economist.com/britain/2020/07/30/ why-britain-is-more-geographically-unequal-than-any-other-rich-country) Extract B Public sector spending on infrastructure Economic differences across the UK are large and have grown. The government is looking at reducing this inequality partly through spending on transport infrastructure. Public sector capital spending is due to rise from just over 2% of GDP to 3%. That amounts to around £20 billion of additional spending per year on new capital projects. The 5 government is looking to take advantage of current low interest rates to finance the expansion without worsening its fiscal position. The government is determined to focus this spending on the north of England, Wales and the Midlands. Planned schemes include a new Trafford Park tram line in Manchester and reopening train lines and stations closed back in the 1960s, including stations in 10 Haxby in Yorkshire and Blyth in Northumberland. Progress has already been made in Wales with the reopening of Bow Street station near Aberystwyth. This project has taken 11 years to become a reality and cost £8m. It is estimated that it will generate a boost to the economy of £24m through boosting local trade, creating new jobs in the local area, and easing pressure on congested roads heading into Aberystwyth. 15 (Source: adapted from https://www.economist.com/britain/2020/01/09/the-coming- splurge-on-northern-infrastructure and https://www.wales247.co.uk/transport-for-wales- delivers-new-bow-street-station) Extract C Options for UK tax rises in the future There are a number of options for raising additional tax revenue in the future. These include: • increasing council tax on houses: this annual charge paid to local government is currently based on estimated house prices in 1991 and so is very out of date. This 5 would negatively affect areas where house prices have risen the most since 1991 • a one-off wealth tax: a 5% tax on property and pension wealth of more than £500 000 would raise £260 billion to help pay for the global health crisis in five years, according to proposals from the Wealth Commission • increasing corporation tax: at the 2021 Budget the Chancellor announced that 10 the top rate of UK corporation tax would be increased to 25% by 2023. This will remain the lowest rate in the G7 group of the world's largest advanced countries, but will raise £17.2 billion in 2025–26. (Source: adapted from https://www.telegraph.co.uk/tax/income-tax/five-tax-rises-rishi- sunak-considering-chances-happening-budget/, and https://home.kpmg/uk/en/home/ insights/2021/03/tmd-corporation-tax-rate-to-increase-to-25-percent.html)
(e) With reference to Extract B, discuss the benefits of an increase in infrastructure spending on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer. (15)
June 2022 · Paper 3 · Q1(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1The food delivery industry Figure 1: Market share for third‑party food delivery services in the UK, 2019 1.2% 10.2% 21.3% 67.3% Just Eat Deliveroo Uber Eats Others (Source: adapted from https://onefourzerogroup.com/the‑takeaway‑takeover/) Extract A National Minimum Wage rises are more significant for 23 to 25-year-olds In 2021, the National Minimum Wage main rate, also known as the National Living Wage, rose by 2.2% to £8.91, following a 6.2% rise in 2020. By reducing the age at which people are eligible for the National Living Wage to 23 in 2021, it is estimated that an additional 7.5% of 23 to 25-year-olds could get a 71p an hour pay rise. This amounts to an 8.7% 5 increase, which may cause further financial worries for employers. (Source: adapted from https://www.ndna.org.uk/NDNA/News/Latest_news/2020/ Minimum_wages_to_rise_by_inflation_in_April.aspx) Extract B What is the true cost of the food delivery service? The food delivery industry has boomed in recent years. Just Eat, Uber Eats and Deliveroo all offer very similar services – third‑party food delivery firms that take up to 30% of the price of restaurant meals and deliver them to customers within a certain radius. The average spend per customer is around £15 with a £5 delivery fee, about five times 5 more expensive than cooking at home and the same price as eating in the restaurant. Cash rich, time poor professionals increasingly turn to food delivery. Food delivery comes with many layers of packaging. In the UK, there are 200 million meals annually with around 1.4 billion individual pieces of plastic for heat retention and protection when travelling, but does it really have to be plastic? People tend to 10 order more food, often high in fat, sugar and salt, and don’t even have to get up from their sofa. But there are concerns that the delivery firms are exploiting employees who have no alternative. There is an issue of low pay and informal contracts. Delivery drivers are classed as ‘independent contractors’, and therefore not subject to some employment 15 rights including a guaranteed minimum wage, sick pay, pensions or holiday pay. Drivers are paid either a flat hourly rate, or a fee per delivery. Factors such as delivery distance, speed, how busy it is and whether there are multiple drop‑offs are all factored into how much a driver is paid. Deliveroo says its wages amount to around £10 per hour, but drivers say that during 2020 their pay has been as low as £1 per hour. Drivers are not 20 paid extra for petrol or to maintain their vehicles. Many drivers are recent immigrants or students, who do not have property or savings to fall back on. The government could address this with widening minimum pay legislation to contracted workers, by setting codes of practice, or by setting recommended wage targets. Furthermore, there are health and safety issues for workers. Vehicle safety checks, 25 length of shifts and safety equipment are of concern. However, there are still people who take benefit from working flexibility. (Source: adapted from https://www.theguardian.com/australia‑news/2020/oct/25/home- food-delivery‑what‑is‑the‑most‑ethical‑way‑to‑order‑in and https://digitalcommons.molloy. edu/cgi/viewcontent.cgi?article=1043&context=bus_fac) Extract C Integration in the third‑party food delivery industry The Competition and Markets Authority (CMA) is watching carefully to prevent any one firm having complete control of the food delivery industry. Just Eat, the market leader, agreed to merge with successful Dutch firm Takeaway.com in 2020, creating a new European leader by revenues. It also bought Grubhub in the US, with 20 million active 5 users. Just Eat uses an aggressive pricing strategy, undercutting delivery fees below the average cost of other firms in the market, that will force them to merge in order to gain some economies of scale. Amazon, having failed with its own delivery company Amazon Restaurants in 2018, has bought 16% of Deliveroo. The CMA took over a year to agree to the partial integration, 10 on the argument that Deliveroo would close down without external investment. Amazon has unique expertise in marketing, increasing customer share and, most importantly, efficiency in delivering things. Food delivery is often uneconomical because a single household puts in a single order from a single restaurant at any one time. Tech companies such as Amazon can improve the business: once a meal has been ordered, an 15 app often moves that restaurant to the top of the rankings for that neighbourhood, in the hope of getting a second and third delivery. So why do restaurants turn to these delivery firms? The sheer volume of customers these delivery firms can hold makes it a difficult deal to turn down. But resentment from small business restaurant owners, angry at being wholly dependent on tech companies, is 20 growing. Most restaurants would prefer that customers come in and pick up their orders themselves because they do not have to pay the 30% commission. Restaurant profit margins are small, and the effects of a 20% fall in the external value of the pound since 2016 on food costs are significant, given that over half of their food and drink is sourced outside the UK. 25 (Source: adapted from https://www.ft.com/content/c20f6848‑3c4b‑11ea‑a01a-bae547046735 https://www.ft.com/content/edf8a144‑a101‑4ef8‑80e3‑7d2f1565d35c and https://www.thisismoney.co.uk/money/markets/article‑8138703/Uber‑set‑sell- takeaway-division‑rival‑Deliveroo‑two‑years.html and https://www.ft.com/content/c20f6848-3c4b‑11ea‑a01a‑bae547046735 and https://www.ft.com/content/bed7c4d8-28c1-11ea-9a4f-963f0ec7e134 and https://www.economist.com/1843/2021/01/26/gulp‑the‑secret‑economics-of-food‑delivery)
(e) Evaluate the microeconomic and macroeconomic effects of significant increases in the minimum wage. Refer to restaurants or other food delivery services in your answer. (25)
November 2021 · Paper 2 · Q1(a) 1 mark Multiple choice
Data and extracts for question 11 After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion. The International Monetary Fund estimated that the multiplier at the time was approximately 1.5. (Source adapted from: https://www.economist.com/the-economist-explains/2016/09/07/ what-is-the-keynesian-multiplier)
(a) Which one of the following is a withdrawal from the circular flow of income? (1) A Exports B Government spending C Investment D Taxation
November 2021 · Paper 2 · Q1(b) 2 marks AO2=2 Calculation
Data and extracts for question 11 After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion. The International Monetary Fund estimated that the multiplier at the time was approximately 1.5. (Source adapted from: https://www.economist.com/the-economist-explains/2016/09/07/ what-is-the-keynesian-multiplier)
(b) Calculate the total final increase in US aggregate demand as a result of the President’s ‘expansionary fiscal policies’, assuming no other changes. (2)
November 2021 · Paper 2 · Q2(a) 1 mark Multiple choice
(a) Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve? (1) B A AS AS Price Price level level P1 P1 P AD1 P AD1 AD AD Y Y Y1 Real output Real output D C AS AS Price Price level level P P P1 AD P1 AD AD1 AD1 Y Y1 Y Real output Real output A B C D
October 2020 · Paper 2 · Q2(a) 1 mark Multiple choice
Data and extracts for question 22 The planned investment in the redevelopment of Dover Port will cost £115 million. The Chief Executive said it will lead to many ‘new job opportunities for local people and a transformed waterfront experience’ with new cafés, bars, and shops. (Source adapted from: https://www.kentonline.co.uk/dover/news/docklands‑ redevelopment‑work‑to‑start‑118581/)
(a) If the value of the multiplier is 1.8, which one of the following will be the total increase in GDP from the redevelopment, assuming other things are equal? (1) A £64 million B £115 million C £207 million D £230 million
October 2020 · Paper 2 · Q2(b) 4 marks AO1=2, AO2=1, AO3=1 Short answer
Data and extracts for question 22 The planned investment in the redevelopment of Dover Port will cost £115 million. The Chief Executive said it will lead to many ‘new job opportunities for local people and a transformed waterfront experience’ with new cafés, bars, and shops. (Source adapted from: https://www.kentonline.co.uk/dover/news/docklands‑ redevelopment‑work‑to‑start‑118581/)
(b) Using the example above, explain how the multiplier process leads to an increase in aggregate demand. (4)
October 2020 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 In August 2018 the Monetary Policy Committee of the Bank of England raised the UK’s base interest rate from 0.5% to 0.75%.
(b) Annotate the aggregate demand (AD) and short-run aggregate supply (SRAS) diagram below to show the possible impact of a rise in the base interest rate on the equilibrium level of real output and the price level. (2) Price level SRAS P1 AD Y Real output 1
October 2020 · Paper 2 · Q5(a) 4 marks AO1=2, AO2=2 Diagram
Data and extracts for question 55 The Hong Kong‑Zhuhai‑Macau Bridge is the world’s longest sea bridge. It reduces the journey time from Hong Kong to Zhuhai from 4 hours to just 30 minutes. It cost the equivalent of $18.8 billion and was government funded. (Source adapted from: www.theguardian.com)
(a) Draw an aggregate demand and aggregate supply diagram to show the likely impact of this new bridge on the price level and real output in the region. (4)
October 2020 · AS Paper 2 · Q6(d) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response
Data and extracts for question 6UK government budget and household consumption Figure 1: UK government spending and tax revenue as % of GDP, 1980–2018 50 45 40 35 30 25 0 1980 2018 1990 2000 2010 Government spending Government tax revenue (Source: adapted from Office for Budget Responsibility (OBR), http://cdn.obr.uk/EFO- MaRch_2018.pdf © Crown copyright 2018) Figure 2: UK real household consumption, quarterly, £ billions, 1997 to 2018 (Source: adapted from ONS, www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/ bulletins/consumertrends/apriltojune2018) Extract A UK household consumption Despite the slow growth in real household disposable incomes, consumer spending rose in 2017. Annual spending per person increased by £589, when compared with 2016. This may have reflected UK households’ delay in adjusting to the increase in inflation that was associated with the fall in the exchange rate of the British pound. The increase 5 in consumption has also been driven by low interest rates. In 2017 UK house prices increased by an average of 5.1%. UK consumers have financed most of their spending by borrowing on credit cards in order to maintain their living standards. In 2017 borrowing on credit cards rose by 9.6%, the second-highest level since before the financial crisis. This has increased the Bank of 10 England’s concerns about the sustainability of borrowing, given the slow growth in real incomes. The Bank has also indicated that the base interest rate was likely to rise faster than previously expected. More expensive credit could therefore constrain the ability of households to spend. (Source: adapted from ‘Consumer Trends UK’, ONS, https://www.ons.gov.uk/economy/ nationalaccounts/ satelliteaccounts/bulletins/consumertrends/octobertodecember2017 and © Crown copyright 2018) Extract B Reduction of the UK’s budget deficit Since 2010 many economists have believed that the biggest problem facing the government was the rising budget deficit. In late 2017, the UK’s Chancellor of the Exchequer announced that the government would continue with its plans to decrease its budget deficit. To address this issue, the government further reduced welfare payments 5 and introduced extra spending cuts in the public sector. The UK government had estimated that the fall in UK productivity since the financial crisis was only temporary. However, it has now accepted that this fall in the level of productivity is a long-term issue. Subsequently, the UK’s forecast long-term trend rate of growth was reduced. Slower growth means lower tax receipts, higher spending and a 10 bigger budget deficit. Some economists have suggested that the government should not pursue additional reductions in the budget deficit. They have also claimed that the responsibility of the government is not to balance the budget but to balance the economy by moving it to full employment. 15 (Source: adapted from ‘Philip Hammond must ditch deficit reduction and invest. But will he?’, The Guardian, https:// www.theguardian.com/politics/2017/nov/19/philip-hammond-must-ditch-deficit- reduction-and-invest-but-will-he’)
(d) Assess the likely impact on the UK economy of an ‘increase in consumption’ (Extract A, lines 5–6). Use an aggregate demand and aggregate supply diagram in your answer. (10)
June 2019 · AS Paper 2 · Q1(a) 1 mark AO1=1 Definition
Data and extracts for question 11 It is estimated that building a second runway at Gatwick airport will require an investment of £9.3 billion. The total increase in UK GDP as a result of this injection is expected to be around £44.1 billion. (Source: adapted from www.gov.uk/government/uploads/system/uploads/attachment_ data/file/ 452267/AC01_tagged_amend_25_11.pdf © Crown Copyright)
(a) Define the term ‘injection’ in this context. (1)
June 2019 · AS Paper 2 · Q1(b) 2 marks AO2=2 Calculation
Data and extracts for question 11 It is estimated that building a second runway at Gatwick airport will require an investment of £9.3 billion. The total increase in UK GDP as a result of this injection is expected to be around £44.1 billion. (Source: adapted from www.gov.uk/government/uploads/system/uploads/attachment_ data/file/ 452267/AC01_tagged_amend_25_11.pdf © Crown Copyright)
(b) Calculate the value of the multiplier based on the data given. You are advised to show your working. (2)
June 2019 · AS Paper 2 · Q1(c) 1 mark Multiple choice
Data and extracts for question 11 It is estimated that building a second runway at Gatwick airport will require an investment of £9.3 billion. The total increase in UK GDP as a result of this injection is expected to be around £44.1 billion. (Source: adapted from www.gov.uk/government/uploads/system/uploads/attachment_ data/file/ 452267/AC01_tagged_amend_25_11.pdf © Crown Copyright)
(c) 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
June 2019 · Paper 2 · Q2(a) 4 marks AO1=2, AO2=2 Diagram
Data and extracts for question 22 The International Monetary Fund has called on the G20 group of large industrialised countries to boost government spending on infrastructure. (Source: https://www.theguardian.com/business/2016/jul/23/ imf-calls-for-more-government-spending-as-rate-cuts-lose-their-impact)
(a) Draw an aggregate demand and aggregate supply diagram to show the likely impact of an increase in government spending on infrastructure on a country’s price level and real output. (4)
June 2019 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 The diagram below shows the aggregate demand (AD) and a possible long-run aggregate supply (LRAS) for the UK. Price LRAS level AD 0 Real output
(b) Annotate the diagram above to show the likely impact of government policy to promote business competition on the equilibrium level of real output and price level. (2)
June 2019 · Paper 2 · Q5(a) 2 marks AO1=2 Short answer
Data and extracts for question 55 According to the charity Oxfam, the combined wealth of the 62 richest people in the world is the same as the wealth of the poorest half of the world’s population. The value of the combined wealth of the poorest half of the world’s population has fallen by 38% between 2010 and 2016. (Source: adapted from https://www.oxfam.org/en/pressroom/pressreleases /2016-01-18/62-people-own-same-half-world-reveals-oxfam-davos-report)
(a) Explain the distinction between income and wealth. (2)
June 2019 · AS Paper 2 · Q6(d) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response
Data and extracts for question 6UK inflation and economic growth Figure 1: UK inflation rate as measured by annual percentage changes in the Consumer Price Index (CPI), January 2014 to January 2018 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 (Source: www.bankofengland.co.uk/publications/Pages/inflationreport/2017/aug.aspx) Figure 2: Selected changes to the CPI basket of goods and services, 2017 IN OUT Non-dairy milk Apple cider Jigsaw puzzles Menthol cigarettes Child scooters Child swings Cycling helmets Basic mobile phones (Source: www.theguardian.com/business/2017/mar/14/uk-inflation- ons-basket-goods-gin-cycling-helmets) Figure 3: UK exports, £ billions per month, January 2014 to January 2018 52 50 £ billions 48 46 44 42 40 0 (Source: Trading Economics, ONS - https://tradingeconomics.com/united-kingdom/exports) Figure 4: Annual percentage change in real Gross Domestic Product (GDP), 2014-2017 2014 2015 2016 2017 United Kingdom 3.1 2.2 1.8 2.0 Developing countries (average) 4.7 4.2 4.1 4.5 (Source: IMF, World Economic Outlook 2017) Extract A Rising inflation After January 2017, the inflation rate, as measured by the Consumer Price Index (CPI), in the UK has exceeded the Bank of England’s 2% target. Sharp increases in food prices as a result of the fall in the exchange rate of the pound have contributed to rising inflation. Between January and September 2017, food prices have increased by 3.5 percentage 5 points. The Office for National Statistics (ONS) has identified that the rapid increase in food prices affected people on low fixed incomes the most. It leaves them with very little money to spend on relatively more expensive items. Moreover, the Bank of England has observed a rise in the size of personal debt relative to income. In order to maintain their standard of 10 living, many consumers on low fixed incomes are using their credit cards and taking out short-term loans to fund their spending. Inflation rose to over 3% at the end of 2017 leading to the Monetary Policy Committee increasing the base rate of interest by 0.25 percentage points to 0.5% in November 2017. Wage growth has been lagging behind price rises and this is expected to continue. 15 Basic wage increases are expected to be only around 1%. This has heaped considerable pressure on households. The ONS has updated the shopping basket that is used in the measurement of UK inflation, to reflect the lifestyle of households in the country. Technological advancements, changes in consumer tastes and a move towards health, fitness and 20 gluten-free products have made it essential to revise the 2017 basket. (Source: adapted from ‘UK inflation tipped to rise again with wages forecast to stagnate’, The Guardian, https://www.theguardian.com/business/2017/aug/13/ uk-inflation-tipped-to-rise-again-with-wages-forecast-to-stagnate#img-1) Extract B Economic growth and living standards Economic growth is expected to accelerate again as foreign demand for UK exports increases due to the global economic recovery. According to some economists, consumer spending is no longer the engine of growth for the UK. The increase in exports, which is largely due to the fall in the exchange rate of the pound, is expected to be the most 5 significant driver of the UK’s economic growth. Some economists have proposed that the quality of economic growth needs to be measured and not just the quantity. This will allow governments to understand how GDP growth affects the living standards of its citizens. They want governments to publish data on the quality of life alongside GDP data as economic growth varies across the country 10 with jobs and wages distributed unevenly. Economic growth figures also hide differences that are not considered in GDP calculations. In 2017, it was estimated that the relative size of the informal economy of developing countries was nearly five times greater than that of the UK. (Source: adapted from ‘Growth to accelerate as UK economy bounces back’, The Telegraph, http://www.telegraph.co.uk /business/2017/08/01/ growth-accelerate-uk-economy-bounces-back/; ‘GDP is not enough: economists and businesses demand new measure of inclusive growth’, The Telegraph, http://www.telegraph.co.uk/business/2017/03/07/gdp-not- enough-economists-businesses-demand-new-measure-inclusive/)
(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)
June 2018 · Paper 2 · Q2(b) 4 marks AO1=2, AO2=2 Diagram
(b) Draw an aggregate demand and aggregate supply diagram illustrating the likely impact of a rise in interest rates on the price level and real output. (4)
June 2018 · AS Paper 2 · Q4(b) 2 marks AO2=2 Diagram
Data and extracts for question 44 The diagram below shows the aggregate demand (AD) and short-run aggregate supply (SRAS) for the UK. Price level SRAS P1 AD Real output Y1
(b) 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)
June 2018 · AS Paper 2 · Q6(b) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response
Data and extracts for question 6The UK economy Figure 1: Unemployment – International Labour Organisation (ILO) and the claimant count, millions, 2010-2016 3 2.5 2 Millions 1.5 1 0.5 0 2010 2011 2012 2013 2014 2015 2016 ILO Claimant count (Source: ONS Datasets, https://www.ons.gov.uk/) Figure 2: Household savings*, 2010-2015 12 % 10 8 6 4 2 0 2011 2012 2013 2014 2015 2010 * Savings as a percentage of household disposable income (Source: http://www.tradingeconomics.com/united-kingdom/personal-savings) Figure 3: UK average house prices, 2005–2016 220 200 180 160 140 0 2006 2008 2010 2012 2014 2016 (Source: http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/) Extract A Soaring house prices House prices are still rising rapidly. The average UK house price was £214 000 in June 2016, according to the Office for National Statistics (ONS). This is £24 000 more than it was at its peak in September 2007, just before the economic downturn. First-time buyers have experienced the largest rise in house prices. 5 Even the loss of consumer confidence over Britain’s vote to leave the EU did not stop house prices from rising – annual growth increased from 5.2% in July 2016 to 5.6% in August 2016. House price growth was the strongest in London, with annual average prices rising by 9.6%. However, in Wales average house prices actually fell by 0.5% during the same period. In its first post-Brexit referendum forecast, estate agency Countrywide 10 said that house prices will fall by 1% across the UK in 2017, before rising by 2% in 2018. Real household income in the UK fell by 10.4% in the years following the financial crisis. This increased the difference between real income and house prices. In 1997, a house cost little more than twice the average income. By early 2015, the average price of a house was five times the average annual income. 15 The rate of home ownership for 25 to 34-year-olds has fallen to 35.8% over the last twenty-five years as houses became less affordable. First-time buyers have to wait longer to save up for a house deposit. Conversely, home ownership has risen to 78.6% among those aged 65 to 74. (Source: adapted from ‘The state of the UK housing market in five charts’, The Telegraph, http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/; ‘UK house price growth slows as demand cools after Brexit vote’, The Guardian, https://www.theguardian.com/business/2016/sep/30/uk-house- price-growth-slows-demand-cools-brexit-vote-nationwide) Extract B UK migration trends in the year ending June 2016 Inward migration levels are among the highest ever recorded with an estimated 650 000 people moving to the UK. This is an increase of around 11 000 from the previous year. Employment remains the most common reason for long-term migration (312 000) to the UK, with around 182 000 of these coming with a definite job and 130 000 looking for 5 work. Long-term migration to the UK for study was estimated to be 163 000. In addition, 80 000 long-term migrants arrived in the UK to accompany their families. There were 41 280 refugees applying for asylum, including dependants, of which 10 547 people were granted asylum. Asylum applicants cannot usually accept offers of employment while 10 their case is being processed. (Source: adapted from ‘Migration Statistics Quarterly Report: December 2016’, ONS, https:// www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/ internationalmigration/bulletins/migrationstatisticsquarterlyreport/dec2016)
(b) 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)
June 2018 · AS Paper 2 · Q6(d) 6 marks AO1=2, AO2=2, AO3=2 Short answer
Data and extracts for question 6The UK economy Figure 1: Unemployment – International Labour Organisation (ILO) and the claimant count, millions, 2010-2016 3 2.5 2 Millions 1.5 1 0.5 0 2010 2011 2012 2013 2014 2015 2016 ILO Claimant count (Source: ONS Datasets, https://www.ons.gov.uk/) Figure 2: Household savings*, 2010-2015 12 % 10 8 6 4 2 0 2011 2012 2013 2014 2015 2010 * Savings as a percentage of household disposable income (Source: http://www.tradingeconomics.com/united-kingdom/personal-savings) Figure 3: UK average house prices, 2005–2016 220 200 180 160 140 0 2006 2008 2010 2012 2014 2016 (Source: http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/) Extract A Soaring house prices House prices are still rising rapidly. The average UK house price was £214 000 in June 2016, according to the Office for National Statistics (ONS). This is £24 000 more than it was at its peak in September 2007, just before the economic downturn. First-time buyers have experienced the largest rise in house prices. 5 Even the loss of consumer confidence over Britain’s vote to leave the EU did not stop house prices from rising – annual growth increased from 5.2% in July 2016 to 5.6% in August 2016. House price growth was the strongest in London, with annual average prices rising by 9.6%. However, in Wales average house prices actually fell by 0.5% during the same period. In its first post-Brexit referendum forecast, estate agency Countrywide 10 said that house prices will fall by 1% across the UK in 2017, before rising by 2% in 2018. Real household income in the UK fell by 10.4% in the years following the financial crisis. This increased the difference between real income and house prices. In 1997, a house cost little more than twice the average income. By early 2015, the average price of a house was five times the average annual income. 15 The rate of home ownership for 25 to 34-year-olds has fallen to 35.8% over the last twenty-five years as houses became less affordable. First-time buyers have to wait longer to save up for a house deposit. Conversely, home ownership has risen to 78.6% among those aged 65 to 74. (Source: adapted from ‘The state of the UK housing market in five charts’, The Telegraph, http://www.telegraph.co.uk/property/house-prices/ the-state-of-the-uk-housing-market-in-five-charts/; ‘UK house price growth slows as demand cools after Brexit vote’, The Guardian, https://www.theguardian.com/business/2016/sep/30/uk-house- price-growth-slows-demand-cools-brexit-vote-nationwide) Extract B UK migration trends in the year ending June 2016 Inward migration levels are among the highest ever recorded with an estimated 650 000 people moving to the UK. This is an increase of around 11 000 from the previous year. Employment remains the most common reason for long-term migration (312 000) to the UK, with around 182 000 of these coming with a definite job and 130 000 looking for 5 work. Long-term migration to the UK for study was estimated to be 163 000. In addition, 80 000 long-term migrants arrived in the UK to accompany their families. There were 41 280 refugees applying for asylum, including dependants, of which 10 547 people were granted asylum. Asylum applicants cannot usually accept offers of employment while 10 their case is being processed. (Source: adapted from ‘Migration Statistics Quarterly Report: December 2016’, ONS, https:// www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/ internationalmigration/bulletins/migrationstatisticsquarterlyreport/dec2016)
(d) Explain two factors that might cause a rise in the value of the multiplier. (6)
June 2018 · Paper 2 · Q7 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
7 In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years. Evaluate the likely economic effects of this planned increase in government expenditure.
June 2018 · Paper 3 · Q1(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1Branded coffee shops Figure 1: Market share of UK branded coffee shops, 2015, percentages Others Costa Coffee 29% 31% Pret a Manger 5% Morrisons Starbucks 6% 13% Tesco Caffè Nero 7% 9% (Source: http://metro.co.uk/2015/12/14/the-uks-most-popular- coffee-shop-has-been-revealed-5564569/) Figure 2: Number of Starbucks coffee shops worldwide, 2003–2016 Number of coffee shops 30 000 25 085 25 000 23 043 21 366 19 767 20 000 18 066 17 003 16 63516 858 16 680 15 011 15 000 12 440 8 569 10 241 10 000 7 225 5 000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Source: https://www.statista.com/statistics/266465/ number-of-starbucks-stores-worldwide/) Figure 3: Price comparison in selected London coffee retailers, February 2017 Coffee style Starbucks Costa Coffee Caffè Nero Greggs McDonald’s Espresso Double £2.00 £2.00 £1.70 £1.65 £0.99 Latte Medium £2.60 £2.50 £2.50 £1.80 £1.79 Latte Large £2.80 £2.70 £2.80 £2.10 £2.09 (Source: data collected from coffee shops in Holborn, London on 25 February 2017) Extract A Starbucks in Britain – a loss-making business? Coffee shops are among the most profitable parts of the food and drink industry, and few are doing quite as well as Starbucks, a US-based transnational company. Starbucks may be complaining of adverse global market conditions but that did not stop the world’s biggest coffee chain from reporting record annual profits in 2016. It made a profit of 5 almost US$4.2 billion for the year, up 16% on 2015. That was mainly the result of a strong performance in its biggest market, America, where revenue rose 11%. The fastest growth was in the China and Asia Pacific region, with revenue up 23%. Howard Schultz, the CEO of Starbucks, said its Chinese coffee shops were the most efficient and profitable. While Starbucks still makes most of its profit in the US, Mr Schultz has said expansion in China 10 will secure its future for “decades to come” and announced plans to more than double the number of shops in China to 5 000 by 2021. However its British subsidiary, at first glance, appears to be doing less well. It has announced its first ever profit in Britain in 2015 – of just £1 million – despite opening its first coffee shop in the UK in 1998. It now has 849 UK outlets. The main reason why 15 Starbucks has reported persistent losses in the UK is not due to a lack of demand for its coffee, but to minimise its tax bill. It is claimed that some of Starbucks’ revenue earned in the UK is transferred to its Dutch subsidiary, which is charged lower rates of tax. Starbucks is not finding life as easy in Britain as in the USA. It faces competition from home-grown chains such as Costa and Caffè Nero. Accusations of tax avoidance have also 20 damaged Starbucks’ sales to the benefit of its competitors. A survey found that a third less people rated Starbucks as their preferred coffee shop than they did before the tax- avoidance allegations were first published. These issues have forced Starbucks to change its strategy. It has slowed down its expansion plans in the UK and has closed 67 underperforming coffee shops over the past 25 year. It has also tried to repair its reputation by transferring its European headquarters from Amsterdam to London. (Sources: adapted from The Economist 14 February 2015 http://www.economist.com/ news/business-and-finance/21643271-tax and Starbucks company report 2016 and http://s21.q4cdn.com/369030626/files/doc_financials/ 2015/Starbucks-Fiscal-2015_Financial-Highlights.pdf) Extract B Tax on disposable coffee cups? Two and a half billion disposable cups are thrown away every year in the UK, that is, seven million every day. Only one in 400 is recycled. The UK Environment Minister has suggested that a coffee cup tax could work in a similar manner to the plastic bag charge. The 5 pence a bag charge has led to an 85% reduction in the number of bags 5 being given out since October 2015. It is estimated that introducing a tax on disposable coffee cups would cut usage by two billion every year. One environment spokesperson, Kate Parminter, said: “We’ve seen how dramatically a small charge has affected public behaviour when it comes to the plastic bags and it is clearly time to extend it to coffee cups. Most people purchase a tea or coffee and throw away the cup without even 10 thinking about it, but a charge would increase our awareness of the environmental impact.” In response, another MP welcomed her comments but said he did not believe a tax was the solution. He said: “My initial reaction is charging 5p or 10p for the cup will not work. It will not encourage people to take their own cups in if a coffee goes up from £2.60 to 15 £2.65. I suspect a more technological answer is what we need – either the composition of the disposable cups being changed so they’re more easily recyclable, or changing the technology in the recycling.” Disposable coffee cups contain a plastic coating inside the cups which prevent them from becoming soggy, making them difficult to recycle. There are just two specialist 20 facilities in the UK that have the required equipment to separate plastic from paper for recycling. Almost no recycled paper is used in the production of disposable cups, meaning that some 43 000 trees must be cut down annually to keep up with the demand. CO emissions of around 83 000 tonnes are generated every year for their production. 25 (Sources: adapted from http://www.independent.co.uk/news/uk/politics/disposable-coffee- cups-could-be-taxed-like-plastic-bags-environment-minister-says-a6938126.html 05/09/16 and https://www.cchdaily.co.uk/lib-dems-call-5p-plastic-bag-tax-coffee-cups) Extract C German city of Freiburg takes action on cutting the use of disposable coffee cups The ‘Freiburg cup’, made from dishwasher-proof plastic, can be reused hundreds of times. Cups are issued with a one-euro deposit, and can be returned to any of the participating coffee shops in the German city. The cups, which are provided to coffee shops by local councils, are washed in the cafés and bakeries that have signed up to the scheme before 5 being reused. 56 coffee retailers have signed up, and 10 000 cups are being used. One of the main obstacles facing a wider-reaching scheme, however, is the number of café chains in Germany that are unwilling to use unbranded multi-use cups, particularly Starbucks and McDonald’s. Starbucks already offers a discounted coffee for customers with a multi-use cup, but only if it is bearing the unmistakable Starbucks logo. 10 (Source: adapted from http://www.dw.com/en/germanys-love-for-coffee-to-go- leaves-environmental-groups-demanding-action/a-36689719)
(e) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops. (25)
June 2017 · Paper 2 · Q1(b) 4 marks AO1=2, AO2=1, AO3=1 Short answer
Data and extracts for question 11 The chart below shows the UK unemployment rate, seasonally adjusted, from 2008 to 2015 9.0 8.0 7.0 6.0 % of all 5.0 economically 4.0 active 3.0 2.0 1.0 0.0 Year (Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2015/ statistical-bulletin.html#tab-8--Unemployment)
(b) Explain the likely effects on the circular flow of income of the change in unemployment between 2013 and 2015. (4)
June 2017 · Paper 2 · Q2(b) 2 marks AO1=2 Short answer
Data and extracts for question 22 The table below shows marginal propensity to save data for an economy. Marginal propensity Year to save (mps) 2010 0.11 2011 0.09 2012 0.07 2013 0.05 2014 0.05 2015 0.04
(b) 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)
June 2017 · Paper 2 · Q2(c) 1 mark Multiple choice
Data and extracts for question 22 The table below shows marginal propensity to save data for an economy. Marginal propensity Year to save (mps) 2010 0.11 2011 0.09 2012 0.07 2013 0.05 2014 0.05 2015 0.04
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. (c) Which one of the following is the correct size of the multiplier? (1) A 0.4 B 0.6 C 1.7 D 2.5
June 2017 · AS Paper 2 · Q4(a) 2 marks AO2=2 Diagram
Data and extracts for question 44 The Chancellor announced in the 2015 Budget that the personal allowance (the annual income that can be earned before starting to pay income tax) would increase from £10 600 to £11 000 in April 2016. This means most consumers will pay less income tax. (Source: adapted from http://www.telegraph.co.uk/finance/personalfinance/ how-budget-affect-me/11721785/Budget-2015-what-to-expect- for-income-tax-and-the-personal-allowance.html)
(a) Annotate the aggregate demand and aggregate supply diagram below to show the likely impact of the increase in the personal allowance on the UK’s price level and real output. (2)
June 2017 · AS Paper 2 · Q5(b) 1 mark Multiple choice
Data and extracts for question 55 The chart below shows the results from a survey of UK consumers’ confidence in their financial situation. A negative balance means that, on average, consumers reported their financial situation got worse, a positive balance means they reported it improved and a zero balance indicates no change. This is recorded on a scale from –100 to +100. UK consumer confidence 20 15 10 5 0 –5 –10 –15 –20 –25 –30 2008 2009 2010 2011 2012 2013 2014 2015 (Source: http://www.ons.gov.uk/ons/dcp171778_418064.pdf)
(b) Which one of the following is most likely to result from an improvement in UK consumer confidence? A decrease in the marginal propensity to: (1) A consume B tax C import D save
June 2017 · Paper 2 · Q8 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
8 Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016. Evaluate the likely macroeconomic consequences of a significant fall in global oil prices.
June 2017 · Paper 3 · Q1(e) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or
Data and extracts for question 1Chile Figure 1: Copper prices, US dollars per tonne, 2007–2015 10000 US dollars per tonne 5000 0 2007 2008 2009 2010 2011 2012 2014 2015 2013 (Source: adapted from http://www.indexmundi.com/commodities/ ?commodity=copper&months=120) Figure 2: US dollar per 100 Chile pesos exchange rate, 2007–2015 0.24 0.22 Price of 100 Chile 0.20 pesos in 0.18 US dollars 0.16 0.14 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Source: https://www.google.co.uk/finance?q=CLPUSD&ei=OGEvVun-AouIU6awjugF) Figure 3: Chile: copper output and real GDP growth, 2007–2015 10 GDP 5 Annual 0 % change –5 Copper output –10 2013 2007 2008 2009 2010 2011 2012 2014 2015 (Source: adapted from FT.com sources below) Extract A Chile’s economic outlook brightens Chile has been hit hard by a worldwide fall in commodity prices since 2011. Copper accounts for 20% of Chile’s GDP and 60% of its exports; one third of the world’s copper is produced by Chile. China purchased 40% of the world’s copper, so a slowdown in China combined with increased global over-supply has meant copper prices have 5 collapsed (see Figure 1). Chilean government income from copper exports had reached $11.5 billion a year before copper prices fell, but now tax revenues from this source have fallen drastically. Growing numbers of copper mines struggle to break even at current prices. Chile’s GDP is now growing, helped by a weak currency that has boosted export 10 industries outside the mining sector, such as its successful wine and salmon industries. There are strengths in tourism and high-tech products. Public services are good in Chile, and poverty rates have been falling fast. On top of this, a large and diversified financial sector with high domestic savings provides a useful safety net, given high levels of corporate debt and the government’s need to finance a fiscal deficit of 3% of GDP. 15 Chile’s economy is often regarded as the best run in the region. This is attributed to the credibility of its financial institutions, relatively low levels of national debt (about 15% of GDP) and its free-trade model, which is unrestricted by government interventionism that has distorted the economies of countries such as Argentina and Venezuela. “Chile is an example of how credible institutions can smooth the economic cycle and make 20 adjustments less traumatic,” said Mr Valdés, the minister of finance in Chile, pointing to its widely respected and independent central bank and a well-established fiscal rule that give officials the freedom to implement counter-cyclical policies. However, there are worries that without enough spare capacity in the economy, expansionary fiscal and monetary policies could end up increasing inflation rather than 25 economic growth. Meanwhile monetary policy is restricted by inflation that has reached 5%, well outside the central bank’s 2–4% target range, fuelled by a weaker exchange rate. Crucially, investment remains low because of uncertainty over the outcome of the Prime Minister’s reforms, which are aimed at reducing inequality. A recent rise in corporation tax from 20% to 25% and labour market reforms that strengthen the power of trade 30 unions may have a negative effect on business confidence. Despite a “mildly contractionary” budget, Valdés insisted that the government would continue with costly reforms. Increased taxes on those on higher incomes are considered by the government to be necessary to sustain economic development in Chile. “We do want to change society, while recognising all the good things that have been done in 35 the past 25 years,” said Mr Valdés, referring to an average growth rate of 5.3% over the past three decades, but under 2% in 2015. There is broad consensus that investment in education is the key to unlocking Chile’s growth potential. (Sources: adapted from http://www.ft.com/cms/s/0/89926ce8-df96-11e4-a6c400144feab7de html#axzz3pCnzT3PC FT 20 April 2015 and http://www.ft.com/cms/s/0/d60ac2b2-7453- 11e5-a129-3fcc4f641d98.html?siteedition=uk#axzz3pCnzT3PC FT 19 October 2015 and http://www.ft.com/cms/s/0/d60ac2b2-7453-11e5-a129-3fcc4f641d98.html?siteedition= uk#axzz3pCnzT3PC FT 19 October 2015 all by Benedict Mander) Extract B Chile’s copper mining on a downward track There was a time when investing in Chilean mining meant guaranteed success. After 1990, when military rule was replaced by an elected government, market reforms and restored relations with the US and UK meant foreign companies were keen to exploit vast copper reserves. The existence of large copper reserves in a stable country with a 5 business-friendly government is rare, making Chile much more attractive to investors than countries such as Zambia. By mid-2015, however, the copper price hit a six-year low. Chilean mines are becoming less productive. After 20 years of heavy digging, the ore is lower grade, and much further down. The deeper pits take longer to mine, and use more fuel. Wages are high, and trade 10 unions are powerful. A mining truck driver earns $70 000 a year, $10 000 more than the US equivalent. Many mining projects that were planned are being postponed, and investors are looking to Peru; even the US copper mining industry is becoming more competitive. Energy supply is also a worry as Chile produces virtually no fossil fuels and relies on 15 imported coal and liquid natural gas to power its mines. Energy costs account for 18% of the cost of copper production. Water supply is also becoming a major problem. Farmers and communities accuse mining companies of causing water shortages to keep their operations running. A prolonged drought has not helped. Mining firms are turning to desalination plants 20 or using untreated seawater. However pumping water 200 kilometres from the Pacific Ocean to the copper mines is costly. Chile’s environmentalist movement has forced the government to tighten regulations. In 2001, it took 236 days to get an environmental impact assessment of a new mine approved. By 2013, this had increased to 506 days. 25 (Source: adapted from http://www.ft.com/cms/s/0/ea060ef4-6ae2-11e5-8171- ba1968cf791a.html#axzz3p20if45k Gideon Long September 27, 2015)
(e) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment. (25)
June 2016 · AS Paper 2 · Q1(a) 1 mark AO1=1 Definition
(a) Define the term ‘national income’. (1)
June 2016 · AS Paper 2 · Q1(b) 1 mark Multiple choice
(b) Which one of the following is an injection into the circular flow of income? (1) A Taxation B Imports C Investment D Saving
June 2016 · AS Paper 2 · Q1(c) 2 marks AO1=2 Definition
(c) Define the term ‘circular flow of income’. (2)
June 2016 · AS Paper 2 · Q2(c) 1 mark AO1=1 Diagram
Data and extracts for question 22 The table below shows GDP per capita at purchasing power parities (PPPs) for a selection of European countries in 2013. GDP per capita Country (US$, at PPPs, 2013, rounded) UK 38 500 Spain 33 000 Italy 35 500 (Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD)
(c) Diagram A shows the aggregate demand and aggregate supply for a country. Illustrate actual economic growth on Diagram A. (1) Diagram A Price Aggregate supply level P1 Aggregate demand Y1 Real output
June 2016 · AS Paper 2 · Q5(a) 3 marks AO1=1, AO2=2 Calculation
Data and extracts for question 55 In 2014 the Bank of England estimated the marginal propensity to consume of UK consumers to be 0.5. In 2014 the Chancellor of the Exchequer announced a £15 billion investment programme into UK road infrastructure. (Sources: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/ 2014/qb14q405.pdf and https://www.gov.uk/government/news/ autumn-statement-2014-16-things-you-should-know)
(a) Using the information above, calculate the total increase in national income, resulting from the £15 billion investment. (3)

Work with an Edexcel economics tutor

Essays stuck in Level 2, or losing the easy marks in Section A? Book a trial session with Lianne, a former Edexcel examiner.

Message us on WhatsApp About Lianne
Prefer email? Send an enquiry

If you are under 18, please include a parent's contact details. Enquiries go to enquiries@economicsaleveltutor.com and are deleted once handled. All tutoring is online.