Professional Documents
Culture Documents
AQA Economics
Section 2: The national economy in a global
context
This Answers document provides suggestions for some of the possible answers that might be given for
the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but
they are intended as a brief guide to give teachers and students feedback.
2 Distribution of income refers to how evenly (or not) incomes are shared out across the population.
3 The balance of payments is a record of the financial transactions undertaken between the UK and the
rest of the world for a specific period of time. Award 2 marks to those who just define current account
or balance of trade.
4 Where the average level of prices remains broadly constant over a period of time or rises by no more
than the official target range of CPI inflation (1–3%).
6 A rise in national income is referred to as economic growth, whereas a rise in economic growth refers
to a faster rate of economic growth.
7 Incomes of the poorest have risen but if richer households have seen their incomes rise by more than
10% then inequality — the gap between rich and poor — will have widened.
8 An objective is an aim the government wishes to achieve for the macroeconomy, whereas a policy is a
tool or instrument which helps the government to achieve its objectives for the macroeconomy.
9 £1,408,316 million. 2 marks for percentage increase and 2 marks for correct numbers
10 $965.5172 billion. 2 marks for attempt to use numbers and 2 marks for realisation that it is not the
same as subtracting 1.5%. Rounding may give different degrees of accuracy.
11 £468,768 million. 2 marks for percentage increase and 2 marks for correct numbers
13 The number of those of working age out of work and actively seeking a job expressed as a percentage
of the labour force.
14 Real GDP is national income which has been adjusted to take account of price changes, whereas
nominal GDP is national income unadjusted for price changes.
15 2.96% or 3%. 2 marks for percentage change and additional marks for recognising that it is not based
on the newer figure but on the original price level instead
16 Differences include:
Claimant count only includes those in receipt of JSA/unemployment benefits, whereas LFS
measure includes them plus those who do not claim benefits
LFS measure is based on 3-month rolling average so will have data ‘smoothed out’
People may be more honest on LFS measure and be working and therefore not appear on data,
whereas claimant count measure may include people who are working but claim to be
unemployed to receive benefits
17 Features include:
18
b 1.82% 4 marks — 2 marks if based on change calculated on new GDP rather than original GDP
19
b 4.8% 4 marks — 2 marks for it being on change compared with new price level
20
(i) Objectives: (a), (d) and (f) 1 mark for each correct answer
(ii) Indicators: (b), (c) and (e) 1 mark for each correct answer
22 Economic growth falling refers to the rate of increase falling. Growth is still positive and therefore the
population may still see incomes rising, albeit at a lower rate of growth than before.
23 (a) T, (b) T, (c) F, (d) F 2 marks for all correct, 1 mark for 2 or more correct
24
i 2003
ii 2009
b We would expect the two to move in the same direction as growth creates more demand for
workers. The data partly support this as the rise in unemployment in 2008 followed the recession of
2008. Unemployment remained fairly stable between 2000 and 2007, despite growth being stable. 2
marks for each point
c Possible points:
Unemployment peaked in 2011 at around 8.5% whereas its lowest point was in 2004–05 at
around 4.8%.
Growth peaked at 4.3% in 2003 and reached the deepest point of the recession in 2009 with
negative growth of 4.3%.
26 C
27 C
28 B
29 B
a Deflation occurs when there is a general fall in the average price level over a period of time.
both measures see sharp falls in 2009 — CPI falls to 2.2% and RPI falls to –0.5%
RPI is more erratic and has a bigger range than CPI (range of RPI is around 5.8% and range
of CPI is 3.5%)
good where it is not necessary to know the absolute value but rather the change in the variable
over time
includes items the average family does not use, e.g. cigarettes/e-cigarettes
2 The level of national income when there is no tendency for it to change. This occurs when incomes are
equal to spending (alternatively, when AD = AS, or when injections = withdrawals).
3 This would involve the mistake of double counting. This is where the output of an intermediate product
is included in the national accounts as well as the output of the final product which includes the
intermediate good as well — meaning the intermediate good appears twice.
5 Expenditure by one party will generate income for another party. This means that both are actually the
same thing viewed from a different perspective (as in the circular flow of income). Therefore the totals
should always be the same. However, due to errors and unrecorded incomes (e.g. cash-in-hand
employment), the two totals are rarely exactly the same.
3 marks for full list, 2 marks for 4–5 correct, 1 mark for 2–3 correct
8 Withdrawals total £185bn. Investment and government spending total £175bn, which means exports
must be £10bn.
10
a China: $12,847, India: $5,799, USA: $54,037, New Zealand: $34,565 1 mark for each correct
answer
b $18,832 billion
c There are a number of problems with using real national income to ascertain living standards. Here
are a few of the issues that would answer this question:
spending on public/merit goods can contribute to living standards (health and education in
particular)
environmental degradation
level of democracy/freedom
military expenditure does not contribute directly to living standards but will add to GDP
12 Spending by firms on additions to the capital stock and additions to their levels of stocks held.
13 The value of exports of goods and services less the value of imports of goods and services.
14 The total value of all investment goods in an economy at a particular point in time.
15
a £527,185
b £589,000
16
a Movement along
b Movement along
c Shift
d Movement along
e Shift
f Movement along
17
a L
b R
c L
d R
18
a AS
b AD
d AD
e AS
f AD
19
2 marks for drawing shift in AD to right and correct AD/AS, 2 marks for correct labelling of all other
features
20
2 marks for drawing shift in AD to left and correct AD/AS, 2 marks for correct labelling of all other
features
Alternatively, answers might focus on a leftward shift in AS as a result of higher indirect taxes — this
should be marked as correct if it is accurate
advances in technology
22
a F
b F
c F
d T
25 This is where a change in aggregate demand leads to a greater than proportional change in national
income.
26 The SRAS shows the amount of output firms are willing to produce at a given price level. The LRAS
shows the maximum capacity of output by the overall economy in the long run. Factors determining the
SRAS include wage rates, cost of raw materials and indirect taxes. Factors determining the LRAS
include the population level, the level of technology and the level of infrastructure.
27 Total increase in aggregate demand is (£15m + £25m) £40m. If national income increases by £84m
then the size of the multiplier must be 84/40 = 2.1.
28
2 marks for drawing shift in AS to left and correct AD/AS, 2 marks for correct labelling of all other
features
29
2 marks for drawing shift in AS to right (this can be either a vertical LRAS curve or a rightward shift in
the vertical section of the AS curve) and correct AD/AS, 2 marks for correct labelling of all other
features
30
NB The direction of the shift is not necessary for the mark to be obtained
31 Advances in technology should lead to a rightward shift in the LRAS as it allows the firms within an
economy to produce at a higher level of output (assuming that the technology increases efficiency). At
the same time, it should also encourage firms to spend more on updating their capital stock, i.e. spend
more on investment. This would lead to a rightward shift in the AD curve.
32
a T
b F
c T
d F
e F
33 An appropriate diagram would look like the following. Do not penalise alternative AS curves if they are
presented correctly.
The lower AD caused by the drop in confidence will also have a downward multiplier effect on real
national income, leading to a lower level of national income in equilibrium. Cyclical unemployment will
rise as workers are no longer needed to produce the output that the lower GDP results in.
34
a A skills shortage will be represented either as a leftward shift in the LRAS or as a constant LRAS
that does not rise over time (as more output cannot be produced).
b This would take the form of either a rightward shift in AD leading to higher real GDP, or a rightward
shift in the LRAS leading to higher GDP and a lower price level. It is possible that both curves will
shift. This all, of course, depends on the quality of the schemes and apprenticeships.
c Spending on infrastructure should make it easier for workers to move around the country. For
example, spending on a new train line or an expanded airport makes business travel (e.g.
commuting) easier and this will encourage workers to seek employment further away from where
they live and thus lower regional unemployment and reduce labour immobility.
crowding out effect on employment as public sector workers cannot be employed by private
sector
inflationary consequences
36 D
37 A
38 B
39 D
b 61%
Both variables have risen over the period — consumption from £973,088m to £1,044,378m
and GDP from £1,549,491m to £1,704,998m.
Both variables fell in 2009 — consumption from £1,016,522m to £982,485m and GDP from
£1,631,995m to £1,561,646m.
lower interest rates may lead to a lower exchange rate and more expensive imports
spare capacity
confidence matters
confidence returns
3 Both types of shock involve unexpected, sudden and sharp changes to the conditions of AD or AS. A
supply shock is likely to be more problematic as it will lead to a sharp fall in GDP and higher inflation,
whereas a demand shock will lead to lower GDP but a fall in inflation, which is normally less
problematic.
Points to include:
Higher input prices means firms are less willing to supply output.
Lower GDP results and there is also higher inflation as we move upwards along the AD curve.
7 This occurs when unemployment exists at the same time as vacancies. However, the vacancies are for
jobs that cannot be filled by those who are unemployed as they do not possess appropriate skills.
8 This unemployment exists when there is insufficient aggregate demand to generate full employment.
There is not enough spending within the economy to ensure that all workers are required to produce
the output which can be sold.
9 Unemployment caused by demand-side factors is concerned with there being too little aggregate
demand to generate sufficient jobs. Supply-side causes of unemployment are connected more with
structural factors and incentives within the economy. The distinction is important for a government as it
will guide the government in coming up with an appropriate policy to solve the particular kind of
unemployment.
10 There are plenty of people of working age who are neither unemployed nor employed and are
economically inactive. Similarly, there are people who fall into neither category but are not of working
age.
11 Structural unemployment can exist in two ways. First, there is regional unemployment where
unemployed workers and vacancies exist but in different geographical locations. Another way it exists
is where there is a mismatch of skills so that those who are unemployed possess the wrong type of
skills for the vacancies that exist in the economy.
Higher government spending must be funded by higher taxes, cuts in government spending
elsewhere or borrowing.
Higher borrowing may force up interest rates, which leads to less private sector employment.
13
Inflation
14 An increase in the average level of prices measured over a period of time — expressed as a
percentage.
15 A fall in the rate of inflation. There is still inflation but at a lower rate.
17 Inflationary: (a), (c), (d) and (e). Deflationary: (b) (f) 1 mark for each
18
19
21 This occurs when the flows of income from trade and investments leaving a country are greater than
the flows of income from trade and investments coming into the county.
22 This is a section of the current account of the balance of payments. It contains the net flows of money
arising through transfers of money between countries, e.g. wage remittances from one country to
another.
23 The balance of payments should always balance at zero as any outflow of money financing a purchase
of imports, for example, must be financed by a flow of money in from somewhere, such as an inflow of
borrowing or an inflow of foreign investment. However, the individual components of the balance of
payments may be in surplus or deficit. For example, the UK regularly runs current account deficits
which are financed largely by surpluses on the financial account.
24
26
b £105,651 million (deficit) 1 mark for each correct step — allow OFR
c It would allow a greater demand for UK exports, which are positively related with the growth in
foreign national income. This would improve the current account balance (assuming no further
growth in import values).
higher UK GDP
It should make exports more competitive and lead to a rise in their value/volume.
Imports will become more expensive so it will increase the value of imports.
It may take time for the effects to be felt on changing patterns of demand.
Policy conflicts
29 Actual growth in GDP is less or greater than trend growth of GDP — this is part of the economic cycle.
30 Where attempts to move closer to achieving one objective move us further away from achieving
another objective. Examples of policy conflicts include:
inflation vs unemployment
31 Economic growth can be achieved through policies designed to boost LRAS. This would also lead to a
more competitive export sector, thus improving the balance on the current account of the balance of
payments. Boosting growth through increases in AD normally leads to a larger quantity of imports and
worsens the current account balance.
Explanations should focus on how, if fiscal and monetary policy are used to boost/reduce AD,
we will normally end up with either high unemployment and low inflation, or high inflation and
low unemployment.
A way of avoiding this conflict is to use supply-side policies that would increase LRAS instead
and lead to higher output (and lower unemployment) and also lower inflation as well.
34
a i 2005 Q4
ii 2008 Q4
high unemployment
low confidence
policy conflicts do exist — boosts to AD will lead to more imports and could be inflationary
supply-side policies may prevent conflicts but may not bring swift end to recession
36 A
37 A
38 C
39 A
i Recession
ii Recovery
iii Boom
b This is where actual growth in GDP is lower than the growth in trend GDP.
Output gap remains positive until recession of 2008–09 and then remains negative even when
actual growth resumes.
Negative output gap remains despite 3–4 years of positive economic growth — though looks
close to disappearing.
d The output gap decreases as actual growth resumes in the recovery phase. This means as actual
output increases, the difference between actual and trend output narrows as more of the idle and
spare capacity is used up.
e Diagram as follows:
where AD2 is after the government intervention (this must be made clear either in text or on
diagram).
low/falling unemployment
high confidence
rising inflation
Can the government take corrective action in time even if it wishes to?
2 Changes in monetary policy which will lead to a lower level of aggregate demand, usually in the form of
higher interest rates but also reducing the availability of credit in the economy.
lower consumption
higher saving
lower investment
lower inflation
rising wages
skills shortages
high investment
It will change the competitiveness of exports (either improving or worsening), which will affect AD
and economic growth.
It will change the price paid for imports, which will affect the inflation rate.
Fiscal policy
8 A tax that has to be paid by the person/firm it is levied on. A tax on incomes.
10 Taxes on income: income tax, corporation tax, national insurance contributions, inheritance tax, capital
gains tax. 1 mark for each to max. of 3 marks
11 A regressive tax means poorer households pay proportionately more of their income in tax whereas a
progressive tax means that richer households pay proportionately more of their income in tax.
Examples of regressive tax include: excise duties on fuel (if this is bought in equal quantities by all
households) and taxes on tobacco. Examples of progressive taxes include: income tax and inheritance
tax, as well as taxes on interest.
12 A change in a direct tax will affect the disposable income of a household which will affect their
spending and therefore shift AD. A change in an indirect tax will affect the costs of production for a firm
and will shift the SRAS. Also, a change in direct taxes will, via incentives changing, affect the LRAS.
13 A government could raise taxes to generate an increase in tax revenue (as long as the incentives are
not reduced to a level which reduces overall tax revenue). It could also cut its own expenditure (again
as long as it does not have a downward multiplier effect meaning significantly less tax revenue is
collected).
14 National debt refers to the outstanding stock of government debt still requiring interest payments and
repayment. The budget balance is the surplus or shortfall of government expenditure over taxation. If
there is a deficit on the government’s budget then this will add to the national debt.
15 VAT on petrol is only a regressive tax if it can be established that poorer households spend more of
their income on the good than richer households. This is unlikely. It is likely that poorer households will
spend an equal amount of their income on this product making the tax a proportional tax.
higher tariffs may reduce foreign trade and reduce AD (though this is debatable)
17 One macroeconomic effect is to reduce economic growth via lower consumption or lower investment
(and the multiplier effect on further consumption). One microeconomic effect is the disincentive effect
on work of higher taxes on income. Individual taxes in individual markets will also change behaviour.
For example, higher taxes on petrol may encourage the sale of more hybrid/electrical cars.
18
a £880
b £3,880
c £9,403
19
20 Features include:
Supply-side policy
21 A sale of a government-owned enterprise to the private sector with the aim of improving the working of
the industry in which the enterprise operates.
22 The removal of barriers that prevent competition emerging in an economy. Ending legal monopolies so
as to introduce competition into an industry to increase output.
23 This is where the barriers of entry and exit into the labour market as a whole or between different
labour markets (divided by occupation, region, job status, etc.) are reduced or minimised. It makes it
easier for firms to recruit and to shed labour as and when required. One example would be the use of
temporary labour contracts or zero hours.
24 Both will increase the LRAS of the economy but supply-side policies are the result of deliberate actions
by the government to improve the supply side, whereas supply-side improvements are increases that
occur without deliberate intervention by the government.
25 Fiscal: (a). Monetary: (c), (f). Supply-side: (b), (d), (e). 1 mark each
26
27
a Should improve productivity of workers and also reduce occupational immobility. 3 marks
b Should make work more attractive and raise relative cost of not-working, therefore people will be
more willing to accept jobs and work longer hours. 3 marks
c Reduced benefits make people more willing to take a job even if low paid. 3 marks
d Privatisation and deregulation should increase output and lower prices due to more competition
appearing in the industry. 3 marks
28 One reason is that the large budget deficit meant that tax cuts could not be ‘afforded’. Another reason
is that as income tax has been steadily cut down to 20% any further cuts are not likely to generate
many more improvements in incentives to work.
29 Monetary: (a), (c). Fiscal: (b), (e). Supply-side: (d), (f). 1 mark each
30
i A monetary stimulus means that monetary policy, such as the setting of interest rates, is used to
increase (stimulate) the level of aggregate demand in the economy.
ii A tight fiscal stance means that the combination of government expenditure and taxation rates
designed to keep AD low or restrict growth in AD.
b Low interest rates may be appropriate given the tight fiscal stance used by the government in that,
even though the economy has been growing more or less now for 4–5 years, low interest rates are
still needed given the cuts in government spending which would otherwise be taking AD out of the
economy. Confidence in borrowing and spending is still low, so ongoing low interest rates are still
needed. Jobs that have been created are jobs that are not necessarily well paid or permanent or
secure.
to slow a boom
1 mark for identification of issue plus a further 2 marks for development of the issue (x 2)
The leftward shift in AD will depend on how fast other components of AD are growing and how far
interest rates rise. There is the possibility of a ‘soft landing’ response to the monetary tightening.
32 B
33 D
34 A
35 D
The biggest gap between spending and tax (where the deficit was widest) was in 2010 at
around 11% of GDP.
The budget was in deficit for all years bar the 1998–2000 period (and the forecast period of
2019/20).
The deficit fell because of cuts in government spending rather than tax rises in the period
2010/11 onwards.
c £844.3 billion
lower AD
lower inflation
easier for firms to recruit and shed labour — will reduce natural rate of unemployment
It is always hard to tell if the reduction in unemployment is caused by one set of policies.
The jobs created are not highly paid — they often have low job security and are of a temporary
nature.
Employment/unemployment rates are much more favourable than other countries — surely this
is the benchmark — the ‘quality’ of jobs being created is not relevant?
Poverty has risen — would this have been worse or better without the supply-side policies?