The National Economy

Paper 2 style Practice Paper

Total marks: 40 marks Total time allowed: 1 hour 45 minutes
Text A:

Paragraph 1: With a population of 2000 people, Urbania is the most populated country in the
continent of Gondwana and accounts for 35 % of Gondwana’s population. It is the biggest oil
exporter in Gondwana and also has the largest natural gas reserves in the continent.

Paragraph 2: Economic growth is estimated to have been 6 % in 2019, owing to continued strong
performance mainly in services, but also industry (apart from oil mining) and agriculture. The oil and
gas sector was in decline, although at a slower rate than in the previous year. Revenues from oil and
gas were estimated to have declined by 1.3 %, relative to a decline of 13.1 % in 2018. The sharp
decline in oil prices since the third quarter of 2019 has posed major challenges to the country’s
current account balance and public finances. Oil contributes close to 90 % of export revenues and
roughly 75 % of the country’s total budget revenues.

Paragraph 3: Lower oil prices will continue to pose strong challenges for public finance at all levels of
government during the year and will also represent a major constraint on the ability of the new
government to introduce some of its ambitious programs. It is focusing on anti-corruption, the
economy, including jobs and unemployment, and security.

Paragraph 4: The central bank of Urbania raised its base interest rate to 14 % in July 2019. It was the
second rate increase in the year. In addition, the inflation rate kept its upward trend and reached
16.5 % in June, the highest since 2010.

Paragraph 5: The major medium-term challenge for the government of Urbania is to accelerate the
creation of productive jobs through private sector growth and to make improvements in education
(skills). So far, the pace of job creation has been inadequate, leading to increasing frustration among
underemployed Urbanian youth.

Table 1:

2019

GDP per capita $ 4000

GDP ?

Consumption spending $ 3.5 million

Investment spending $ 1.5 million

Government spending ?

Export revenue $ 1.7 million

Import spending $ 0.5 million

(a) (i) Define the term GDP per capita indicated in bold in Table 1. [2 marks]

(a) (ii) Define the term aggregate demand. [2 marks]

(b) (i) Using information from (Text 1, Paragraph 1) and Table 1, calculate the total GDP of Urbania in
2019. [3 marks]

(b) (ii) Using information from Table 1 and your calculation of GDP in part (b)(ii), calculate the
amount of government spending in 2019. [2 marks]

(c) Using a circular flow diagram of the Urbanian economy, explain which injections and leakages will
be affected by raising the base interest rate by the Central bank (Text 1, Paragraph 4), and by the
decline in oil prices (Text 1, paragraph 2). [4 marks]

(d) Using a business cycle diagram and information from (Text 1, Paragraph 2), explain which phase
of the business cycle is the Urbanian economy currently operating at. [4 marks]

(e) Using a monetarist/new classical AD/AS diagram, explain whether the economy of Urbania is
currently experiencing an inflationary gap or a recessionary gap (Text 1, Paragraphs 2 and 4).

[4 marks]

(f) Using a monetarist/new classical AD/AS diagram, explain how raising the base interest rate by the
Central bank (Text 1, Paragraph 4) will affect the aggregate demand of the Urbanian economy. [4
marks]

(g) Using information from the text/data and your knowledge of economics, discuss whether
national income statistics alone (like GDP and GDP per capita) are the most appropriate measure of
the economic well-being of the citizens of Urbania. [15 marks]