Download AQA Economics Section 2: The national economy in a global context

WORKBOOK ANSWERS
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.
Topic 1 The measurement of economic
performance
Macroeconomic objectives
1 EITHER economic growth is the percentage change in GDP measured over a period of time OR
economic growth is the increase in the economy’s productive capacity over a period of time.
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%).
5 (b) and (c)
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
AQA Economics
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Section 2: The national economy in a global context
Philip Allan for Hodder Education
1
Topic 1
The measurement of economic performance
Macroeconomic indicators and index numbers
12 National income per person or average income per head (calculated as GDP measured in £/population
level).
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
2 marks for each difference explained to max. of 4 marks
17 Features include:

based on typical household purchases

weighted basket of goods

does not include housing costs

updated each year to reflect changes in buying trends
2 marks for each difference explained to max. of 4 marks
18
a $1,629.1 billion 4 marks — 2 marks for price levels being inverted
b
1.82% 4 marks — 2 marks if based on change calculated on new GDP rather than original GDP
a
£2,389.1 million 4 marks — 2 marks for price levels being inverted
b
4.8% 4 marks — 2 marks for it being on change compared with new price level
19
c –2.9% 4 marks — OFR applies
20
(i) Objectives: (a), (d) and (f) 1 mark for each correct answer
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Section 2: The national economy in a global context
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2
Topic 1
The measurement of economic performance
(ii) Indicators: (b), (c) and (e) 1 mark for each correct answer
21 (a) F, (b) T, (c) F, (d) T 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
a
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%.
2 marks for each point to max. of 4 marks
d Possible reasons include:
 growth generates higher tax revenue
 growth leads to less expenditure on welfare
 growth improves living standards
 growth will improve the popularity of the government
2 marks for each point explained to max. of 6 marks
Exam-style questions: multiple choice
25 D
26 C
27 C
28 B
29 B
Exam-style questions: data response
30
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Section 2: The national economy in a global context
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Topic 1
The measurement of economic performance
a Deflation occurs when there is a general fall in the average price level over a period of time.
b 0.2% (or 0.16%) 2 marks for calculation of percentage change
c Possible answers include:

both measures of inflation peak in 2011 — RPI at 5%, CPI at 4.5%

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%)
2 marks for each point to max. of 4 marks
d Index numbers have the following uses:

easy to represent graphically and show changes more clearly

good for comparative data

good where it is not necessary to know the absolute value but rather the change in the variable
over time
2 marks for each developed point to max. of 4 marks
e CPI has the following limitations:

takes no account of improvements in quality of products

regularly updated so not comparing like with like

ignores housing costs which are significant

only based on a typical family’s shopping so may be unrepresentative for most

includes items the average family does not use, e.g. cigarettes/e-cigarettes
AQA Economics
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Section 2: The national economy in a global context
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Topic 2
Topic 2
How the macroeconomy works
How the macroeconomy works
National income and the circular flow of income
1 The model of the macroeconomy where money flows from firms to households as incomes and back
again as consumer spending.
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.
4 Any two from the following:

to forecast tax revenue receipts

to forecast government spending (on welfare)

making a decision on whether to relax or tighten fiscal and monetary policy

estimates of needs for transport (which is a derived demand) can be made

any other variable use
2 marks for each point developed to max. of 4 marks
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.
6
(i) Injections: investment, government spending, exports
(ii) Withdrawals: saving, taxation and imports
3 marks for full list, 2 marks for 4–5 correct, 1 mark for 2–3 correct
7 I + G +X = S + T + M for equilibrium. S must be £20 billion.
8 Withdrawals total £185bn. Investment and government spending total £175bn, which means exports
must be £10bn.
9 Answers are as follows: 1 mark for each correct one
Investment
(£m)
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Saving (£m)
Taxation
(£m)
Government
spending (£m)
Exports
(£m)
Section 2: The national economy in a global context
Philip Allan for Hodder Education
Imports (£m)
5
Topic 2
How the macroeconomy works
Scenario 1
545,341
313,123
363,634
424,231
12,123
304,938
Scenario 2
2,413,432
4,101,810
5,445,312
7,356,452
344,241
567,003
Scenario 3
39,080
41,511
65,446
123,131
132,312
187,566
Scenario 4
222,678
231,707
602,080
543,535
765,654
698,080
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:

population size — per capita is a better measure

income may not be distributed evenly

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
Aggregate demand and aggregate supply
11 Total planned expenditure at a given price level (or C + I + G + X – M).
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
a
Movement along
b
Movement along
16
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Section 2: The national economy in a global context
Philip Allan for Hodder Education
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Topic 2
c
Shift
d
Movement along
e
Shift
f
Movement along
How the macroeconomy works
1 mark for each correct answer
17
a
L
b R
c
L
d
R
1 mark for each correct answer
18
a AS
b AD
c
AS (both though eventually, as export prices change)
d
AD
e
AS
f
AD
1 mark for each correct answer
19
2 marks for drawing shift in AD to right and correct AD/AS, 2 marks for correct labelling of all other
features
AQA Economics
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Section 2: The national economy in a global context
Philip Allan for Hodder Education
7
Topic 2
How the macroeconomy works
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
21 Possible factors include:

lower interest rates

lower corporation tax

advances in technology

greater business confidence
2 marks for each point developed to max. of 4 marks
22
a
F
b
F
c
F
d
T
1 mark for each correct answer
23 Ways in which a cut in interest rates would boost consumption include:

reduces the incentive to save

increases the amount of credit-financed consumption (i.e. borrowing to consume)

increases discretionary income of those with mortgages
AQA Economics
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Section 2: The national economy in a global context
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Topic 2
How the macroeconomy works
AD/AS and economic activity
24 This is where increases in business investment are the consequence of an increase in national income
(as firms build up their capacity in anticipation of the higher sales economic growth should bring).
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
AQA Economics
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Section 2: The national economy in a global context
Philip Allan for Hodder Education
9
Topic 2
How the macroeconomy works
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
a Shift SRAS to left
b Shift SRAS to right
c Shift LRAS to right
d Shift SRAS to left
e Shift LRAS to right
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
1 mark for each correct answer
33 An appropriate diagram would look like the following. Do not penalise alternative AS curves if they are
presented correctly.
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Section 2: The national economy in a global context
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Topic 2
How the macroeconomy works
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.
Up to 4 marks for the diagram
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.
d
Negative consequences would include:

increased budget deficit

cuts in government expenditure elsewhere

crowding out effect on employment as public sector workers cannot be employed by private
sector

externalities — pollution, environmental damage, etc.

inflationary consequences
Exam-style questions: multiple choice
35 D
36 D
37 A
38 B
39 D
Exam-style questions: data response
40
a Consumption refers to spending by households out of disposable income on consumer durables
and consumer non-durables.
b 61%
c Possible points to include:

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.
AQA Economics
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Section 2: The national economy in a global context
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11
Topic 2
How the macroeconomy works

Both variables fell in 2009 — consumption from £1,016,522m to £982,485m and GDP from
£1,631,995m to £1,561,646m.

Consumption as a proportion of GDP could be explored.
2 marks for each point to max. of 4 marks
d Uses of data include:

calculation of tax revenue

plans for government expenditure

decisions on macro policy

forecast of likely government borrowing

calculation of contribution to EU budget
e Possible answers include:
f

contractionary fiscal policy

low consumer/business confidence

high exchange rate

interest rates low for a short period of time
Relevant issues include:

cuts in interest rates will boost consumption

cuts in interest rates will lead to higher investment

lower interest rates may lead to a lower exchange rate and more expensive imports
Points for evaluation include:

spare capacity

size/duration of interest rate cuts

depends on fiscal stance

confidence matters
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Section 2: The national economy in a global context
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Topic 3
Topic 3
Economic performance
Economic performance
Economic growth and the economic cycle
1 Trend growth is another name for long-run growth. This relates to the increases in the productive
capacity of an economy over time.
2 Any three of the following:

unemployment stops rising or slows in its increases

confidence returns

investment begins to rise

inflation stops falling

budget deficit stops increasing

trade balance begins to worsen again
1 mark for each to max. of 3 marks
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.
4 Correct answers: (a), (d), (e) 1 mark for each
5
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Topic 3
Economic performance
Points to include:

A sudden sharp increase in oil prices leads to unexpected fall in AS.

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.
Employment and unemployment
6 This is where all those who are looking for work can find employment at the going wage rate. There
should be no cyclical unemployment, although other types of unemployment may exist.
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.
12 There are a number of problems with this statement.

Higher government spending must be funded by higher taxes, cuts in government spending
elsewhere or borrowing.

Crowding out may occur.

Higher borrowing may force up interest rates, which leads to less private sector employment.

Unemployed workers may be unsuited to the jobs the government creates.
10 marks for a discussion of two or more of the above or related points
13
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Topic 3
Economic performance
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.
16 A fall in the average level of prices measured over a period of time.
17 Inflationary: (a), (c), (d) and (e). Deflationary: (b) (f) 1 mark for each
18
19
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Topic 3
Economic performance
The balance of payments
20 This refers to the net investment income in the current account of the balance of payments. It is the
income arising from factors of production located overseas less the income paid overseas by foreign
factors located in the UK.
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
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Topic 3
Economic performance
25 £1,011 million (surplus) 1 mark for each correct step
26
a £35,224 million (deficit) 1 mark for each correct step
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).
27 Any two from the following:

higher UK GDP

higher relative UK inflation

higher exchange rate — might take time though

reduced UK productivity in goods which can be substituted by imports
1 mark for identification + 1 for explanation to max. of 4 marks
28 Relevant issues would include:

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.

Marshall–Lerner condition/J-curve effect may be mentioned, but this is not expected.
Policy conflicts
29 Actual growth in GDP is less or greater than trend growth of GDP — this is part of the economic cycle.
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Section 2: The national economy in a global context
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Topic 3
Economic performance
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

inflation vs economic growth

economic growth vs balance on current account
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.
32 (b) and (d) 1 mark for each
33 Relevant diagram may appear as follows:

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
b Five quarters/1.25 years
c A shock is a sudden/unexpected/large change in either AD or AS (or both).
d Any three of the following:

high unemployment

low inflation/falling inflation/deflation perhaps
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Topic 3
Economic performance

low confidence

high budget deficit

low current account deficit

any other relevant point
3 marks for each point explained to max. of 9 marks
e Relevant issues would include:

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

depends on how large the policy response is

depends on how much spare capacity there is
Exam-style questions: multiple choice
35 C
36 A
37 A
38 C
39 A
Exam-style questions: data response
40
a
i
Recession
ii Recovery
iii Boom
b This is where actual growth in GDP is lower than the growth in trend GDP.
c Relevant points would include:

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.

Output gap is between 2 and –4% of GDP.
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.
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Topic 3
Economic performance
e Diagram as follows:
where AD2 is after the government intervention (this must be made clear either in text or on
diagram).
f
Relevant points would include:

low/falling unemployment

high confidence

rising inflation

increasing current account deficit

narrowing of budget deficit

any other relevant point
2 marks for each point explained to max. of 6 marks
g Relevant points for analysis would include:

Booms can be inflationary if not addressed.

The current account balance will worsen in a boom.

A smoother economic cycle will generate stability and more confidence.

Booms may lead to skills shortages.
Points for evaluation:

How do we know when a boom is going to occur?

Can the government take corrective action in time even if it wishes to?

Booms are popular — with the electorate.

Booms can often only be identified retrospectively.
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Topic 4
Topic 4
Macroeconomic policy
Macroeconomic policy
Monetary policy
1 Policies relating to the amount of money in an economy and the price of that money through the rate of
interest.
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.
3 Any three of the following:

lower consumption

higher saving

lower investment

lower economic growth

lower inflation

higher exchange rate

any other relevant point
1 mark each to max. of 3 marks
4 Likely factors include:

falling exchange rate

rising wages

falling unemployment (and low unemployment)

positive output gap

skills shortages

high investment

fast actual economic growth

any other relevant point
3 marks for each explanation to max. of 9 marks
5 Likely ways include:

It will change the competitiveness of exports (either improving or worsening), which will affect AD
and economic growth.
AQA Economics
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Section 2: The national economy in a global context
Philip Allan for Hodder Education
21
Topic 4
Macroeconomic policy

It will change the price paid for imports, which will affect the inflation rate.

It will affect the current account balance as a result.
2 marks for each way explained to max. of 4 marks
6 Diagram as follows, where AD2 follows the rise in interest rates:
7 Relevant issues include:

effect on AD — easing demand-pull pressures

effect on AS — via likely rise in exchange rate lowering cost-push pressures

effect on AS — via likely moderation in wage growth lowering cost-push pressures
Fiscal policy
8 A tax that has to be paid by the person/firm it is levied on. A tax on incomes.
9 Changes in taxation or government spending implemented by the government to effect macroeconomic
change.
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
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
22
Topic 4
Macroeconomic policy
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.
16 Ways affected include:

higher taxes on income reduce consumption and reduce AD

higher taxes on income reduce incentives to work and reduce LRAS

higher indirect taxes increase costs of production and reduce SRAS

higher corporation taxes reduce investment

higher tariffs may reduce foreign trade and reduce AD (though this is debatable)
3 marks for each point developed to max. 9 marks
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
4 marks for each correct calculation
19
20 Features include:
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
23
Topic 4
Macroeconomic policy

different bands of tax — higher rates on higher earners

likely but not necessary tax-free band on low incomes

richer pay a higher proportion of their incomes as taxes

may be more tax avoidance/evasion by higher earners due to disincentive effects
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
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
24
Topic 4
Macroeconomic policy
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
a
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.
c Reasons would include:

need to eliminate the budget deficit

need to reduce growth in AD (to prevent demand-pull inflation)

as a complement to loose monetary policy

to slow a boom

to maintain financial credibility This is quite a high-level response
1 mark for identification of issue plus a further 2 marks for development of the issue (x 2)
d
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
25
Topic 4
Macroeconomic policy
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.
Exam-style questions: multiple choice
31 B
32 B
33 D
34 A
35 D
Exam-style questions: data response
36
a An excess of taxation revenue over the level of government expenditure.
b Relevant points include:

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 budget surplus peaked in 1999/2000 at around 4% of GDP.

The deficit fell because of cuts in government spending rather than tax rises in the period
2010/11 onwards.
c £844.3 billion
d
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
26
Topic 4
Macroeconomic policy
e Higher taxes would potentially have the following effects:
f

lower AD

reduced budget deficit

potentially higher unemployment via cyclical effects

lower inflation

improved current account balance of balance of payments
Issues for analysis would include:

unemployment has fallen quickly since the end of the recession

lower unemployment compared with other major economies

lower inflation which has remained low since continued recovery

easier for firms to recruit and shed labour — will reduce natural rate of unemployment

expansion can continue without inflationary pressures emerging early
Issues for evaluation:

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?

Surely there is an element of value judgement in any overall conclusion?
AQA Economics
© David Horner and Steve Stoddard
Section 2: The national economy in a global context
Philip Allan for Hodder Education
27