Paper 2: The UK Economy – Performance and Policies · 8EC0/02
Edexcel A AS Paper 2, June 2016
All 15 written questions and 5 multiple choice questions from Edexcel A AS Paper 2 (June 2016), The UK Economy – Performance and Policies. Case studies: UK incomes, inflation and monetary policy. Each question shows its marks and topic, with an examiner insight on 6, and opens the question paper and mark scheme at the right page.
Section A
Q1(a)
Define the term ‘national income’.
Mark splitKnowledge 1
Q1(b)
Which one of the following is an injection into the circular flow of income?
- ATaxation
- BImports
- CInvestment
- DSaving
Show the answer
The answer is C.
TopicNational incomeAggregate demand
Q1(c)
Define the term ‘circular flow of income’.
Mark splitKnowledge 2
TopicNational income
Q2(a)
Define the term ‘purchasing power parities’.
Mark splitKnowledge 2
Q2(b)
The Office for National Statistics estimates that the UK population was 64 million in 2013. Using the data, what was the UK’s total GDP in 2013?
- A$2 464 000 million
- B$2 272 000 million
- C$1 662 000 million
- D$2 112 000 million
Show the answer
The answer is A.
Q2(c)
Diagram A shows the aggregate demand and aggregate supply for a country. Illustrate actual economic growth on Diagram A.
Mark splitKnowledge 1
TopicAggregate demandAggregate supplyEconomic growth
Q3(a)
Define the term ‘claimant count’.
Mark splitKnowledge 1
Q3(b)
Calculate the percentage change in the claimant count from August 2014 to February 2015.
Mark splitApplication 2
Q3(c)
Which one of the following is likely to cause a reduction in the claimant count?
- AAn increase in the weekly payment for claimants
- BA compulsory weekly interview for every claimant
- CAn increase in the size of the workforce
- DA fall in employment
Show the answer
The answer is B.
Q4(a)
Which one of the following can be inferred from Figure 1 in the period shown?
- AThe total UK trade deficit was the largest in June 2013
- BThe trade in goods was always in surplus between January 2013 and
- CThe total UK trade deficit was the smallest in January 2014
- DThe trade in goods deficit was the smallest in June 2013
Show the answer
The answer is D.
Q4(b)
Explain one likely reason for the reduction in the total UK trade deficit in January 2015.
Mark splitKnowledge 1Application 1Analysis 1
Q5(a)
Using the information above, calculate the total increase in national income, resulting from the £15 billion investment.
Mark splitKnowledge 1Application 2
TopicAggregate demand
Q5(b)
Which one of the following is most likely to cause a rightward shift in the aggregate supply curve?
- AA decrease in real output
- BA rise in price level
- CA fall in price level
- DAn increase in productivity
Show the answer
The answer is D.
TopicAggregate supply
Section B
Case study
UK incomes, inflation and monetary policy
Extracts: A: Britons should not fear rise in interest rates · B: Deflation is bad news
In the extracts: MPC, Carney, Monetary Policy, Bank of England, Kristin Forbes, European Union, Committee, Inflation, Deflation, Consumer
Q6(a)
With reference to Figure 1, explain the term ‘real income’.
Mark splitKnowledge 2Application 2
TopicMacroeconomic objectives and policyEconomic growth
Q6(b)
Assess the likely impact of falling real incomes on UK consumers.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 4
TopicMacroeconomic objectives and policyEconomic growth
Examiner insight
- What to cover
- Falling real income cuts purchasing power, so consumption falls and saving may be run down. Demand shifts toward inferior goods and away from normal and luxury goods.
- Evaluation
- Weigh the size and duration of the fall. Low income households are hit hardest. Consumers may borrow or use savings, so consumption falls by less than income.
- Watch out
- Confusing nominal income with real income, so the effect of inflation on purchasing power is missed.
Q6(c)
With reference to Extract A, explain the likely effect of a rise in the value of the pound on aggregate demand.
Mark splitKnowledge 1Application 2Analysis 2
TopicAggregate demand
Examiner insight
- What to cover
- A stronger pound makes UK exports dearer abroad and imports cheaper. Exports fall and imports rise, so net exports fall and aggregate demand shifts left. Use Extract A.
- Diagram
- Aggregate demand and aggregate supply with AD shifting left from AD1 to AD2, real output and the price level both falling.
- Watch out
- Writing the exchange rate effect the wrong way round, so exports are said to rise.
Q6(d)
With reference to the data, explain two likely reasons for the UK’s falling inflation rate.
Mark splitKnowledge 2Application 2Analysis 2
TopicMeasures of economic performance
Examiner insight
- What to cover
- Use the data. Give two causes, such as falling oil and commodity prices cutting firms' costs, and a stronger pound lowering import prices. Explain each as a cost push or demand pull effect.
- Watch out
- Saying prices are falling when a lower inflation rate means prices still rise, only more slowly.
Q6(e)
With reference to Extracts A and B and your own knowledge, discuss whether the MPC should be concerned about the risk of deflation in the UK economy.
Mark splitKnowledge 3Application 3Analysis 3Evaluation 6
TopicMeasures of economic performance
Examiner insight
- What to cover
- Define deflation as a sustained fall in the price level. Falling prices delay spending, raise the real value of debt and cut aggregate demand, pushing inflation below the 2 per cent target.
- Diagram
- Aggregate demand and aggregate supply with AD shifting left, the price level falling below target and real output falling.
- Evaluation
- Separate benign supply side deflation from cheaper oil, which raises real incomes, from damaging demand side deflation. Weigh whether the fall is temporary. Reach a judgement.
- Watch out
- Treating every fall in prices as harmful without separating supply side from demand side causes.
Q6(f)
Evaluate whether the MPC has been successful in controlling the UK’s inflation rate since 2011.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
TopicMeasures of economic performance
Examiner insight
- What to cover
- Compare CPI inflation with the 2 per cent target across the period using the data. Explain how Bank Rate and quantitative easing work through borrowing, spending and aggregate demand to prices.
- Diagram
- Aggregate demand and aggregate supply with AD shifting right after looser monetary policy, raising the price level toward target and raising real output.
- Evaluation
- Weigh years on target against years off it, and note oil prices and the exchange rate moved inflation for reasons outside MPC control. Allow for time lags. Judge.
- Watch out
- Listing inflation figures without linking them to the target or to MPC decisions.
Q6(g)
Evaluate demand-side policy responses to the Global Financial Crisis of 2008.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
TopicMacroeconomic objectives and policy
Examiner insight
- What to cover
- Cover the cut in Bank Rate to near zero, quantitative easing and fiscal stimulus. Explain each through cheaper borrowing, higher consumption and investment, the multiplier and aggregate demand.
- Diagram
- Aggregate demand and aggregate supply with AD shifting right from AD1 to AD2, real output rising and the negative output gap closing.
- Evaluation
- Weigh the recovery in output and employment against weak transmission at very low interest rates, higher public debt, asset price inflation and wider inequality. Judge overall.
- Watch out
- Narrating what happened in the crisis instead of evaluating whether the policies worked.
Question text is quoted from the question papers, © Pearson Edexcel, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.