Paper 2: The UK Economy – Performance and Policies · 8EC0/02
Edexcel A AS Paper 2, November 2020
All 16 written questions and 5 multiple choice questions from Edexcel A AS Paper 2 (November 2020), The UK Economy – Performance and Policies. Case studies: UK government budget and household consumption. 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.
Summer exams were cancelled, so this paper was sat in the autumn series. The paper itself is headed with the original May date.
Section A
Q1(a)
Define the term ‘inflation’.
Mark splitKnowledge 1
Q1(b)
Explain one likely cause of inflation.
Mark splitKnowledge 2
Q1(c)
From the above data, it can be deduced that the percentage point difference between CPI and RPI was:
- A0.0
- B0.2
- C0.4
- D0.6
Show the answer
The answer is D.
Q2(a)
Illustrate the shape of the Classical long-run aggregate supply (AS) curve on the diagram below.
Mark splitKnowledge 1
TopicAggregate supply
Q2(b)
Explain the reason for the shape of the Classical long-run AS curve.
Mark splitKnowledge 2
TopicAggregate supply
Q2(c)
Which one of the following is an example of a market-based supply-side policy?
- AA reduction in unemployment benefits
- BConstruction of new transportation links
- CGovernment-funded apprenticeship schemes
- DIncreased government spending on healthcare
Show the answer
The answer is A.
TopicAggregate demandMacroeconomic objectives and policy
Q3(a)
Which one of the following can be inferred from the above chart over the period shown?
- AThe government was spending more than it received in taxation
- BThe UK’s balance of trade, by value, was always in equilibrium
- CThe value of imports was greater than the value of exports
- DThe value of inflows was greater than the value of outflows
Show the answer
The answer is C.
Q3(b)
Explain one likely reason for the UK’s balance of trade in goods and services over the period shown. Refer to the chart on page 6 in your answer.
Mark splitKnowledge 1Application 1Analysis 1
Q4(a)
Define the term ‘interest rate’.
Mark splitKnowledge 1
Q4(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.
Mark splitApplication 2
TopicAggregate supplyAggregate demandMacroeconomic objectives and policy
Q4(c)
Which one of the following demand-side policies best explains a rise in the base interest rate?
- AContractionary fiscal policy
- BContractionary monetary policy
- CExpansionary fiscal policy
- DExpansionary monetary policy
Show the answer
The answer is B.
Q5(a)
Define the term ‘Gross National Income’.
Mark splitKnowledge 1
Q5(b)
Which one of the following represents the ratio of Gross National Income in 2015 to Gross National Income in 2017?
Show the answer
The answer is C. Open the question paper to read the options.
Q5(c)
Using 2014 as the base year, calculate the index number for 2016. You are advised to show your working.
Mark splitApplication 2
Section B
Case study
UK government budget and household consumption
Extracts: A: UK household consumption · B: Reduction of the UK’s budget deficit
In the extracts: Crown, Bank, GDP, UK Chancellor, Subsequently, Reduction, Exchequer, Guardian, British, England
Q6(a)
With reference to Figure 1, explain the term ‘balanced government budget’.
Mark splitKnowledge 2Application 2
TopicAggregate demandMacroeconomic objectives and policyMeasures of economic performance
Q6(b)
Explain the likely effect of a fall in the exchange rate of the British pound on aggregate demand. Refer to Extract A in your answer.
Mark splitKnowledge 1Application 2Analysis 2
TopicAggregate demand
Examiner insight
- What to cover
- A weaker pound makes UK exports cheaper abroad and imports dearer at home. Export demand rises and import spending may fall, so net trade improves and AD rises. Refer to Extract A.
- Watch out
- A falling pound raises import prices; reversing the SPICED relationship loses the analysis marks.
Q6(c)
With reference to Figure 2 and Extract A, explain two likely influences on the level of UK real household consumption.
Mark splitKnowledge 2Application 2Analysis 2
TopicAggregate demand
Examiner insight
- What to cover
- Give two developed influences using Figure 2 and Extract A, such as real disposable income, interest rates and borrowing costs, consumer confidence, or housing wealth.
- Watch out
- Consumption here is real, so treat price changes only through their effect on real income.
Q6(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.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 4
TopicAggregate demandAggregate supply
Examiner insight
- What to cover
- Consumption is the largest component of AD, so a rise shifts AD right. The multiplier raises real GDP, employment and tax revenue, with upward pressure on the price level.
- Diagram
- AD/AS: AD shifts right. Label price level, real GDP and both equilibria.
- Evaluation
- Depends on spare capacity, the size of the multiplier, how much is spent on imports, and the inflation risk. A falling saving ratio and more debt may make the rise short lived.
- Watch out
- A rise in consumption shifts AD to the right; it does not cause a movement along AD.
Q6(e)
Discuss the factors that might explain why ‘the UK’s forecast long-term trend rate of growth was reduced’ (Extract B lines 9–10).
Mark splitKnowledge 3Application 3Analysis 3Evaluation 6
TopicAggregate demandMacroeconomic objectives and policyMeasures of economic performance
Examiner insight
- What to cover
- Trend growth depends on LRAS, so explain weak productivity, low investment, slower labour force growth, skills gaps and lasting damage from the pandemic. Use Extract B.
- Diagram
- AD/AS: LRAS shifts left or grows more slowly. Label real GDP and the price level. A PPF shifting inwards is an acceptable alternative.
- Evaluation
- Judge which factor matters most and how reliable a long run forecast is. Depends on whether weak productivity is permanent, on the investment response and on the time period.
- Watch out
- Trend growth is about long run supply, so do not explain it with short run falls in AD.
Q6(f)
Evaluate supply-side policies that could be used to increase the UK’s rate of economic growth.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
TopicEconomic growthMacroeconomic objectives and policy
Examiner insight
- What to cover
- Choose market-based and interventionist policies such as tax cuts, deregulation, infrastructure spending and training. Show each raising productivity and the quantity or quality of factors, shifting LRAS right.
- Diagram
- AD/AS: LRAS shifts right with AD unchanged. Label the higher real GDP and the lower price level.
- Evaluation
- Weigh long time lags, high cost and uncertain success against lasting non-inflationary growth. Depends on the cause of weak UK growth, on the opportunity cost of the spending and on demand being strong enough.
- Watch out
- Demand-side policies do not answer this question; effects must work through LRAS and productivity.
Q6(g)
Evaluate the likely macroeconomic effects of the UK government pursuing a policy of reducing its budget deficit.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
TopicMacroeconomic objectives and policy
Examiner insight
- What to cover
- Lower government spending or higher taxes is contractionary fiscal policy. AD shifts left, so the reverse multiplier cuts real GDP and employment, while inflation and debt interest fall.
- Diagram
- AD/AS: AD shifts left. Label the fall in real GDP and the fall in the price level.
- Evaluation
- Depends on the multiplier, the stage of the cycle, whether private investment is crowded in, and market confidence in UK debt. Cutting capital spending also weakens LRAS.
- Watch out
- Keep deficit and debt separate; a smaller deficit still adds to the national debt.
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.