Edexcel A · Theme 2: The UK economy, performance and policies · 2.2 Aggregate demand
Edexcel A Economics past paper questions: Aggregate demand
Every Edexcel A question on Aggregate demand from 2016 to 2025: 6 essays, 35 data response questions, 31 short answer questions and 21 multiple choice questions. It covers Aggregate supply, Macroeconomic objectives and policy, Economic growth, Measures of economic performance and International economics. Each question links to its paper, mark scheme and examiner report.
SubtopicsAggregate supply 20Macroeconomic objectives and policy 8Economic growth 5Measures of economic performance 4International economics 4National income 3Business growth 3Market structures 3Role of the state in the macroeconomy 1Emerging and developing economies 1
Essay questions on aggregate demand
Case study: Changes in the nature of UK towns and cities
Evaluate the microeconomic and macroeconomic effects of falling house prices.
Examiner insight
- What to cover
- Cover both sides. Micro: negative wealth effect on consumption, construction firms cutting output, estate agents and related markets. Macro: lower AD, lower growth, improved affordability, effects on bank balance sheets.
- Watch out
- Treating falling house prices as wholly bad. Affordability gains for buyers must appear in the judgement.
Case study: Turkey – an emerging economy
Evaluate the microeconomic and macroeconomic impact of large infrastructure projects such as the building of a third airport in Istanbul.
Examiner insight
- What to cover
- Cover both sides. Micro: construction jobs, negative externalities, land use, effects on competing airports. Macro: the multiplier and accelerator, higher LRAS, tourism receipts, opportunity cost of public funds.
- Watch out
- Treating infrastructure spending as unambiguously good. The opportunity cost and the risk of white elephant projects must be weighed.
Case study: The UK economy
Evaluate the microeconomic and macroeconomic effects of a decline in the literacy and numeracy skills of a country’s young workers.
Examiner insight
- What to cover
- Cover both sides. Micro: lower marginal revenue product, lower wages, reduced labour mobility, higher training costs for firms. Macro: lower productivity, weaker LRAS, reduced competitiveness and slower growth.
- Watch out
- Writing about education policy instead of the effects of the decline itself.
Case study: Markets for food and drinks high in fat, salt or sugar (HFSS)
Evaluate the microeconomic and macroeconomic effects of increased government spending on education to promote healthy eating in the UK.
Examiner insight
- What to cover
- Cover both sides. Micro: education corrects information failure, shifting demand for HFSS foods left and healthy foods right, towards the social optimum. Macro: the spending raises AD, and healthier workers raise LRAS.
- Watch out
- Assuming information campaigns change behaviour, without noting that habit and addiction limit the shift in demand.
Case study: The UK economy
Evaluate government policies, apart from migration policies, that could be used to increase the employment rate in the UK.
Examiner insight
- What to cover
- Select two or three policies, such as cutting income tax, funding training, childcare support or expansionary fiscal policy. Trace each to more people willing and able to work.
- Watch out
- The employment rate is the share of the working age population in work, not the unemployment rate.
Case study: Copper prices, US dollars per tonne, 2007–2015
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment.
Examiner insight
- What to cover
- Cover both sides. Micro: investment cuts Chilean firms unit costs, raises productivity and can change market structure. Macro: investment raises AD now and LRAS later, lifting growth, jobs and competitiveness.
- Watch out
- Treating investment only as a demand side injection and ignoring its long run supply side effect.
Data response questions on aggregate demand
Case study: The German economy
With reference to Extract B, discuss the impact of the planned investment by Intel in a new semiconductor factory on Germany’s aggregate demand. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Investment is a component of AD, so the Intel semiconductor plant shifts AD right. The multiplier raises income, consumption and employment further, with construction and supply chain firms gaining first.
- Watch out
- Analysing only the supply side effect when the question asks specifically about aggregate demand.
Discuss the likely macroeconomic effects of a decrease in government expenditure on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer.
Examiner insight
- What to cover
- Government spending is a component of AD, so a cut shifts AD left. The reverse multiplier lowers real GDP, raises unemployment and eases inflation, while the budget deficit falls.
- Watch out
- Show the leftward AD shift and remember that cutting investment spending harms long run supply too.
Case study: The UK Economy
With reference to Figure 4 and Extract A, examine the likely impact of the ‘freeze in income tax thresholds’ (Extract A line 1) on aggregate demand.
Examiner insight
- What to cover
- Frozen thresholds cause fiscal drag, as rising nominal wages pull workers into higher tax bands. Disposable income falls, so consumption falls and AD shifts left, with a multiplier effect on output.
- Watch out
- Treating the freeze as no tax change because rates are unchanged, which misses fiscal drag entirely.
Case study: UK monetary policy since the Global Financial Crisis of 2008
Assess the likely impact of an increase in real wages on the UK economy. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Higher real wages raise disposable income and consumption, shifting AD right. They also raise firms' labour costs, shifting SRAS left. Show both effects on output and the price level.
- Watch out
- Real wages are wages adjusted for inflation, so a nominal rise below inflation is a real cut.
Case study: Trade and development in Africa
With reference to Extract A, explain what is meant by a ‘regional trade agreement’ (Extract A, line 7).
Examiner insight
- What to cover
- Define a regional trade agreement as a deal between countries in one region to reduce or remove tariffs and other barriers on trade with each other. Use the African agreement named in Extract A.
- Watch out
- Confusing a regional trade agreement with a customs union or common market by adding a common external tariff or free movement of labour.
Case study: Trade and development in Africa
With reference to Extract A, examine two causes of the high cost of transporting goods between African countries.
Examiner insight
- What to cover
- Pick two causes from Extract A, such as poor road and rail infrastructure, and border delays, customs paperwork and corruption. Link each to higher unit transport costs and longer journey times.
- Watch out
- Describing African poverty in general instead of naming specific causes of transport costs from the extract.
Case study: Trade and development in Africa
Discuss market-orientated strategies the Angolan government could use to improve development.
Examiner insight
- What to cover
- Suggest trade liberalisation, privatisation, deregulation, removing subsidies, a floating exchange rate and promoting foreign direct investment. Explain how competition and stronger incentives raise efficiency, investment and incomes in Angola.
- Watch out
- Offering interventionist strategies such as protectionism or state ownership, which the command excludes.
Case study: Changes in the nature of UK towns and cities
Examine two reasons why retailers on the high street tend to remain small.
Examiner insight
- What to cover
- Give two reasons and develop each. Options include a small local market, diseconomies of scale in retail premises, niche or personal service, limited access to finance, and the owner's objectives beyond profit.
- Watch out
- Explaining why firms grow instead of why these firms stay small.
Case study: Changes in the nature of UK towns and cities
Discuss possible methods of price and non‐price competition that firms could use to increase the value of sales on the high street.
Examiner insight
- What to cover
- Price competition includes discounting, loss leaders and price matching. Non price competition includes loyalty schemes, service, opening hours, product range and click and collect. Link each to higher sales value.
- Watch out
- Listing methods without linking them to the value of sales, which is price times quantity.
Case study: UK Government spending and inequality
With reference to Extract B, discuss the benefits of an increase in infrastructure spending on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer.
Examiner insight
- What to cover
- Infrastructure spending raises AD directly, then the multiplier raises income and consumption further. Better transport and broadband cut firms costs and raise productivity, shifting LRAS right, so growth comes without inflation.
- Watch out
- Shifting AD right only and forgetting the long run supply side gain that infrastructure is meant to deliver.
Case study: UK investment and productivity
With reference to Figure 1, explain the term ‘investment’.
Case study: UK investment and productivity
With reference to Extract A, explain two influences on the level of UK investment.
Examiner insight
- What to cover
- Give two developed influences from Extract A, such as business confidence, interest rates and the cost of borrowing, corporation tax, or expected demand and spare capacity.
- Watch out
- Investment means firms buying capital goods, not buying shares or saving money.
Case study: UK investment and productivity
Explain one likely reason why ‘the UK Government expects the UK economy to perform better than Germany and Italy’ (Extract A, lines 19–20).
Examiner insight
- What to cover
- Give one developed reason from Extract A, such as stronger consumer spending, a larger policy stimulus, recovery from a deeper fall, or a different mix of industries.
- Watch out
- Growth rates depend on the base year, so a faster rate does not mean a higher level of output.
Case study: The German economy
Discuss the likely impact of investment in new technology on the profitability of firms in Germany, as described in Extract C line 20. Use a cost and revenue diagram to support your answer.
Examiner insight
- What to cover
- New technology raises fixed costs first, then lowers average and marginal costs as output rises. Show profit increasing where the gap between AR and AC widens for German firms.
- Watch out
- Shifting the cost curves but not identifying the new profit maximising output and the changed profit area.
Case study: Trade and Development Issues in Africa
With reference to Figure 1 and Extract A, explain the likely impact of a Fairtrade scheme on agricultural communities.
Examiner insight
- What to cover
- Treat Fairtrade as a guaranteed minimum price above the free market price for cocoa. Higher and more stable farm incomes, as Extract A shows, fund investment in schools, health and farm equipment in cocoa communities.
- Watch out
- Students describe Fairtrade as charity and never link the guaranteed price to higher producer revenue and community investment.
Case study: Trade and Development Issues in Africa
Examine two ways, apart from Fairtrade schemes, in which cocoa farmers could boost their incomes despite the falling price of cocoa.
Examiner insight
- What to cover
- Choose two routes, such as processing cocoa into chocolate to add value, diversifying into other crops, or forming a cooperative to raise bargaining power. Chain each to higher revenue or lower unit costs.
- Watch out
- Offering two versions of the same idea, or drifting back into Fairtrade, which this question excludes.
Case study: Trade and Development Issues in Africa
Discuss the problems for the Ivory Coast of dependency on cocoa for a large proportion of their exports. Refer to Figure 2 in your answer.
Examiner insight
- What to cover
- Link cocoa price volatility in Figure 2 to unstable export revenue, a swinging current account, unpredictable government tax revenue and weak investment. Add the long run decline in commodity terms of trade.
- Watch out
- Listing general problems of developing countries without tying each one to reliance on a single commodity.
Case study: Trade and Development Issues in Africa
Discuss the likely benefits of increased economic integration for sub‐Saharan African countries.
Examiner insight
- What to cover
- Build a chain from integration to trade creation, comparative advantage, a larger market allowing economies of scale, more foreign direct investment, faster growth, higher incomes and more tax revenue for development.
- Watch out
- Writing about globalisation in general rather than regional integration between sub-Saharan African countries.
Case study: The UK economy
With specific reference to Figure 3, explain why productivity is measured by ‘GDP per hour worked, nominal values at PPPs’.
Examiner insight
- What to cover
- Output must be measured per hour, not per worker, so differences in hours worked do not distort the comparison. PPPs convert currencies at comparable purchasing power so countries can be compared directly.
- Watch out
- Explaining productivity in general rather than why each element of that specific measure is used.
Case study: The UK economy
Apart from literacy and numeracy skills in young workers, examine one reason for the trend in productivity in the UK, over the period shown in Figure 4.
Examiner insight
- What to cover
- Choose one reason and develop it fully. Options include weak business investment since 2008, low spending on research and development, an ageing capital stock, or a shift towards low productivity service jobs.
- Watch out
- The question asks for one reason only, developed in depth. Listing several reasons briefly wastes the analysis marks.
Case study: The UK economy
Discuss factors that are causing many high street retailers in the UK to close some branches or shut down completely. Use a cost and revenue diagram to support your answer.
Examiner insight
- What to cover
- Trace falling revenue from online competition and weak real incomes against high fixed costs of rent and business rates. Show the firm making a loss and closing branches where AR falls below AVC.
- Watch out
- Drawing the diagram but not using it. The loss area and the shut down condition must be referred to in the writing.
Case study: UK government budget and household consumption
With reference to Figure 1, explain the term ‘balanced government budget’.
Case study: UK government budget and household consumption
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.
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.
Case study: UK government budget and household consumption
With reference to Figure 2 and Extract A, explain two likely influences on the level of UK real household consumption.
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.
Case study: UK government budget and household consumption
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.
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.
- Watch out
- A rise in consumption shifts AD to the right; it does not cause a movement along AD.
Case study: UK government budget and household consumption
Discuss the factors that might explain why ‘the UK’s forecast long-term trend rate of growth was reduced’ (Extract B lines 9–10).
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.
- Watch out
- Trend growth is about long run supply, so do not explain it with short run falls in AD.
Case study: UK inflation and economic growth
With reference to Figure 3, assess the likely impact of the change in the value of exports, since mid-2016, on the economic growth of the UK. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Describe the export trend in Figure 3 since mid-2016. Higher exports raise net trade, so AD shifts right and the multiplier raises real GDP, giving actual economic growth.
- Watch out
- Use the direction actually shown in Figure 3 and judge net trade, not exports on their own.
Case study: World coal prices, 2006–2016, US dollars per tonne
Examine the likely effects on the profitability of Indonesian rice farmers of the government’s increased investment in dams (Extract E, lines 43-48). Use a cost and revenue diagram to support your answer.
Examiner insight
- What to cover
- Dams improve irrigation, so yields rise and cost per tonne of rice falls. With price unchanged, profit per unit and total profit for Indonesian rice farmers increase.
- Watch out
- Drawing a market supply and demand diagram when a cost and revenue diagram is specified.
Case study: The UK economy
With reference to Extract A, assess the likely macroeconomic effects of an increase in house prices. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Higher house prices create a wealth effect and more equity withdrawal, so consumption rises. AD shifts right and the multiplier raises real GDP, employment and the price level.
- Watch out
- House price rises are a wealth effect on consumption, not investment in the national accounts.
Case study: The UK economy
With reference to the information provided, explain one likely factor, other than changes in house prices, that could influence the level of savings of UK households.
Examiner insight
- What to cover
- Choose one factor such as interest rates, consumer confidence, real income or inflation. Trace the chain to the household saving ratio using the data provided.
- Watch out
- Only one factor is credited, so developing several loses the analysis marks.
Case study: The UK economy
Explain two factors that might cause a rise in the value of the multiplier.
Examiner insight
- What to cover
- Use the multiplier as 1/(MPS+MPT+MPM). Explain two changes that cut withdrawals, such as a lower saving rate or a lower marginal tax rate, so each round of spending is larger.
- Watch out
- Quoting the formula is not enough; show why the withdrawal falls and why the multiplier then rises.
Case study: The UK economy
With reference to Extract B and Figure 1, discuss the likely impact of migration on employment and unemployment in the UK.
Examiner insight
- What to cover
- Migration raises labour supply, filling vacancies and raising employment and output. It also raises AD through spending. Use Extract B and Figure 1 to judge the effect on unemployment.
- Watch out
- Employment and unemployment are different measures, so answer both and avoid the lump of labour fallacy.
Case study: The UK economy
With reference to Extract D (line 18), explain the meaning of the term ‘output gap’. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Define the output gap as the difference between actual real GDP and the trend or potential level of output. Say whether Extract D describes a negative or a positive gap.
- Watch out
- Drawing AD and SRAS with no LRAS or potential output line, so there is no gap left to label.
Case study: UK economic recovery
With reference to Extract A, paragraph 2, explain one likely influence on UK investment.
Examiner insight
- What to cover
- Take one influence from Extract A paragraph 2, such as business confidence, interest rates or expected demand. Explain the chain from it to the expected return on capital and then to investment.
- Watch out
- Listing several influences briefly rather than explaining one in a full chain of reasoning.
Case study: UK incomes, inflation and monetary policy
With reference to Extract A, explain the likely effect of a rise in the value of the pound on aggregate 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.
- Watch out
- Writing the exchange rate effect the wrong way round, so exports are said to rise.
Short answer questions on aggregate demand
With reference to the data, explain one likely effect of the fall in investment in 2020.
In July 2020 a survey estimated that the marginal propensity to consume in the UK was 0.1. (Source: adapted from https://ifs.org.uk/uploads/WP202035-MPCs-through- COVID-spending-saving-and-private-transfers.pdf ) Calculate the total increase in aggregate demand from an increase in government spending of £60 million.
Case study: Ghana – cocoa and chocolate production
Discuss factors influencing the level of aggregate demand in Ghana. Use an aggregate demand and aggregate supply diagram in your answer.
Examiner insight
- What to cover
- Identify the components of AD and the factors moving them in Ghana: consumer incomes and confidence, interest rates and credit, government spending, exchange rate and world cocoa demand.
- Watch out
- Listing the components of AD without applying them to Ghana. The application marks need the extracts.
Define the term ‘marginal propensity to consume’.
Explain one likely factor that could increase the level of consumption of UK households.
Define the term ‘investment’.
Annotate the aggregate demand (AD) and short-run aggregate supply (SRAS) diagram below to show the likely impact of a fall in business investment on the equilibrium level of real output and the price level.
Draw an aggregate demand and aggregate supply diagram to illustrate the likely impact of an increase in the UK base interest rate on the average price level and real output.
With reference to the chart on the previous page, explain the likely effect of a fall in the marginal propensity to consume on the level of real GDP. Refer to the multiplier in your answer.
Define the term ‘investment’.
Annotate the aggregate demand (AD) and aggregate supply (AS) diagram below to show the likely impact of a fall in business investment on the equilibrium level of real output and the price level.
Using the information above, calculate the total reduction in the UK’s GDP from a fall in government spending of £20 million.
With reference to the chart on the previous page, explain the likely impact of an increase in average house prices on UK consumption.
With reference to the chart above, explain the likely impact of a reduction in the base interest rate on UK investment.
Annotate the aggregate demand (AD) and aggregate supply (AS) diagram below to show the likely impact of an improvement in net trade on the equilibrium level of real output and the price level.
Calculate the total final increase in US aggregate demand as a result of the President’s ‘expansionary fiscal policies’, assuming no other changes.
Explain the likely impact on aggregate demand of a fall in average house prices.
Using the example above, explain how the multiplier process leads to an increase in aggregate demand.
Draw an aggregate demand and aggregate supply diagram to show the likely impact of this new bridge on the price level and real output in the region.
Case study: Turkey – an emerging economy
Discuss the likely success of policies to reduce the consumption of single‐use plastic bags in cities such as Istanbul.
Examiner insight
- What to cover
- Set out the policies: a charge or tax per bag, a ban, recycling subsidies, and information campaigns. Trace how each changes the price or availability of bags in a city such as Istanbul.
- Watch out
- Describing the policies without judging how well each works. The command word is Discuss, so a supported judgement is needed.
Draw an aggregate demand and aggregate supply diagram to show the likely impact of an increase in government spending on infrastructure on a country’s price level and real output.
Calculate the value of the multiplier based on the data given. You are advised to show your working.
Draw an aggregate demand and aggregate supply diagram illustrating the likely impact of a rise in interest rates on the price level and real output.
Define the term ‘aggregate demand’.
In 2016/17 total forecast UK government spending amounted to £772 billion and total forecast tax receipts amounted to £716 billion. Calculate forecast UK government spending on social protection as a percentage of total forecast UK government spending in 2016/17. You are advised to show your working.
Explain one possible reason for the changes in the marginal propensity to save as shown in the table.
Explain the likely effect of a fall in the marginal propensity to save on the value of the multiplier if other things remain equal.
Annotate the aggregate demand and aggregate supply diagram below to show the likely impact of the increase in the personal allowance on the UK’s price level and real output.
Explain one likely reason for the change in consumer confidence between 2012 and 2015.
Diagram A shows the aggregate demand and aggregate supply for a country. Illustrate actual economic growth on Diagram A.
Using the information above, calculate the total increase in national income, resulting from the £15 billion investment.
Multiple choice questions
- A-level Paper 2, June 2024, Q2(a)
Which one of the following is the percentage point fall in investment between April 2020 and July 2020?
- AS Paper 2, June 2024, Q2(c)
Using the above data, which one of the following represents the value of the multiplier?
- AS Paper 2, June 2024, Q4(c)
Which one of the following factors might have caused business investment in the UK to fall?
- A-level Paper 2, June 2023, Q1(b)
Which one of the following is the most likely impact of an increase in the base interest rate?
- A-level Paper 2, June 2023, Q3(c)
Which one of the following is most likely to lead to an increase in potential economic growth?
- A-level Paper 2, June 2023, Q4(a)
Which one of the following is an example of consumption?
- A-level Paper 2, November 2021, Q1(a)
Which one of the following is a withdrawal from the circular flow of income?
- A-level Paper 2, November 2021, Q2(a)
Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve?
- A-level Paper 2, November 2020, Q2(a)
If the value of the multiplier is 1.8, which one of the following will be the total increase in GDP from the redevelopment, assuming other things are equal?
- A-level Paper 2, November 2020, Q5(b)
Which one of the following would be most likely to solve a negative output gap problem in a domestic economy? An increase in
- AS Paper 2, November 2020, Q2(c)
Which one of the following is an example of a market-based supply-side policy?
- A-level Paper 2, June 2019, Q1(a)
Which one of the following would be most likely to cause an increase in credit card lending?
- A-level Paper 2, June 2019, Q2(b)
Which one of the following would be an example of government spending on infrastructure?
- AS Paper 2, June 2019, Q1(c)
Which one of the following is a likely cause of a decrease in the value of the UK’s multiplier?
- AS Paper 2, June 2019, Q2(c)
Which one of the following is most likely to cause a movement along the AS curve? Changes in:
- AS Paper 2, June 2019, Q5(a)
Which one of the following is the most likely impact of an increase in average UK house prices on existing homeowners?
- A-level Paper 2, June 2018, Q2(a)
Which one of the following would be most likely to cause aggregate demand to increase?
- AS Paper 2, June 2018, Q4(c)
Which one of the following factors is most likely to cause an increase in the long-run aggregate supply?
- AS Paper 2, June 2018, Q5(a)
Which one of the following can be inferred from the chart? In 2016/17:
- A-level Paper 2, June 2017, Q2(c)
Which one of the following is the correct size of the multiplier?
- AS Paper 2, June 2017, Q5(b)
Which one of the following is most likely to result from an improvement in UK consumer confidence? A decrease in the marginal propensity to:
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.