3 (a) Explain what is meant by aggregate supply and explain one reason why the aggregate
supply curve of an economy would shift outwards in (i) the short run, and (ii) the long run.
[8]
(b) Discuss whether an increase in aggregate demand would be of overall benefit for an
economy. [12]
For an analysis of the benefits of an increase in aggregate demand to the economy (up to 4
marks) For an analysis of the possible problems for an economy if aggregate demand
increases (up to 4 marks) Up to 4 marks for an evaluation which clearly compares the
benefits and the problems for an economy resulting from an increase in AD with one mark
reserved for a reasoned conclusion
A good answer should consider firms, government and consumers/workers The benefits for
an increase in AD may include economic growth, higher employment etc The problems may
include inflation, current account deficit etc
4 (a) Explain what is meant by inflation and, using diagrams, show how it can arise both
as a result of a shift in the aggregate demand curve and a shift in the aggregate supply
curve. [8]
For knowledge and understanding of inflation defined as a continuous/ sustained rise (1) in
the general/average level of prices – a simple reference to price level is acceptable if it is
clear from the rest of the answer that this refers to all prices and not just the price level of one
product (1) (up to 2 marks)
And application that uses a diagram to show that inflation can be caused by a shift to the right
of the aggregate demand curve. For an explanation why AD might increase (1), an accurately
labelled diagram that shows the rightwards shift in AD and resulting increase in the general
price level (1), and clearly explains that inflation occurs due to this excess in aggregate
demand (1) (up to 3 marks)
And application that uses a diagram to show that inflation can be caused by a shift to the left
of the aggregate supply curve. For an explanation why AS may fall (1), an accurately labelled
diagram that shows the leftwards shift in AS and resulting increase in the general price level
(1), and clearly explains that inflation occurs due to this decrease in aggregate supply (1) (up
to 3 marks)
Do not reward ‘micro’ diagrams showing S/D or P/Q
Axes should show general/average price level and output/GDP, etc. However, if it is clear
from the written response that the candidate understands that it is an impact on general or
average prices, then benefit of doubt can be given if the Y axis simply refers to P or prices
and everything else on the diagram is accurate
Reasons why AD may increase include a rise in C, I, G, X or a fall in M
Reasons why AS may fall include a rise in costs, tax, etc
5 Discuss the extent to which gross domestic product (GDP) is a useful measure of living
standards and economic development. [25] oct/nov/42/21
Definition of GDP explanation of real GDP per head and its link to measuring the standard of
living (SoL). Explanation of economic development (ED). A comment on the relationship
between SoL and ED. Problems of measuring GDP in general and especially in developing
countries. Relevance of GDP as a measure.
Relevance of alternative measures of SoL HDI, MEW HPI or MPI.
L4 (18–25 marks): For an answer that defines living standards in terms of real GDP per head
and develops an argument that links it to ED. The link between GDP and SOL and ED is
explicitly discussed. Detailed discussions regarding to the limitations of measuring GDP. A
candidate may refer to one or more alternative measures of measuring GDP. A conclusion is
reached for 22–25 marks.
L3 (14–17 marks): For an answer that defines SoL in terms of real GDP per head. Some
reference is made to the limitations of measuring GDP or one alternative measure of GDP.
L2 (10–13 marks): For an answer that defines living standards in terms of real GDP per head
of population.
L1 (1–9 marks): For an answer that has some basic correct facts but includes irrelevancies.
Errors of theory or omissions of analysis will be substantial.
7 (a) Consider, with the help of a circular flow diagram, the potential impact of a fall in
the rate of interest on the level of output and the level of employment. [12]
feb/march/42/22
Candidates should produce an accurate, clearly labelled, three sector circular flow diagram.
Injections and withdrawals should be clearly identified. The existing equilibrium level of
income, output and employment should be identified and explained. Also the links between
expenditure, output and employment should be explained. The full employment level of
income, expenditure and output should be labelled on the diagram. Analysis should then
examine the potential impact of a fall in the rate of interest on withdrawals. For example,
savings and imports, or injections for example, investment and exports. The extent of the
potential impact should be discussed in each case. For example, a fall in interest rates is
likely to reduce the level of savings and increase the level of consumer spending. This will
produce higher levels of expenditure, output and employment.
However, the overall impact will also be affected by any subsequent change in the multiplier
effect. If the marginal propensity to save falls significantly, the multiplier will increase and
the overall impact on output and employment will be substantial. The impact on investment
(injection) will also depend upon factors such as the interest elasticity of investment and/or
the current level of confidence of potential investors. Reference might be made to the
importance of locating the current state of the economy before the fall in the rate of interest
takes place. If there is a lot of existing spare capacity, the impact of a fall in interest rates on
output and employment is likely to be significant.
L4 (9–12 marks) for an answer which uses circular flow theory to analyse the relationship
between expenditure, income, output and employment. Analysis should be supported by an
appropriate diagram. The impact of a fall in the rate of interest should be considered in
relation to at least one withdrawal and one injection. Some evaluative comment should be
provided in each case. A conclusion should be provided.
L3 (7–8 marks) for analysis which explains the circular flow model and identifies
withdrawals and injections. Full employment equilibrium will also be identified. Analysis
will focus upon either one withdrawal or one injection but it should be supported by a
diagram and at least one evaluative comment.
L2 (5–6 marks) for a less well-developed comment which describes the circular flow of
income and identifies withdrawals and injections and makes some reference to the full
employment level of income. There will be no evidence of analysis which examines the
impact of a fall in the rate of interest on either withdrawals or injections. Diagrams might not
be accurately labelled.
L1 (1–4 marks) for an answer that shows some knowledge but does not indicate that the
question has been fully grasped or where the answer is mostly irrelevant.