177Exam Café

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Make a list of important economic indicators and explain what they indicate

XX Explain how these objectives can conflict with each other

XX

Define the term ‘economic cycle’ XX Use a production possibility diagram to explain short-run and long-run growth

XX

Use a diagram to explain how positive and negative output gaps occur in the economic cycle

XX Define inflation and distinguish between demand-pull and cost-push inflation

XX

Define the ‘multiplier’ and explain how the multiplier process works

XX Explain how unemployment is measured XX

Explain the main components in the circular flow of income

XX List and explain the different types of unemployment; distinguish between demand-side and supply-side causes of unemployment

XX

Explain why income = output = expenditure XX Describe the balance of payments on current account; explain the meaning of surplus and deficit on current account.

XX

Explain how the circular flow of income can be in ‘equilibrium’

XX Give examples of how strengths and weaknesses in the domestic economy can affect the balance of payments

XX

Explain the influence of the multiplier and accelerator

XX Explain how changes in the exchange rate can affect the balance of payments, and how this in turn can affect the level domestic economic activity

XX

Use an AD and AS diagram to analyse changes in the macro-economy

XX Distinguish between fiscal and monetary policy

XX

List the components of AD and explain how each of these components is determined

XX Explain why governments collect taxes and how government spending can affect the economy

XX

Explain how AD affects the level of economic activity

XX Explain how modern fiscal policy is governed by ‘budgetary rules’

XX

Distinguish between short- and long-run aggregate supply and explain how each is determined

XX Explain how the interest rate is used by the Bank of England to influence AD in the short run and achieve its inflation target

XX

List the main objectives of macro policy XX Make a list of ‘supply-side policies’ and explain how these are used to try to increase the long-run trend rate of non-inflationary growth

XX

Define:1.  aggregate demandand supply  2.  gross domestic product3.  injections and withdrawals  4.  equilibrium in the national income5.  the multiplier  6.  output gap

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Student answersThese are answers to the following data-response question:

‘UK inflation is mainly caused by rising costs in the economy.’ Use the data to help you evaluate this statement (25 marks).

Armand’s answer

The data says that ‘cost pressures’ are strengthening. (1) This can lead to cost-push inflation, where increased costs of production, e.g. higher labour or oil prices, force producers and suppliers to shift the burden onto consumers in the form of higher prices. The firm’s ability to pass on these higher costs of production depends on what type of good or service they are providing, e.g. if it is a luxury good or a necessity. (2) Hence the effects of cost-push elasticity can be limited by the price elasticity of demand. If a good is price elastic (3) the producer will be limited in its ability to pass on the costs in the form of higher prices.However, the extract in the data says that there has been a ‘steep rise in a number of goods’, and this would suggest that cost-push inflation is a major problem.Price increases of this sort can have wider repercussions. Following each round of inflation, the purchasing power of consumers (their real income’ will effectively fall. This can lead to a wage-price spiral, where people look to reinstate the value of their real income by asking for higher wages (often via their trade union negotiating on their behalf). This again puts pressures on the costs of production, which producers might again pass on to consumers in the form of higher wages.However, one of the extracts says that productivity and competition among suppliers have both increased. This means that the effect of ‘sharp increases in raw material costs’ and ‘record oil prices’ will both be limited. Hence, the fairly constant inflation rates shown in the graph can be explained by economic growth, which has also meant that

Examiner comments:(4) Armand has done very

well here to link an important micro concept (elasticity) to a macro issue (demand-pull inflation).

Examiner comments:(1) Armand does well to refer

to the data straight away, and this will help him score marks for analysis. We do not have sight of the data here, so this does not affect us, but the examiner might have found it helpful Armand had indicated to which part of the data he was referring, e.g. ‘Extract A’, or ‘line 25’ (AQA extracts always have line numbers).

(2) The phrases ‘luxury’ and ‘necessity’ are rather vague, and some further explanation would help here.

(3) Strictly speaking, ‘goods’ are not price-elastic. It is the demand for goods that has an ‘elasticity’ that can be measured with respect to price.

Examiner comments:(6) Some repetition here.(7) This final piece is very

evaluative, and makes an important argument. It ends rather abruptly. A short paragraph of one or two sentences would be good, in order to sum up and round things off.

Overall: Good analysis and evaluation. Armand has considered more than one possible line of argument and come to a sensible conclusion, while applying his knowledge of economics well. Level 5 (22 marks).

178 Exam Café

Examiner comments:(5) Good evaluation in these

two paragraphs.