Department of Economics

ST PAUL'S SCHOOL
LONSDALE ROAD, BARNES, LONDON SW13 9JT
Tel: 020 8748 9162

Fax: 020 8746 5353

UNIT 2 SHORT ANSWER QUESTIONS JAN 2011 - 2004

Unit 2 style past paper short answer questions mainly on AD/AS
(all questions from the old unit 3 papers only)
You must aim to develop your analysis and evaluate where the bold command words
highlight.
Remember to use the data for application marks AND to define the terms in the
questions where relevant.
The analysis marks might be awarded as follows:
Transmission mechanism 4 marks
Diagram showing shifts and change in equilibrium 4 marks
Impact on price level and real output up to 4 marks
Multiplier effect on AD 2 marks
Impact on aggregate supply (if question focused on AD) 2 marks
Evaluation should aim to produce each point for between 2 to 4 marks. Possible points
might be:
Size of the multiplier
Elasticity of LRAS
Time lags
Trade-offs
Current context eg credit crunch/recovery
Significance of the change, or component of AD reference to the data should help
here

St Pauls School is a charitable company limited by guarantee registered in England at

Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619

JAN 2011
With reference to Figure 1, and your own knowledge, to what extent has monetary
policy, as conducted by the Monetary Policy Committee, been a success? (12)
Discuss two problems of comparing the economic growth of the UK and developing
economies using GDP as a measure. (12)
Illustrating your answer with an aggregate demand and aggregate supply diagram, evaluate
the likely effect of an increase in the fiscal deficit on the level of real output and on the price
level. Refer to the multiplier effect in your answer. (16)
With reference to Figure 1, discuss two likely reasons for the fall in consumer expenditure
in 2009. (14)

JUNE 2010
Discuss the likely effectiveness of expansionary... fiscal and monetary policies (Extract 1,
lines 2 to 3) as means of closing the output gap. (16)
With reference to Figure 3 and Figure 4, assess the significance of immigration for
employment and unemployment. (14)
Examine how interest rate decisions may be used to achieve the governments inflation
target. (14)
Assess the likely effects on real output and the general price level of changes in house
prices since mid-2007. Use an aggregate demand and supply diagram to support your
answer. (16)

JUNE 2009
Using an AD/AS diagram, assess the likely effects on the price level and equilibrium real
output of the rise in oil and gas prices. (16)
Outline the likely impact on employment levels of two supply-side policies, apart from
spending on education and health, currently being implemented in the UK. (12)
Assess how a small cut in interest rates is likely to affect the current account of the balance
of payments in the UK. (16)
Outline two reasons why the slowdown in the USA is likely to affect aggregate demand in
the UK. (8)

St Pauls School is a charitable company limited by guarantee registered in England at

Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619

JAN 2009
With reference to the information provided, examine the reasons why changes in real
GDP per head might be considered as an inaccurate indicator of changes in living standards
between countries. (16)
With reference to Figure 2 (below), use AD/AS analysis to explain the significance of
investment for economic growth. (14)
Country

Investment
% GDP 2003-7

Britain
Japan
US
Canada
Germany
France
Italy

18.1
23.4
19.1
21.5
17.5
20.1
21.1

Average annual
increase real GDP
2003-7 (approx)
2.7
2.1
2.8
2.7
1.4
1.8
0.9

Apart from investment, outline two other factors which might explain the difference in
growth rates between Britain and Italy as shown in Figure 2 (above). (8)
Using AD/AS analysis, assess the impact of the rise in oil and energy prices on real output
and the price level. (16)
Explain the likely economic effect of the 15% fall in value of sterling on aggregate demand.
(12)

JUNE 2008
With reference to the extract, assess the significance of three factors which explain
Britains failure to increase its productivity levels seen in other countries. (16)
Analyse two possible effects of productivity improvements on the British economy. Use an
AD/AS diagram in your answer. (12)
Using an AD/AS diagram, assess the likely impact on the price level and equilibrium real
level of output caused by the rise in interest rates since August 2006. (16)

JAN 2008
Using an AD/AS diagram, illustrate the likely impact on real output and the price level of an
increase in business investment. (12)
Apart from productivity changes, outline two reasons which might explain the deficit in the
current account of the balance of payments. (12)
St Pauls School is a charitable company limited by guarantee registered in England at
Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619

Using an AD/AS diagram, analyse the likely impact on the price level and equilibrium real
level of output which may result from the rise in interest rates. (16)
Examine why significant spare capacity in the economy is a factor that the MPC considers
when making its interest rate decision. (8)

JUNE 2007
Outline two possible costs for the economy experiencing interest rates higher than they
needed to be. (12)
Using an appropriate diagram, evaluate how significant increases in share and house prices
are likely to affect the price level and equilibrium real level of output in the UK. (16)
Using AD/AS analysis, assess the likely long run impact on the UK economy of the planned
increase in health and education spending. (16)
Analyse the likely impact of the expected rise in exports of 5% on GDP growth and the UK
balance of payments. (14)

JAN 2007
Using AD/AS analysis, outline the likely effect on a countrys economic growth of an increase
in the value of its currency. (12)
Examine one likely effect on a countrys balance of payments of an increase in its growth
rate. (8)
Analyse two pieces of information which the Bank of Englands MPC might consider when
making its interest rate decisions. (14)
Using an AD/AD diagram, explain how the forecast changes in injections from 2004 to 2005
are likely to influence the price level in the UK. (12)

Consumption
Government spending
Investment
Exports
Imports
GDP market prices

2004
3.3
4.7
5.6
3.0
5.2
3.1

Annual real percentage change

2005
1.7
2.9
4.0
2.9
3.5
2.4

St Pauls School is a charitable company limited by guarantee registered in England at

Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619

JUNE 2006
Using an appropriate AD/AS diagram, explain the likely effect of the increase in oil prices on
the level of aggregate supply and the price level in the UK. (10)
Discuss why the impact of higher oil prices on the UK AD and equilibrium output might be
different from that in the USA. (16)
Assess the likely impact of a slowdown in the housing market on aggregate demand. (12)

JAN 2006
Using an AD/AS diagram, examine the likely implications for the UK economy of imposing
more regulations on businesses. (14)
With the aid of an AD/AS diagram, analyse the likely economic effects on the UKs real
output and price level of the rise in world commodity prices between 2003 and 2004. (12)

JUNE 2005
Use AD/AS analysis to explain the likely effects of a fall in company investment on UK prices
and real output. (10)
Assess the significance of two items of information, other than those mentioned in the
extract, which the MPC may have considered before reaching its decision to cut interest
rates. (12)

JAN 2005
Using a carefully labelled AD/AS diagram, explain the significance of the depreciation in the
exchange rate shown to the UK price level and equilibrium level of real output. (12)
Examine the significance of the rise in oil prices between 1998 and 2002 for the level of AS
and hence for the equilibrium level of real output. (12)
Using a carefully labelled AD/AS diagram, explain the likely significance of the initial rise to
nearly 6.5bn in monthly bank lending to individuals in 2002 for the level of AD and the
equilibrium level of real output. (12)

St Pauls School is a charitable company limited by guarantee registered in England at

Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619

JUNE 2004
Using a carefully labelled AD/AS diagram, explain the significance of the fall in UK business
investment in 2001 for the equilibrium level of real output. (10)
Using a carefully labelled AD/AS diagram, explain the likely significance of the rise in average
earnings from 4.7% to 5.8% in 2002 for level of AD and the equilibrium level of real output.
(10)
Examine how a high sterling exchange rate may lead to unemployment in manufacturing.
(12)
Explain the significance to the UK current account of the balance of payments of narrowing
the productivity gap with its major trading partners. (12)

JAN 2004
Using AD/AS analysis, explain how a sharp oil price rise can lead to an increase in the UK
price level and a fall in the level of real GDP. (8)
Evaluate the benefits of low inflation to the UK. (12)
Why might the introduction of the MPC have been a significant factor in maintaining low
inflation rates. (12)
Using an AD/AS diagram, examine the likely effect of a sharp rise in house prices on the
UK price level. (12)
Explain the significance of two items of information, other than those shown in the data,
that would help the MPC decide whether to change interest rates. (12)

St Pauls School is a charitable company limited by guarantee registered in England at

Lonsdale Road, London SW13 9JT.
Registered Company Number 6141973 Registered Charity Number 1119619