SECTION A
Answer ALL questions. Write your answers in the spaces provided.
Use the data to support your answers where relevant. You may annotate and
include diagrams in your answers.
1. The table below shows inflation in the UK, Eurozone and the US since 2008
All items CPI 12 month % change
UK
Eurozone
USA
2008 JUN
3.8
3.7
5
2009 JUN
1.8
0
-1.4
2010 JUN
3.2
1.7
1.1
2011 JUN
4.2
2.8
3.6
2012 JUN
2.4
2.5
1.7
2013 JUN
2.9
1.4
1.8
2014 JUN
1.9
0.5
2.1
2015 JUN
0
0.2
0
Sources: ONS, Trading Economics and www.usainflationcalculator.com
1a) Define the term ‘inflation’. (1)
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1b) Explain one limitation of the CPI in measuring the rate of inflation. (2)
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1c) Which of the following are both true?
A. The 2009 recession was deflationary in all three regions; the period 2013 to 2015 was
disinflationary in the UK
B. Taking the period as a whole, inflation was higher in the U.S. than in the U.K.; between 2010 and
2011 inflation was 1% in the UK
C. Deflation occurred in the USA in 2009; taking the period as a whole, inflation was higher in the UK
than in the US or the Eurozone
D. The Eurozone experienced deflation between 2011 and 2015; in the UK, prices were falling
between 2013 and 2014.
1c) Your answer is: _______
(1 mark)
2a) Which factor is most likely to cause an equilibrium shift from J to K?
J
K
K
A. A cut in company investment due to higher interest rates
B. A fall in inflation
C. A fall in the external value of the £
D. A reduction in real wages
2a) Your answer is: _________ (1 mark)
2b) An economy with a current account deficit of $80 billion has the following components:
Consumption = $600bn
Investment = $100bn
Government = $200bn
Imports: $300bn
Calculate its Aggregate Demand:
(2 marks)
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2c) Define the term ‘aggregate supply’. (1)
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3a) The data below shows the monthly spending balance between UK tourists going abroad
and tourists coming here. Which is the firmest conclusion that can be drawn from the data?
UK tourism spending: monthly balance
£millions
Source: ONS July 2015
500
- 1,000
2014
May¹
Apr¹
Mar
Feb
Jan†
Dec
Nov
Oct
Sept
Aug
July
June
May
Apr
Mar
Feb
- 500
Jan
-
2015
- 1,500
- 2,000
- 2,500
A. The data for March-May 2015 show more UK tourist spending overseas compared with 2014
B. This shows the importance of controlling secondary income within the country’s current account
C. The 2015 figures show a deteriorating balance in this trade in services
D. The seasonal pattern shows how much British tourists love going abroad at Christmas
3a) Your answer is: _________
(1 mark)
3b) Explain how tourist spending in the UK might be affected by a rise in the value of the £. (2)
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3c) Define the term: ‘current account’. (1)
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4. An economy is operating at AD1. If the Monetary Policy Committee chooses to increase
interest rates, how would that be reflected in the diagram?
A. AD will shift rightwards to AD2 because foreign investors will bring hot money into the country
B. AD will remain at AD1 but the long run AS curve will move rightwards
C. AD will shift leftwards to AD3 because UK consumers will tend to cut back on their spending
D. AD will remain at AD1 but the long run AS curve will move leftwards
4a) Your answer is: _________
(1 mark)
4b) Define the term ‘interest rates’ (1 mark)
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4c) Explain what ‘real’ means in the term ‘real output’. (2 marks)
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5. The Financial Times printed this pie chart of Hyundai car sales regionally.
5a) From the data in Extract A, calculate the ratio of Hyundai sales in Europe to sales made in
China/India. Show your workings. (2)
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5b) The chart shows that Hyundai exports 85.8% of its products from South Korea. Explain the impact
these exports would have on the South Korean economy. (2)
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End of Section A
SECTION B
Read Figures 1 and 2 and extract (A) before answering Question 6.
Answer ALL Questions 6(a) to (e), and EITHER Question 6(f) OR Question 6(g).
Q6. The UK Economy
Extract A: Output trends
The data is from 2nd quarter 2003 to 1st quarter 2015 and comes from the government source: the
Office of National Statistics (ONS).
It may be useful to know that services are nearly 80% of UK GDP, construction 6% and industrial
production just under 14%, with agriculture (0.7%) making up the full 100%.
Index
UK output per sector, indexed to 2011 = 100 Source: ONS
115
110
105
103.6
Construction
100
Services
95
90
90.5
Production
85
80
2014 Q4
2014 Q2
2013 Q4
2013 Q2
2012 Q4
2012 Q2
2011 Q4
2011 Q2
2010 Q4
2010 Q2
2009 Q4
2009 Q2
2008 Q4
2008 Q2
2007 Q4
2007 Q2
2006 Q4
2006 Q2
2005 Q4
2005 Q2
2004 Q4
2004 Q2
2003 Q4
2003 Q2
Extract B. Robert Peston, the BBC’s Economics Correspondent, on the UK economy, August
5th 2015
There is what to many will look like a contradiction at the heart of the Bank of England's
pronouncements on inflation and interest rates. On the one hand it expects price changes to be zero
or even negative - or well below the 2% target - for longer than it predicted back in May. But the Bank
also expects inflation to return to target on the basis of interest rates that could rise a bit faster next
year than it had been anticipating.
That said, don't panic if you have a mortgage - the Bank's forecasts are based on the assumption that
the interest rate it controls, Bank Rate, will rise just 0.25% in the first four months of next year and
could double from 0.5% to 1% by the end of 2016. So if banks and building societies simply pass on
this increase in their borrowing costs to customers, mortgage rates would rise by 0.5% next year.
But if inflation is too low, why on earth would accelerated rises in interest rates do anything but
reinforce the stagnation or even fall in prices? It's because the Bank of England reckons that what is
bearing down on inflation is temporary in nature, and is foreign in origin. Or to tell you what you know,
the big deflationary influences are the collapse in oil prices and the softness of food prices.
A few months ago, it looked as though we were through the downward phase of the energy price
cycle. But there has been another lurch downward in the oil price in recent weeks. And a 3.5%
increase in the price of sterling relative to other currencies since May - which makes imports cheaper means inflation could turn to deflation again in the next couple of months.
By contrast, wage rises are now accelerating (yes yes - about time too). And although there is no sign
yet that companies are passing on those wage increments in the form of sharply higher prices for their
goods and services, the Bank believes wage growth will start to push inflation back to target by the
end of the year. In fact one member of the Bank's Monetary Policy Committee, Ian McCafferty, this
week voted for an increase in the interest rate of 0.25% , because of "his view that demand growth
and wage pressures were likely to be greater, and the margin of spare capacity smaller, than
embodied in the Committee's collective August projection".
And here lies the central uncertainty for the Bank of England about the British economy: whether a
recent faint rise in unemployment represents a serious weakening in the economy, or skills shortages.
For what it's worth, businesses are telling surveys that they still have considerable appetite to hire.
That implies they can't get the people with the abilities they need - and that they will have to start to
pay more for growth.
So the notion - implied by the Bank of England's pronouncements - of interest rates being set to rise
at a time when employment has stopped growing may be a painful one, but perhaps not bonkers.
Extract C: Official government data on UK productivity
Productivity: output per worker, whole UK economy
Index
2011=100
110
1st quarter 1980 - 1st quarter 2015 Source: ONS 2015
100
90
80
70
60
50
1980 Q1
1981 Q2
1982 Q3
1983 Q4
1985 Q1
1986 Q2
1987 Q3
1988 Q4
1990 Q1
1991 Q2
1992 Q3
1993 Q4
1995 Q1
1996 Q2
1997 Q3
1998 Q4
2000 Q1
2001 Q2
2002 Q3
2003 Q4
2005 Q1
2006 Q2
2007 Q3
2008 Q4
2010 Q1
2011 Q2
2012 Q3
2013 Q4
2015 Q1
40
6a) From the data in Extract C, calculate the % change in construction output based on the indexed
data between 3rd quarter 2008 and the 1st quarter 2009. [4 marks]
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6b) With reference to Extract C, explain the likely effect on the UK economy of a continuation of the
productivity trend established from 2007/08 onwards. [5 marks]
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6c). With reference to Extract B, draw an AS/AD diagram to help explain the effect of a rise in interest
rates at a time when oil prices are falling. [6 marks]
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6d) Assess the possible impact of the data in Extract A on positive and negative output gaps in the
UK. [10 marks]
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6e) Using the data in the extracts and your economic knowledge, assess whether it would be wise for
the Monetary Policy Committee to increase interest rates by 0.5% in the coming year. [15 marks]
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6f) Using the data in the extracts and your economic knowledge, evaluate the possible effects on
macroeconomic performance of a sustained rise in UK productivity. (20)
OR
6g) Evaluate the probable effectiveness of fiscal policy in fostering a recovery in aggregate demand
after a recession. (20)