mark scheme edexcel practice paper 2

PRACTICE EXAM PAPER

Paper 2: Number 2

Edexcel Economics (AS)Practice Paper

Edexcel Economics (AS) – Paper 2: Number 2

Mark scheme - Section A

Q1 The chart below shows the UK’s inflation rate between January 2005 and January 2015.

(a) Define the term ‘inflation rate’: [1 mark]

Knowledge 1The percentage rate of change in the price index, usually annually

(b) Give one positive effect and one negative effect of an inflation rate of 4% in an economy. [2 marks]

Knowledge 2Positive (1) – any positive effect, such as reduces the value of debt, usually accompanied by economic growth / rising income if demand-pull, less harmful than deflation of 4%

Negative (1) – any negative effect, such as fall in real income reducing living standards, higher cost of borrowing, risk of wage-price spirals, reduction in international competitiveness

(c) Which one of the following can be inferred from the table? [1 mark]

A Consumer prices rose over the whole periodB Consumer prices were at their highest in December 2008C Consumer prices were at their lowest in January 2015D Consumer prices were subject to deflation during the period

Answer A

(Total for Question 1 = 4 marks)

Jan 2005 Jan 2007 Jan 2009 Jan 2011 Jan 2013 Jan 2015

Per cent6

5

4

3

2

1

0

Social protection - £232 billion

Personal social services - £30 billion

Health - £141 billion

Debt interest - £35 billion

Other (including EU transactions) - £48 billion

Public order and safety - £34 billion

Housing and environment - £28 billion

Industry, agriculture and employment - £24 billion

Defence - £45 billion

Education - £99 billion

Transport - £29 billion

Income tax - £170 billion

National insurance - £113 billion

Excise duties- £47 billion

Other (non-taxes) - £45 billion

Other (taxes) - £62 billion

Council tax - £28 billion

Business rates- £28 billion

VAT- £131 billion




cise duties- £47 billion

2005 07 09 11 13 15

60

55

50

45

40

35

30

Manufacturing activityA reading above 50 indicates increasing activity

Ave

rag

e p

rice

leve

l

Real GDP

Real GDPA

vera

ge

pri

ce le

vel

Y Y1

LRAS

P

P1

AD1 AD


Q2 The pie charts below give details of the UK government’s forecast for taxation revenue and spending for the financial year 2015-2016. [1 mark]

(a) Define the term ‘budget surplus’: [1 mark]

Knowledge 1Government tax receipts/income exceeds government spending

(b) Calculate the expected budget surplus or deficit expected in 2015-16. Show your workings: [2 marks]

Knowledge 1, Application 11 mark for calculating Total spending = £745bn and Total receipts = £666bn1 mark for calculating difference between the two = 666 - 745 = -£79bn (i.e. a budget deficit)


Per cent6

5

4

3

2

1

0



















VAT- £131 billion





2005 07 09 11 13 15

60

55

50

45

40

35

30


Ave

rag

e p

rice

leve

l

Real GDP

Real GDP

Ave

rag

e p

rice

leve

l

Y Y1

LRAS

P

P1

AD1 AD


Per cent6

5

4

3

2

1

0



















VAT- £131 billion





2005 07 09 11 13 15

60

55

50

45

40

35

30


Ave

rag

e p

rice

leve

l

Real GDP

Real GDP

Ave

rag

e p

rice

leve

l

Y Y1

LRAS

P

P1

AD1 AD

Chart 1:Public sector spending2015-16

Chart 2: Public sector receipts 2015-16


Q3 Unemployment has risen in the first two quarters of 2015, despite there being a rise in the number of people in work. In June 2015, there were 1.85 million people unemployed in the UK, yet there were 354000 more people in work when compared to a year earlier. Source: BBC News August 2015

(a) Define ‘unemployment rate’: [2 marks]

Knowledge 1The percentage of the total labour force that is unemployed i.e. without a job but willing and able to work

(b) Explain how unemployment can be rising at the same time as the number of people in work is rising: [2 marks]

Application 2The size of the labour force must be increasing (1), so even if the unemployment rate remains constant then the number of people who are unemployed must also be rising (1)

(c) Which one of the following is the likely consequence of a rise in the unemployment rate: [1 mark]

A Aggregate demand is likely to riseB There would be downward pressure on real incomesC Import volumes may riseD UK goods and services will become less competitive

Answer B


c) Which one of the following statements is true? [1 mark]

A The largest area of government spending is on healthcare B The government earns more from VAT than income tax C The amount earned from Council Tax is equal to the amount spent on housing and the environment D The smallest amount of tax revenue comes from excise duties

Answer C(Total for Question 2 = 4 marks)


Q4

(a) Using the aggregate demand and supply axes below, show the effect of a rise in the exchange rate on the equilibrium level of real national output and average price level on the economy. [2 marks]

Knowledge 1, Application 1Left shift in AD (1) and new price level and real GDP level indicated (1)(OR some candidates may show a downwards movement in AS, as imported oil/commodities become cheaper)

(b) Which one of the following is likely to cause an appreciation of a country’s currency? [1 mark]

A A reduction in the base rate of interest in the economyB An increase in import volumesC An increase in export volumesD A reduction in inwards foreign direct investment

Answer C

(c) Explain the effect of a depreciation in a country’s exchange rate on its current account balance: [2 marks] Knowledge 1 Analysis 1Depreciation means that a currency is weaker and so exports become relatively cheaper and imports relatively more expensive (1)Cheaper X plus more expensive M should lead to an improvement in the trade balance, and therefore improve the current account balance (1)Award 1 mark max for definitions e.g. depreciation, current account balance



Per cent6

5

4

3

2

1

0



















VAT- £131 billion





2005 07 09 11 13 15

60

55

50

45

40

35

30


Ave

rag

e p

rice

leve

l

Real GDP

Real GDP

Ave

rag

e p

rice

leve

l

Y Y1

LRAS

P

P1

AD1 AD


Q5 Below is a graph of the UK’s quarterly growth rate between 2012 and 2015.

(a) Which of the following statements can be correctly inferred from the chart above? [1 mark]

A GDP was lowest in Q4 2012 B GDP was highest in 2014 C GDP was highest in Q2 2015 D The value of GDP in Q4 2013 was identical to the value of GDP in Q1 2015

Answer C

(b) Explain two factors that may cause an increase in a country’s short run growth rate: [2 marks]

Analysis 2 (1 + 1)Factors include anything that could cause aggregate demand to increase e.g. lower interest rates, higher consumer/business confidence, an increase in the amount of government spending relative to tax etc.

(c) Distinguish between GDP and GNP [1 mark]

Knowledge 1(GDP = Gross Domestic Product, GNP = Gross National Product)

GDP refers to the value of output produced within a country’s geographical boundaries regardless of who owns the factors of production, whereas GNP refers to the value of output produced by a country’s factors of production, regardless of their location

(Total for Question 5 = 4 marks)TOTAL FOR SECTION A = 20 MARKS

% c

hang

e

9

8

7

6

5

4

24

22

20

18

16

14

12

■ UK Unemployment rate ■ UK Youth unemployment rate

2006 2008 2010 2012 2014

2200000

2000000

1800000

1600000

1400000

1200000

1000000

1.2

1.0

0.8

0.6

0.4

0.2

0.

-0.2

2012 2013 2013 2014 2014 2015 2015

Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

40

30

20

10

0

-10

-20

-30

-40

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 2015


Mark scheme - Section B

(a) With reference to Figure 1, explain what has happened to manufacturing activity between 2007 and 2015 according to the purchasing managers’ survey. [4 marks]

Knowledge 2, Application 2

Knowledge: N Explanation of “manufacturing” (2)N Explanation of GDP (1)

Application: N Between 2008 and 2010, the level of manufacturing activity was below 50, which indicates falling levels of

manufacturing (1)N The highest level of manufacturing activity reported was in 2011 and the lowest level was in early 2009 (1)N Manufacturing activity levels fell from mid 2011 to mid 2013 (1)N Comment on volatility of manufacturing (1)

N.b. there must be a specific reference to the data for both application marks to be awarded

(b) With reference to Extract A, explain the likely effect of a ‘contraction in the investment goods sector’ on the performance of the UK economy. [5 marks]

Knowledge 1, Application 2, Analysis 2

Knowledge: N Definition of investment (an increase in the capital stock of an economy) (1)N Recognition that economic performance is measured through macro indicators such as unemployment rate,

growth rate, inflation rate etc (1)

Application: N 2 points for 2 data references from Extract A, for example, upturn in inflation, UK growth is unbalanced, lack

of exports

Analysis: N 2 x analytical chains linking reduction in production of investment goods to an economic performance

indicator, e.g. reduction in investment causes AD to decrease since I is a component of AD, therefore causing short-run growth to fall, or a lack of investment goods reduces the available stock of factors of production which can reduce the level of full capacity and prevent long run economic growth


(c) With reference to Extract A, explain two reasons why a strengthening of Sterling may affect the market for Britain’s manufactured goods. [6 marks]

Knowledge 2, Application 2, Analysis 2 (2 x 3)

Knowledge: N identification of two reasons (1 + 1) e.g. UK’s manufactured goods are less internationally competitive, imported

manufactured goods are more competitive

Application: Link to Extract A for each of the reasons mentioned (1 + 1) e.g. reference to unbalanced growth,

Analysis: Linked development of how each reason affects the market for manufactured goods (1 + 1), for example:N Stronger currency makes exports appear more expensive overseas ceteris paribus therefore reducing the

quantity demanded N Britain’s manufactures are already very expensive compared with manufactures from countries such as Germany,

or even China, so a stronger currency reduces further the chance that manufactures will get exportedN British producers are more likely to buy imported manufactured goods rather than buy British because the

stronger Sterling makes imports seem relatively cheaperN The market for manufactured goods may decline even further, worsening the balance of output in the UK

(d) Assess the significance of having balanced growth in both manufacturing and consumer goods sectors in the UK economy. [10 marks]


Possible points for inclusion:N Definition of balanced growthN Distinguish between manufactured goods and consumer goods (n.b. candidates may use the terms capital

goods and consumer goods)N Use of PPF to illustrate current scenario of SR movement along away from capital goods towards consumer

goods, and then LR inwards shift – balance allows the PPF to continue to shift outwards, therefore allowing both SR and LR growth

N Importance of manufactured goods – cause LRAS to shift right, therefore boosting productive capacity, allowing non-inflationary growth, can lead to increased employment if firms are expanding, prevents over-reliance on services

N Importance of consumer goods – can increase living standards / happiness, generates SR growth which also drives employment

N Link with increased equality – different regions produce different goods, so balanced growth allows all regions to grow


Level Mark Descriptor

0 Completely inaccurate response

1 1 -3 Displays isolated or imprecise knowledge and understanding of key terms, concepts, theories and models. Uses generic or irrelevant information or examples. Descriptive approach with no link between causes and consequences.

2 4 - 6 Displays elements of knowledge and understanding of economic principles, concepts and theories. Applies economic ideas and relates them to economic problems in context, although does not focus on the broad elements of the question. A narrow response; chains of reasoning may be developed but the answer may lack balance.

4 7 - 9 Demonstrates accurate knowledge and understanding of the concepts, theories and models. Ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated. Economic ideas are applied appropriately to the broad elements of the question.

Evaluation 4

Possible points for inclusionN Comparative advantage theory suggests we should specialise in producing what we are best at producing in

order to boost productive efficiency – this implies that balanced growth is undesirableN Not really possible to compete with the likes of Germany or Japan in terms of high tech manufactured items, or

China in terms of low-cost high-volume manufactured goodsN UK does not have the infrastructure to have balanced growth – it would take too long to achieveN UK focus should be on servicesN Balanced growth requires large amounts of government intervention, which can be costly and misguided – could

“back the wrong horse”


0 No evaluative comments

1 1-2 Identification of generic evaluative comments without supporting evidence or reference to context. No evidence of a logical chain of reasoning.

2 3-4 Evaluative comments supported by chains of reasoning and appropriate reference to context. Evaluation is balanced and considers the broad elements of the question.

(e) Discuss the policies the UK Government could adopt to achieve a stronger growth rate in the UK’s manufacturing sector. [15 marks]


Possible points for inclusionN Definition of growth rateN Definition of supply-side policiesN Outlines of at least 2 policiesN Possible policy: provide subsidies to manufacturers, to lower production costs and make manufactures more

price competitive, therefore boosting demand for UK manufactures and providing more profit to manufacturers which can then be used for further investment


N Possible policy: Provide tax breaks to manufacturers – similar analysis to above for subsidiesN Possible policy: change the school curriculum so that more young people are keen to develop STEM skills and

take up a career in manufacturing – this would boost productivity, causing production costs to fall and output to rise

N Possible policy: building infrastructure to allow more manufactured goods to be transported / raw materials purchased, therefore reducing costs and making goods more price competitive



1 1 -3 Displays isolated or imprecise knowledge and understanding of key terms, concepts, theories and models. Uses generic or irrelevant information or examples. Descriptive approach with no link between causes and consequences.

2 4 - 6 Displays elements of knowledge and understanding of economic principles, concepts and theories. Applies economic ideas and relates them to economic problems in context, although does not focus on the broad elements of the question. A narrow response; chains of reasoning may be developed but the answer may lack balance.

4 7 - 9 Demonstrates accurate knowledge and understanding of the concepts, theories and models. Ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated. Economic ideas are applied appropriately to the broad elements of the question.

Evaluation 6

Possible points for inclusionN Subsidies may not be used to lower production costs; industries may get too used to receiving subsidies and be

productively inefficient; opportunity cost of spending on manufacturing; subsidies may still not be big enough to make UK manufacturing price competitive compared with other countries

N Tax breaks – unpopular in the current economic climate, people may feel that the government is backing the wrong industries

N School curriculum takes a long time to change – cultural issues mean that it is unlikely to take hold; current gov’t seem intent on making the school curriculum more academic and less practical; university too expensive for many, especially to study STEM subjects which are perceived as difficult and taking longer

N Infrastructure development can be really disruptive in the short/medium term, raising costs of production, and takes a long time to complete

N Laissez-faire evaluation, for example, the government should leave growth to the free marketN Unbalanced growth is more effective – the UK already has strong performing industries, especially the service

sector




2 3-4 Evidence of evaluation of alternative approaches which is unbalanced. Evaluative comments with supporting evidence / reference to context and a partially developed chain of reasoning.

3 5 -6 Evaluative comments supported by chains of reasoning and appropriate reference to context. Evaluation is balanced and considers the broad elements of the question.


EITHER

(f) Evaluate the use of fiscal policy to achieve the UK’s macroeconomic objectives [20 marks]


Possible points for inclusion:N Definition of fiscal policyN Explanation of UK macro objectives (economic growth, low unemployment, low stable inflation, current account

equilibrium, balanced budget deficit, environmental protection, greater income equality)N Outline of possible fiscal policies e.g. more progressive income tax / lower income tax for the poor, greater use of

excise duty to help protect the environment, lower corporation tax to boost employment and growth, reduction in benefits to boost labour market participation rates, increased spending on education and healthcare to boost living standards

N Answers should cover the impact on a range of macroeconomic objectivesN It is likely that answers would be illustrated with at least one AD/AS diagram to show the impact of a particular

fiscal policy/policies on GDP, the price level and employment levels



1 1 -3 Displays isolated or imprecise knowledge and understanding of key terms, concepts, theories and models. Uses generic or irrelevant information or examples. Descriptive approach with no chains of reasoning and no link between causes and consequences.

2 4 - 6 Displays elements of knowledge and understanding of economic principles, concepts and theories. Applies economic ideas and relates them to economic problems in context, although does not focus on the broad elements of the question. A narrow response or superficial , two-stage chains of reasoning only.

3 7 - 10 Demonstrates accurate knowledge and understanding of the concepts, theories and models. Ability to apply economic concepts and relate them directly to broad elements of the question with evidence integrated into the answer. Analysis is clear and coherent, although it may lack balance. Chains of reasoning are developed, but the answer may lack balance.

4 11 - 14 Demonstrates precise knowledge and understanding of the concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples. Analysis is relevant and focused with evidence fully and reliably integrated. Economic ideas are carefully selected and applied appropriately to economic issues and problems. The answer demonstrates logical and coherent chains of reasoning.

Evaluation 6

Possible points for inclusion:N Fiscal policy is only really changed once per year in the Budget, and occasionally the Autumn Statement, but

changes can take some time to come into playN Key aim of fiscal policy over recent years has been to move the budget balance into a surplus rather than a

deficit, and eliminate the structural deficit altogether – this has outweighed other macro objectives


N Monetary policy is the key tool for managing inflation, not fiscal policyN Objectives may be better met through non-interventionary supply side policiesN Views on fiscal policy depend on the governing political party – Conservatives traditionally more likely to cut

taxes and cut government spending than, for example, LabourN Specific evaluation of individual policies mentioned n.b. the evaluation must focus on whether or not that policy

will allow macro objectives to be achieved or notN Trade-offs between macro objectives e.g. rising AD as a result of rising government spending will cause rising

GDP but could be inflationary – possible use of the Philips Curve to illustrateN Impact of fiscal policy depends on the size and nature of the output gap






OR

(g) Evaluate whether low and stable inflation should remain as the main macroeconomic objective for the UK government. . [20 marks]


Possible points for inclusion:N Definition of inflationN Explanation of other UK macro objectives (economic growth, low unemployment, current account equilibrium,

balanced budget deficit, environmental protection, greater income equality)N Explanation of UK’s 2% CPI inflation target, and the use of monetary policy by the MPC at the Bank of England

for controlling itN Recognition that we need some inflation, rather than deflation – sign of a growing economyN Problems associated with inflation e.g. menu costs / shoe leather costs, redistribution of income from savers to

borrowers, hits those on benefits hardest because they may not rise in line with inflation, reduces real income and therefore purchasing power, can reduce confidence which in turn reduces growth and employment, may cause exports to be less price competitive

N Ideally the achievement of low stable inflation should be linked to how it can help to achieve other macro objectives



1 1 -3 Displays isolated or imprecise knowledge and understanding of key terms, concepts, theories and models. Uses generic or irrelevant information or examples. Descriptive approach with no chains of reasoning and no link between causes and consequences.


2 4 - 6 Displays elements of knowledge and understanding of economic principles, concepts and theories. Applies economic ideas and relates them to economic problems in context, although does not focus on the broad elements of the question. A narrow response or superficial , two-stage chains of reasoning only.

3 7 - 10 Demonstrates accurate knowledge and understanding of the concepts, theories and models. Ability to apply economic concepts and relate them directly to broad elements of the question with evidence integrated into the answer. Analysis is clear and coherent, although it may lack balance. Chains of reasoning are developed, but the answer may lack balance.

4 11 - 14 Demonstrates precise knowledge and understanding of the concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples. Analysis is relevant and focused with evidence fully and reliably integrated. Economic ideas are carefully selected and applied appropriately to economic issues and problems. The answer demonstrates logical and coherent chains of reasoning.

Evaluation 6

Possible points for inclusion:N Discussion of whether low stable inflation really is the main macro objective for the government – has it been

surpassed by growth, or a balanced budget? Why are other objectives arguably more important?N Comment on whether we need to be more concerned about the risk of deflation (could outline problems

associated with deflation e.g. rapid reduction in economic growth and employment if people start to delay their spending, causes the value of debt to rise etc) – is deflation worse than inflation

N Impact of inflation depends on its cause e.g. demand pull is less concerning than cost pushN Independence and credibility of the Bank of England means that we don’t really need to worry about inflationN Trade offs associated with achieving low inflation e.g. could use a Philips Curve or AD/AS diagram to illustrate

the impact it could have on employment or growth levels






TOTAL FOR SECTION B = 60 MARKSTOTAL FOR PAPER = 80 MARKS