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APT Initiatives Ltd

www.apt-initiatives.com

Multiple Choice Questions

for

AQA AS ECONOMICS

Unit 2:

THE NATIONAL ECONOMY

250 Multiple Choice Questions [10 Tests of 25 Questions]

Tests on each Specification Topic & End of Unit Tests

Answers with Supporting Explanations
General Advice on How to Tackle the Questions

Minimising Workloads, Maximising Performance

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy i

APT Initiatives Ltd, 2011

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy ii

CONTENTS
Page No

A INFORMATION SHEET FOR STUDENTS: TACKLING THE MULTIPLE

CHOICE QUESTIONS – UNIT 2 1

B INDIVIDUAL TESTS AND ANSWERS WITH EXPLANATIONS 2

1 THE MEASUREMENT OF MACROECONOMIC PERFORMANCE 2

Test 1 Questions 3
Test 1 Answers 8
Test 2 Questions 14
Test 2 Answers 19

2 HOW THE MACROECONOMY WORKS 26

Test 1 Questions 27
Test 1 Answers 32
Test 2 Questions 38
Test 2 Answers 43

3 ECONOMIC PERFORMANCE 49

Test 1 Questions 50
Test 1 Answers 55
Test 2 Questions 61
Test 2 Answers 66

4 MACROECONOMIC POLICY 72

Test 1 Questions 73
Test 1 Answers 78
Test 2 Questions 84
Test 2 Answers 89

5 ENTIRE UNIT 95

Test 1 Questions 96
Test 1 Answers 101
Test 2 Questions 107
Test 2 Answers 112

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 1

STUDENT INFORMATION SHEET

TACKLING THE MULTIPLE CHOICE QUESTIONS – UNIT 2

A multiple choice paper provides you with a good opportunity to achieve a high mark,
but only if you know the subject matter and think logically. In addition to revising
thoroughly to learn the subject matter, the following points should be taken into
account when tackling the multiple choice questions for AQA AS Economics Unit 2.

1. Pace yourself. You are advised to spend 25 minutes on the 25 multiple choice
questions. On some questions, you should identify the correct response very
quickly, others will take a little longer, but you have an average of one minute per
question. Do not rush your answer, but do make sure that after 25 minutes you are
in a position to move on to section B of the examination.

2. Read the question very carefully. Work on the assumption that every word is of
significance.

3. There is only one correct answer. Do not “hedge your bets” by suggesting two
answers. If you give two answers then you will not get a mark (even if one is
correct).

4. You should (a) identify the correct answer and (b) understand why the others
are incorrect. Sometimes you can identify the correct answer by eliminating the
wrong ones. Ideally, you should approach the question from both angles.

5. There are no half marks. Even though one of the 3 distracters (incorrect answers)
might be more valid than the other 2, you do not get half marks for spotting the “half
right answer”. The fact is that if it is “only half right”, then it is wrong.

6. It is very tempting to guess the answer when you are unsure. However, remember,
there is only a one in four chance of guessing correctly and a three in four chance of
guessing it wrong. Therefore, always try to work out the answer using your
knowledge and logical thinking. Only guess the answer if you genuinely have no
idea of what the correct answer is.

7. Be extra careful when answering the negative questions ie “Which if the

following is not....”

8. Use the question paper to do rough working. This applies particularly to

quantitative questions such as those requiring mathematical calculations.

9. Use the question paper to jot down or to manipulate a sketch graph. This
advice is especially relevant in questions that refer to aggregate demand or
aggregate supply curves shifting to the left or to the right. It is easier to see a
leftward / rightward shift on paper than trying to visualise it in your mind.

10. Graphs showing a shift in the aggregate supply or aggregate demand curve are
labelled AD1, AD2, AS1 and AS2 etc with the curve labelled 1 as the original. To
make it clearer to see this on the question paper, draw an arrow to show the
direction of the shift.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 2

The Measurement of
Macroeconomic Performance

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 3

The Measurement of Macroeconomic Performance - Test 1

1. Gross Domestic Product is defined as

A the value of goods and services produced by households in a country.
B the value of goods and services produced by factors owned by the population of a country.
C the value of goods and services produced by factors within a country.
D the value of goods and services after capital consumption is taken into account.

2. An economy is currently experiencing growth in GDP below trend. In the short-run, if the rate of
growth of aggregate demand is less than the rate of growth in productive capacity, then this
economy is most likely to experience
A an increase in inflation.
B a decrease in output.
C an increase in unemployment.
D a decrease in imports.

3. The diagram below shows two production possibility frontiers for an economy.

Capital
Goods

Consumer
Goods

The movement of the economy from position S to T could indicate that there has been
A a boom, and GDP is growing faster than trend.
B a recession, and the rate of growth in GDP is falling.
C an increase in GDP per capita.
D there is a leftward shift in the country’s aggregate supply curve.

4. A country’s per capita GDP is a useful measure of economic welfare because

A it takes out the effect of inflation.
B it reflects the average wealth of each factor owner.
C it measures the average income earned by each citizen.
D it takes out the effect of output from foreign owned businesses.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 4

5. The Consumer Price Index has been chosen as the means of measuring inflation because
A it makes use of a more extensive range of products compared to the retail price index.
B it is calculated using the same methods as those found elsewhere in the EU.
C it mirrors closely changes in the Retail Price Index.
D it includes mortgage interest payments.

6. If the Consumer Price Index rises from 100 to 104, this means that
A the price of each product has increased by 4%.
B the average price level has increased by 4%.
C consumer goods inflation has increase by 4%.
D inflation is rising at a constant 4% per annum.

7. Refer to the table below.

YEAR Annual % change in Retail Prices

2003 3.9
2004 2.9
2005 2.5
2006 3.0
2007 3.0

From the data, it can be concluded that

A average prices rose is some years and fell in others.
B prices were at their lowest in 2005.
C prices remained constant in 2006.
D prices grew least quickly in 2005.

8. The Government decides in April 2011 to use the Retail Price Index to increase the Basic State
Pensions by 4.2% to £120.68 per week. How much would this pension have been worth in 2010, to
the nearest penny?
A £113.12
B £115.82
C £117.27
D £125.75

9. The labour force only includes those who

A are willing and able to work.
B are employed full and part time.
C are employed, or are claiming Jobseeker’s Allowance.
D who are not earning money in the black economy.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 5

10. A current account deficit on the UK balance of payments means that typically
A the value of the goods we sell overseas is less than the value of the goods we import.
B the total value of exports of goods and services is less than the total value of imports of goods and
services.
C the volume of exported goods and services is less than the volume of imported goods and services.
D government revenue is less than government expenditure.

11. The current account of the balance of payments does not include
A invisible trade.
B the value of exports in services.
C profits earned from overseas investment.
D the transfer of funds to be invested overseas.

12. Macroeconomists make extensive use of index numbers because it can help them to
A demonstrate more clearly a percentage change in output.
B understand how much the level of unemployment has fallen.
C clarify trends in economic data over a period of time.
D compare the price of a product across different countries with different currencies.

13. The economic cycle is characterised by

A changing rates of real GDP growth.
B changing rates of inflation arising from Bank of England intervention.
C the change of emphasis in the UK economy from manufacturing to services.
D increasing rates of unemployment over two consecutive quarters.

14. Recession is defined as a period of time over which

A output growth falls below the trend rate.
B nominal output falls, but real output continues to grow.
C output falls over two consecutive quarters.
D output grows less fast over two consecutive quarters.

15. The UK trend rate of economic growth is 2.5%. If next year’s inflation is expected to be at 3% and
money national income is expected to grow by 4%, which one of the following is most likely?
A The economy will operate below its trend rate, and unemployment will increase
B Employment will rise, and national output will be above trend rate
C Employment will fall, and the economy will operate above its trend rate
D Unemployment will decrease, and the economy will grow below the trend rate

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 6

16. Higher rates of inflation are typically associated with

A the boom phase of the economic cycle.
B an increase in the trend rate of real GDP.
C the recovery phase of the economic cycle.
D higher rates of unemployment.

17. During the recovery phase of the economic cycle, after a prolonged recession, economists would
expect the rate of inflation, all other factors being equal, to
A be falling at a faster rate.
B be rising at a slower rate.
C remain unchanged.
D be rising at a faster rate.

18. Unemployment may not fall during a recovery phase in an economic cycle because
A the rate of change of output is increasing .
B businesses will first try to increase output with existing factors.
C unemployment will rise for non-cyclical reasons.
D all of the above.

19. The rate of change of investment during a period of boom could be

A decreasing in anticipation of an economic slowdown.
B rising or falling, because many businesses are unconcerned about the economic cycle.
C negative because interest rates may have fallen.
D rising or falling, because businesses do not take a long-run view.

20. The macroeconomic performance of the UK economy may be undermined by supply shocks, for
example
A an increase in the world price of oil.
B an increase in the £ exchange rate, in relation to other major currencies.
C low inflation and corresponding low interest rates.
D falling house prices.

21. A positive output gap is defined as the extent to which

A actual output is greater than the productive potential of an economy.
B GDP is greater than GNP.
C the productive potential of an economy output is greater than actual output.
D GNP is greater than GDP.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 7

22. A positive output gap is more likely to occur when

A growth is below trend.
B there is full employment.
C inflation is low.
D aggregate demand equals aggregate supply.

23. If an economy’s output gap moves from being negative to positive, the economy is likely to
experience
A deflation.
B excess aggregate supply.
C inflationary pressure.
D rising unemployment.

24. A deflationary gap is typically associated with

A aggregate demand and aggregate supply in equilibrium.
B increasing imports.
C a higher price level.
D changes in the economic cycle.

25. A negative output gap is defined as the extent to which

A actual output is greater than the productive potential of an economy.
B Inflation is falling.
C output is falling.
D the productive potential of an economy output is less than actual output.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 8

The Measurement of Macroeconomic Performance - Test 1 - Answers

1. Gross Domestic Product is defined as

EXPLANATION: Gross Domestic Product is one of the measures of National Income. It includes the value
of output produced, irrespective of the nationality of the businesses responsible. Therefore, C is the
correct answer.

EXPLANATION: in these circumstances, actual output will grow less quickly than potential output, a
deflationary (or negative) output gap will grow, and unemployment will rise. Hence, option C is the
correct response.

3. The diagram below shows two production possibility frontiers for an economy.

Capital
Goods

Consumer
Goods

EXPLANATION: The diagram, with a leftward shift in the production possibility, could either represent a
fall in output below trend growth, which is not offered as an option, or a long-term fall in the productive
capacity of this economy, which could also be illustrated as a leftward shift in the long-run in the
aggregate supply curve. Hence, option D is the correct response.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 9

4. A country’s per capita GDP is a useful measure of economic welfare because

EXPLANATION: GDP refers to the flow of goods and services and corresponding income produced in an
economy over a period of time. Therefore, GDP per capita means income per person in the population.
Hence, C is the correct option.

EXPLANATION: The earlier measure of price change, the Retail Price Index, was found to be a less useful
measure of inflation because it included changes in mortgage interest payments. Since interest rates
were the primary way of managing inflation, their inclusion would be misleading. Primarily for this
reason, in 2004, the Consumer Price Index (CPI), which excluded these payments, was introduced.
Furthermore, calculation of CPI used the same methodology adopted by other EU countries, enabling
more useful comparisons of economic performance and policy effectiveness. Hence, B is the correct
response.

EXPLANATION: The Consumer Price Index (CPI) provides a measure of the level of prices in the economy,
and because it excludes some changes that also affect inflation, it can only remain an indicator of
inflation. Hence option B can be the only correct response. Since price changes, over a time period, vary
significantly between products, option A is clearly incorrect. Option C is incorrect because it excludes
changes in the prices of services, which must be included in the CPI in order to remain representative of
price change generally. Given the different cost, market and price pressures in different markets, at
different times, inflation cannot be constant, and therefore option D is also incorrect.

7. Refer to the table below.

YEAR Annual % change in Retail Prices
2003 3.9
2004 2.9
2005 2.5
2006 3.0
2007 3.0
From the data, it can be concluded that
A average prices rose is some years and fell in others.
B prices were at their lowest in 2005.
C prices remained constant in 2006.
D prices grew least quickly in 2005.

EXPLANATION: The data shows that prices rose each year, and at various rates. However, in 2005 the
price level grew least, at only 2.5%. Hence, option D is the correct response.
© APT Initiatives Ltd, 2011
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 10

EXPLANATION: Since £120.68 is 4.2% greater than the Basic State Pension in 2010, this pension in 2010
can be derived by the following calculation: (120.68 / 104.2) x 100, which equals £115.82. Hence, B is the
correct option.

9. The labour force only includes those who

A are willing and able to work.
B are employed full and part time.
C are employed, or are claiming Jobseeker’s Allowance.
D who are not earning money in the black economy.

EXPLANATION: The labour force includes those from the workforce who are economically active and,
therefore, are either in work, or are actively seeking work. Hence, it refers to those who are willing and
able to work. They may or may not be able to claim Jobseeker’s Allowance, or may or may not be
working in the black economy. Therefore, the correct answer is option A.

EXPLANATION: A current account deficit refers to the fact that the value of goods and services exported
from the UK is less than the corresponding value of goods and services imported. Hence, option B is the
correct response.

EXPLANATION: The current account of the balance of payments identifies transactions in goods and
services between the residents of a country and the rest of the world. It, therefore, includes factor
rewards from earlier investment overseas. The actual investment, which will generate this reward at
some future date, is included in the capital account. Therefore, option D is the correct answer.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 11

Explanation: Economic data is often expressed using large, detailed, and precise numbers. Hence, any
comparison, for example over time, or across two or more variables, is very difficult and time consuming.
By using index numbers, with 100 representing a typical and therefore useful base year, the size and
significance of any changes is much more apparent. Hence, option C is the correct response.

13. The economic cycle is characterised by

EXPLANATION: The economic cycle refers to the way in which real GDP changes around the long-term
growth trend. Hence, option A is the correct response.

14. Recession is defined as a period of time over which

EXPLANATION: Recession is a feature of some economic (or business) cycles. It occurs when output is
falling, at least over two consecutive quarters compared with the previous quarter. Hence, option C is the
correct answer.

EXPLANATION: According to this data, the economy will grow by 4% in £ terms, but with a 3% rate of
inflation real growth will be restricted to about 1%, which is below trend. Trend growth reflects the
ability of the economy to maintain current levels of employment and, therefore, in principle,
unemployment. Thus, a real growth rate of less than trend, in this case 1%, will result in an increase in
unemployment. Hence, option A is the correct response.

16. Higher rates of inflation are typically associated with

A the boom phase of the economic cycle.
B an increase in the trend rate of real GDP.
C the recovery phase of the economic cycle.
D higher rates of unemployment.

EXPLANATION: The economic cycle is often associated with significant changes in aggregate demand,
which in turn have implications for inflation. During a boom phase, there is high aggregate demand, and
therefore the economy is typically producing at a higher-than-trend rate of growth. As a result, there will
be increased inflationary pressures through shortages, as businesses strive to keep pace with demand.
Therefore, option A is the correct response.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 12

EXPLANATION: During the recovery phase, as aggregate demand increases at a faster rate than
aggregate supply, the rate of inflation would be expected to rise, and at a faster rate than rates incurred
before. Hence, the correct response is option D. NB Inflation can be affected by factors outside the
economic cycle.

EXPLANATION: There is typically a time lag between the recovery phase of the economic cycle and a
corresponding reduction in unemployment. This is because businesses may be nervous about the
strength and duration of the recovery and, in the first instance, will accommodate increases in demand
from existing resources. Hence, option B is the correct response.

19. The rate of change of investment during a period of boom could be

EXPLANATION: Investment levels across the whole economy will broadly reflect current and anticipated
changes in the economic cycle. Therefore, during a boom, in anticipation of an economic slowdown some
businesses may cancel or postpone investment plans. Hence, option A is the correct answer.

EXPLANATION: A supply shock typically refers to an unanticipated reduction in aggregate supply, which
results in macroeconomic disequilibrium and, in due course, less being supplied at each price level (ie a
shift usually to the left in the long-run aggregate supply curve). The most common examples arise from
wars, natural disasters, and increases in the price of key commodities such as oil. Hence, A is the correct
response.

21. A positive output gap is defined as the extent to which

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 13

EXPLANATION: A positive output gap (also known as an inflationary gap) occurs when an economy is
producing at a level of output, which, in the short-term, is greater than the productive potential of the
economy. Hence, option A is the correct response.

22. A positive output gap is more likely to occur when

A growth is below trend.
B there is full employment.
C inflation is low.
D aggregate demand equals aggregate supply.

EXPLANATION: A positive (or inflationary) output gap occurs when actual output is greater than potential
output. Output at these exceptionally high levels is more likely to be associated with full employment.
Hence, the correct answer is option B.

23. If an economy’s output gap moves from being negative to positive, the economy is likely to
experience
A deflation.
B excess aggregate supply.
C inflationary pressure.
D rising unemployment.

EXPLANATION: Such a move will result in this economy moving from producing real output levels below
production potential, to real output above output potential (albeit temporarily). Therefore, of the options
available, this economy is more likely to be experiencing Inflation. Hence, option C is the correct
response.

24. A deflationary gap is typically associated with

A aggregate demand and aggregate supply in equilibrium.
B increasing imports.
C a higher price level.
D changes in the economic cycle.

EXPLANATION: A deflationary gap (also known as a negative output gap) occurs when real GDP (output)
falls below potential output levels, usually as a result of a deficiency of aggregate demand. Changes in
the level of aggregate demand are most commonly associated with changes in the economic cycle.
Hence, option D is the correct response.

25. A negative output gap is defined as the extent to which

A actual output is greater than the productive potential of an economy.
B Inflation is falling.
C output is falling.
D the productive potential of an economy output is less than actual output.

EXPLANATION: A negative output gap (also known as a deflationary gap) occurs when an economy is
producing at a level of output that is below the productive potential of the economy. Hence, option D is
the correct response.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 14

The Measurement of Macroeconomic Performance - Test 2

1. Gross Domestic Product cannot be measured using

A the output method.
B the income method.
C the expenditure method.
D the factor services method.

2. Care must be taken in comparing GDP (Gross Domestic Product) over a period of time because
A it is presented in output terms, and output varies from year to year.
B it is presented in income terms, and real income changes from one year to the next.
C it is presented in money terms and, therefore, reflects changes in prices as well as output.
D it is presented in expenditure terms, and this reflects taxes and subsidies as well as factor costs.

3. UK GDP per capita increased from £16,100 in 2008, to £17,560 in 2009. With Inflation of 2.3% over
the year to 2009, by how much did real GDP per head increase?
A 6.2%
B 6.6%
C 7.1%
D 8.4%

4. If GDP per capita in the UK is estimated at £6,700 and GDP is £410,375m, what is the population
estimated to be?
A 60.35 million
B 61.25 million
C 63.85 million
D 65.65 million

5. The Consumer Price Index can be used to

A determine the real value of wages and salaries.
B adjust state welfare benefit levels.
C deflate monetary economic indicators.
D deal with all of the above.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 15

6. The table below shows the change in the Consumer Price Index for the UK between 2005 and 2006.

Year Consumer Price Index

2005 200
2006 208

These figures suggest that, between 2005 and 2006

A the purchasing power of money fell by 4%.
B consumers’ standard of living increased by 8%.
C the inflation rate was 8%.
D the purchasing power of money increased by 4%.

7. One way in which the Retail Price Index differs from the Consumer Price Index is that
A it is now thought to be a more effective way of measuring policy effectiveness.
B the data is collected more often.
C it includes the more up to date basket of representative goods.
D it includes mortgage interest payments.

8. Unemployment is an important measure of economic performance because

A it represents a source of economic inefficiency.
B it is unfair that some people cannot find jobs.
C it is a source of inflationary pressure.
D it is concentrated in areas traditionally associated with manufacturing.

9. The level of unemployment is a reliable measure of economic performance because

A the number unemployed but able and willing to work can be measured accurately.
B its level rises and falls closely in response to other variables.
C it provides a relative measure of how an economy is performing in relation to its productive
potential.
D every country measures unemployment in the same way.

10. Comparing the current account of the UK’s balance of payments with a previous year is challenging
because
A the government’s tax revenue is greater than expenditure.
B exchange rates will have changed over the period.
C the current account performance depends on export competitiveness.
D the current account excludes capital movements.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 16

11. The UK current account of the balance of payments is an important macro-economic variable
because
A it identifies the level of UK imports and exports in a period.
B it shows the extent to which the UK government is raising sufficient tax income to cover expenditure.
C it highlights the transfer of UK government funds for international development.
D it represents an important component of UK aggregate demand.

12. Set out below is some economic data using index numbers. A comparison is being made between
the economic wealth of 4 countries and the UK, which has an index of 100.

Country Standard of Living Index

A 86.3
B 91.5
C 103.6
D 109.1

From this data, we can deduce that

A country D is 5.5% richer than Country C.
B country A is 5.7% poorer than Country B.
C country C is 12.1% richer than Country B.
D none of the above.

13. The stages of business (or economic) cycle are defined by

A changes in output in relation to the trend growth rate.
B how much the economy grows or shrinks compared to the previous quarter.
C the difference between periods of boom and periods of slowdown or recession.
D changes in nominal GDP in relation to the trend growth rate.

14. The recovery phase of the economic cycle is typically associated with
A rising unemployment.
B high inflation.
C increasing investment.
D a declining current account deficit.

15. The business (or economic) cycle is an important economic feature because it
A highlights the relationship between recession and boom.
B represents an important source of economic growth.
C determines the potential levels of employment of factor services.
D shows how nominal GDP changes over time.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 17

16. During periods of recession, UK inflation will be

A unaffected.
B rising.
C falling.
D unpredictable.

17. The relationship between changes in the economic cycle and changes in unemployment
A depends on the level of unemployment to start with.
B does not exist and is, therefore, meaningless.
C is the same in every advanced economy.
D depends on the causes of the changes of unemployment.

18. Towards the anticipated end of a recession, economists would expect businesses to
A invest more heavily in training and implement a redundancy programme.
B increase advertising and raise prices.
C implement a redundancy programme and raise prices.
D invest more heavily in training and increase advertising .

19. During periods of recession, investment

A may recover temporarily, as some businesses replenish stocks.
B may be falling because businesses are anticipating economic recovery.
C may parallel a rise in output levels.
D None of the above.

20. A demand shock in the UK could be caused by

A an anticipated recession.
B falling house prices.
C an increase in the price level.
D a fall in the price of oil.

21. If an economy is operating beyond its production possibility frontier, it has generated a
A negative output gap.
B deflationary gap.
C positive output gap.
D none of the above.

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 18

22. An inflationary gap is NOT associated with

A a strong currency.
B full employment.
C actual output greater than potential output.
D excess aggregate demand.

23. When the level of demand across the whole economy is insufficient to ensure that the productive
potential of the economy is being achieved, the economy will be experiencing
A a positive output gap.
B an inflationary gap.
C a negative output gap.
D none of the above.

24. The diagram below shows the trend and actual growth paths for an economy.

Output Actual Growth

S
T Trend Growth

Time

Which of the following combinations A, B, C, or D describes the state of the economy when it moves
from S to T?
Stage of the Output Gap
Business Cycle
A Recession Inflationary
B Boom Deflationary
C Recession Deflationary
D Boom Inflationary

25. If an economy is operating within its production possibility frontier, which of the following has it
generated?
A An inflationary gap
B A negative output gap
C A positive output gap
D None of the above

© APT Initiatives Ltd, 2011

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 19

The Measurement of Macroeconomic Performance - Test 2 - Answers

1. Gross Domestic Product cannot be measured using

A the output method.
B the income method.
C the expenditure method.
D the factor services method.

EXPLANATION: There are three ways in which national income and, therefore, Gross Domestic product
can be measured. Since output generates corresponding expenditure from consumers, and income for
factor owners, they each represent ways of measuring national income. Option D is clearly irrelevant and
is, therefore, the correct selection.

EXPLANATION: Because of the diversity of goods and services included in the national income accounts,
they can only be presented in £ terms. However, this means that, over time, any change in the values
shown will reflect both changes in price as well as changes in output levels. Hence, C is the correct
answer.

3. UK GDP per capita increased from £16,100 in 2008, to £17,560 in 2009. With Inflation of 2.3% over
the year to 2009, by how much did real GDP per head increase?
A 6.2%
B 6.6%
C 7.1%
D 8.4%

EXPLANATION: The increase in GDP per capita shown from 2008 to 2009 will, in part, be as a result of
prices generally increasing by 2.3% and, in part, as a result of an increase in output. By adjusting the
2009 GDP per capita value of £17,560 to reflect 2008 prices, thereby stripping out the effect of inflation,
GDP output has increased only to £17,165 (rounded). £17,165 is 6.6% greater than £16,100, thus, B is the
correct answer.

4. If GDP per capita in the UK is estimated at £6,700 and GDP is £410,375m, what is the population
estimated to be?
A 60.35 million
B 61.25 million
C 63.85 million
D 65.65 million

EXPLANATION: Calculating GDP per capita requires 2 pieces of information: The GDP and population of
an economy. Hence, the population on which these particular calculations are based is derived by
dividing GDP by the average GDP per person; £410,375m / £6,700 = 61.25m, which is option B.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 20

5. The Consumer Price Index can be used to

A determine the real value of wages and salaries.
B adjust state welfare benefit levels.
C deflate monetary economic indicators.
D deal with all of the above.

EXPLANATION: Nowadays, the Consumer Price Index is used to measure and monitor inflation, and thus it
is used by the Bank of England to determine the success of their interest rate interventions. There is
sufficient confidence in the methodology used to determine this monthly index, that economists will also
use it to deflate any monetary variables and outcomes, such as those exemplified by options A, B, and C
above, into more useful real changes in the economy. Option D is, therefore, the correct option.

6. The table below shows the change in the Consumer Price Index for the UK between 2005 and 2006.

Year Consumer Price Index

2005 200
2006 208

These figures suggest that, between 2005 and 2006

A the purchasing power of money fell by 4%.
B consumers’ standard of living increased by 8%.
C the inflation rate was 8%.
D the purchasing power of money increased by 4%.

EXPLANATION: An increase in a prices index, in this case of 4% (ie 8/200 x 100), means a unit of currency
buys less than before. Specifically, the purchasing power of this currency fell by (about) 4%. Hence,
option A is the correct response.

EXPLANATION: Traditionally, the Retail Price Index was used as a measure of the movement of prices in
the economy, and therefore changes in inflation. The methodology used to determine this index included
the monitoring of changes in mortgage interest payments, a very significant household expenditure item.
Since interest rates became the dominant way inflation was being controlled, any change would
immediately impact upon mortgage interest payments, hence the rate of inflation itself. For this reason,
a new measure of the price level in the economy - the Consumer Price Index, was introduced in 2004,
which excluded this item from the representative “basket” of goods and services used.

8. Unemployment is an important measure of economic performance because

EXPLANATION: Unemployment refers to those of the workforce in an economy, who are willing and able
to work, but cannot find work. Hence, a factor resource is not being fully employed, output is being
foregone, some consumer wants are not being met, and therefore the economy is less than efficient than
it would otherwise be. A is, therefore, the correct option.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 21

9.The level of unemployment is a reliable measure of economic performance because

EXPLANATION: The level of unemployment is a key measure of economic performance, despite significant
difficulties agreeing a common measure and identifying the numbers actually willing and able to work.
Nevertheless, since a measure of unemployment using a particular methodology is retained for a
significant period of time, relative assessments can usefully be made about how well an economy
achieves its productive potential. Hence, option C is the correct response.

EXPLANATION: The balance of payment throughout is expressed in £, but the goods and services involved
may have been traded in a variety of currencies whose values against the £ will have changed throughout
the years in question. Hence, any £ changes that occur would be impossible to convert into volume
changes, which is a more useful measure of our competitiveness, and our trade performance generally.
Hence, option B is the correct response.

EXPLANATION: Aggregate demand in the UK is made up of demand from consumers, businesses, and
government. It also includes demand for our goods and services overseas, minus any UK demand for
goods and services from overseas. Hence, option D is the correct answer.

12. Set out below is some economic data using index numbers. A comparison is being made between
the economic wealth of 4 countries and the UK, which has an index of 100.

Country Standard of Living Index

A 86.3
B 91.5
C 103.6
D 109.1

From this data, we can deduce that

A country D is 5.5% richer than Country C.
B country A is 5.7% poorer than Country B.
C country C is 12.1% richer than Country B.
D none of the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 22

EXPLANATION: Since the index shows the % difference between standard of living in the UK and any of
the other 4 countries, it is also possible to make % comparisons across any of these 4 countries. For
example, Country A’s standard of living, represented by an index of 86.3, is 5.7% less than 91.5 for
Country B, calculated as follows: {(86.3 / 91.5) x 100} - 100. Hence, option B is the correct response.
Options A and C are incorrect because the % number shows differences in terms of percentage points
rather than the % differences.

13. The stages of business (or economic) cycle are defined by

EXPLANATION: The output of an economy typically varies around a long-term trend, which, in the case of
the UK, is 2.5% per annum. This variation in real GDP, around the trend, is defined as the economic or
trade cycle. Hence, option A is the correct response.

14. The recovery phase of the economic cycle is typically associated with
A rising unemployment.
B high inflation.
C increasing investment.
D a declining current account deficit.

EXPLANATION: The recovery phase of the economic cycle is characterised by increasing rates of
aggregate demand and of real economic growth, following a period of slowdown, recession, or slump. In
response, businesses will increase investment in productive capacity to exploit this more positive
economic environment. Hence, option C is the correct response.

EXPLANATION: The economic (or business) cycle shows changes in real GDP over a period of time. Since
these changes can vary considerably in degree and direction, for example, between a boom and a
recession, they have a direct impact (albeit sometimes with a time lag) on the level of factor employment
required. Hence, Option C is the correct response.

16. During periods of recession, UK inflation will be

A unaffected.
B rising.
C falling.
D unpredictable.

EXPLANATION: Recession, defined as a period of negative growth, and associated with lower-than-
average aggregate demand, is often associated with falling or low inflation. However, inflation will also
be affected by the intensity of demand from overseas customers, changes in the value of £, and any
changes in the cost of imported materials, components and finished goods. Because inflation may be
only partly affected by recession, the relationship may be tenuous and, thus, unpredictable. Hence,
option D is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 23

EXPLANATION: Since changes in the economic cycle are a reflection of changes in real output growth,
these changes may also have an impact on the employment of factors of production. However, since
changes in unemployment are not caused exclusively by cyclical factors, the relationship is rather
uncertain. Hence, the correct answer is option D.

EXPLANATION: Towards the end of a recession, businesses will want to increase productivity, and be well
placed to exploit increasing customer confidence as the economy recovers. Both approaches will
contribute to increasing profitability. However, there is a time lag in reaping the rewards of both these
strategies, so investment would be expected to start some while before the recovery is confirmed from
real GDP data. Hence, the correct response is option D.

19. During periods of recession, investment

A may recover temporarily, as some businesses replenish stocks.
B may be falling because businesses are anticipating economic recovery.
C may parallel a rise in output levels.
D None of the above.

EXPLANATION: During recessions, businesses endeavour to bring their capacity levels in line with falling
demand, as soon as they can. Manufacturers will run down stocks of materials and finished goods.
However, when in due course they anticipate a recovery, they invest in restoring stocks to levels in line
with anticipated demand. Given the time lag between capacity investment and resulting output, there
may well be little parallel between rate of output and investment. Hence, answer A is correct.

20. A demand shock in the UK could be caused by

A an anticipated recession.
B falling house prices.
C an increase in the price level.
D a fall in the price of oil.

EXPLANATION: A demand shock is an event that increases or decreases demand across the whole
economy. In the UK, many hold the majority of their wealth in their homes. Therefore, any sustained fall
in house prices will discourage consumption and increase saving to protect real wealth, thereby creating
a demand shock. Hence, option B is the correct response.

21. If an economy is operating beyond its production possibility frontier, it has generated a
A negative output gap.
B deflationary gap.
C positive output gap.
D none of the above.

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EXPLANATION: If an economy is operating beyond its production possibility frontier, its output level is
(temporarily) greater than its productive potential, and, therefore, it has generated a positive output gap.
Hence, option C is the correct response.

22. An inflationary gap is NOT associated with

A a strong currency.
B full employment.
C actual output greater than potential output.
D excess aggregate demand.

EXPLANATION: An inflationary gap (also known as a positive output gap) occurs when excess aggregate
demand results in a short-term rise in actual output beyond potential output, and therefore full
employment. A strong currency will result in lower prices for imports, and higher prices for exports, both
of which will reduce inflationary pressure. Hence, option A is the correct response.

EXPLANATION: If the productive potential of the economy is not being achieved, at current levels of
demand, then the economy is suffering a negative output gap, which is option C.

24. The diagram below shows the trend and actual growth paths for an economy.

Output Actual Growth

S
T Trend Growth

Time

EXPLANATION: From position S to T, this economy is suffering a period of falling output, which would be
recessionary (if it continues over 2 consecutive quarters), and yet it is still achieving output levels above
trend, and an (shrinking) inflationary gap. Hence, the correct answer is option A.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 25

EXPLANATION: If an economy is operating within its production possibility frontier, its output level is less
than its productive potential, and it has, therefore, generated a negative output gap. Hence, option B is
the correct response.

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How the Macroeconomy Works

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How the Macroeconomy Works - Test 1

1. The circular flow of income refers to

A the process by which households depend on each other.
B the movement of income and spending throughout the economy.
C the way in which the economy will always be in equilibrium.
D the relationship between factor incomes and factor services.

2. When planned injections equal planned leakages

A there will be macroeconomic equilibrium.
B household expenditure equals household income.
C factor incomes equal factor services.
D imports and saving will equal exports and investment.

3. Which of the following factors will NOT result in a shift to the right in aggregate supply?
A A reduction in Jobseeker’s Allowance
B An increase in investment in on the job training
C An increase in business optimism
D A fall in the cost of imported raw materials and components

4. An increase in long-run aggregate supply CANNOT be caused by

A an increase in immigration.
B an increase in the retirement age.
C a decrease in business taxes.
D an increase in road congestion.

5. Economic growth can be successfully achieved by

A reducing business taxes and thereby reducing business short-run costs.
B increasing aggregate demand, through higher government spending on employment benefits.
C increasing long-run aggregate supply, through investing in improved transport infrastructure.
D reducing spending on defence, to pay for improved police services.

6. Economic growth is negative when there is

A an increase in unemployment.
B no longer any increase in real output in the economy.
C a fall in the productive capacity of the economy.
D a rise in wage rates.

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7. The diagram below shows changes in the conditions in aggregate demand in an economy.

Price Level

AD2

AD1

Real National Output

The shift from AD1 to AD2 could be explained by a decrease in

A imports.
B the costs of production.
C the price level.
D consumption.

8. An economy is more likely to experience inflation, all other things being equal, if
A aggregate supply decreases at a slower rate than aggregate demand.
B it is operating below its production possibility frontier.
C it runs a balance of trade deficit at full employment.
D aggregate supply increases at a slower rate than aggregate demand.

9. An economy is in equilibrium at full employment. The following year it benefits from an increase in
its productive capacity, and also from an increase in investment. As a result
A the price level will be higher, and real output could be higher or lower.
B the price level will be lower, but real output will be higher.
C the price level will be higher, and real output will be higher.
D the price level could be higher or lower, but output will be higher.

10. To calculate the level of aggregate demand, economists must NOT take account of
A imports.
B investment.
C net exports.
D transfer payments.

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11. The accelerator theory of investment is concerned with how

A net investment changes in response to the rate of change of national output.
B an increase in aggregate investment leads to an increase in national income.
C an increase in profits leads to an increase in investment expenditure.
D changes in gross investment will affect output.

12. UK consumption is defined as

A household expenditure on goods and services over a period of time.
B the quantity of goods and services produced by UK owned businesses.
C expenditure on goods and services over a period of time in the UK.
D the value of goods and services produced in the UK.

13. Investment, a component of aggregate demand, includes expenditure

A undertaken by firms on the resources and materials it needs.
B by firms on replacing and adding to capital stock.
C from retained profit, which businesses spend on machinery.
D by firms and government on replacing capital stock.

14. The level of government spending in any one year is determined by

A the amount of tax raised.
B the level of income.
C the decisions of politicians.
D spending on transfer payments.

15. Calculating UK aggregate demand must take account of imports because

A imports are a leakage in the circular flow of income.
B some UK demand is for foreign goods and services and, therefore, must be excluded.
C UK government, consumers, and businesses spend money on foreign goods and services.
D none of the above.

16. The multiplier can be used to demonstrate the way in which

A aggregate demand is affected by changes in national income.
B the level of aggregate demand affects the level of unemployment.
C changes in exports affect national income.
D imports could be affected by changes in national income.

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17. If exports were to increase by 3% and imports were to increase by 8%

A real output would increase by more than the change in aggregate demand.
B real output would fall by more than the change in exports.
C real output would fall by more than the change in aggregate demand.
D real output would increase by less than the change in aggregate demand.

18. A short-run aggregate supply curve will shift to the right when
A more is produced at a higher price level.
B money wage rates increase.
C less is produced at a lower price level.
D factor costs fall.

19. If businesses can increase factor productivity, in the short-run

A there will be movement up the aggregate demand curve.
B there will be a shift to the left in the aggregate supply curve.
C the price level will fall and there will be more output.
D the price level will rise.

20. A long-run aggregate supply curve for an economy shows its

A potential output.
B level of employment.
C equilibrium price level.
D rate of economic growth.

21. The long-run aggregate supply curve will NOT shift to the right if
A net immigration increases.
B aggregate demand increases.
C a higher proportion of women enter the labour force.
D the quality of resources is improved.

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22. The diagram below shows the conditions of aggregate demand and aggregate supply in the short and
long-run.

Price LRAS
Level
A SRAS

Real National Output

When this economy is operating at point A, it must be experiencing

A excess supply.
B labour unemployment.
C a high rate of economic growth.
D a rise in the rate of inflation.

23. The Keynesian long-run aggregate supply curve assumes that

A aggregate supply is unrelated to the price level.
B unemployment may persist because wages do not fall.
C as the economy approaches full employment, higher output lead to lower prices.
D greater efficiency shifts the curve downwards.

24. According to classical economists, an increase in long-run aggregate supply will lead to
A higher equilibrium output and a lower price level.
B higher aggregate demand and higher employment.
C a higher price level and higher equilibrium output.
D unpredictable changes in output and the price level.

25. A vertical long-run aggregate supply curve represents the maximum output that an economy can
produce
A per period of time.
B without incurring an increase in the price level.
C without incurring increased unemployment.
D at current levels of aggregate demand.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 32

How the Macroeconomy Works - Test 1 - Answers

1. The circular flow of income refers to

EXPLANATION: The circular flow of income is a model that illustrates how money, in the form of
expenditure and income, always flows between households and businesses. Hence, option B is the correct
response.

2. When planned injections equal planned leakages

A there will be macroeconomic equilibrium.
B household expenditure equals household income.
C factor incomes equal factor services.
D imports and saving will equal exports and investment.

EXPLANATION: When injections equal leakages from the circular flow, income equals expenditure,
aggregate demand equals aggregate supply, and real GDP is not changing. This also defines
macroeconomic equilibrium. Hence, option A is the correct response.

EXPLANATION: Options A, B, and D will lead to a shift to the right in aggregate supply. Option C leads to
a shift in aggregate demand, thus option C is the correct response.

4. An increase in long-run aggregate supply CANNOT be caused by

A an increase in immigration.
B an increase in the retirement age.
C a decrease in business taxes.
D an increase in road congestion.

EXPLANATION: Options A, B, and C can all contribute to an increase in the productive capacity of an
economy, whereas option D will reduce the competitiveness of an economy, thereby reducing long-run
aggregate supply.

5. Economic growth can be successfully achieved by

EXPLANATION: Economic growth depends on increasing the productive potential of the economy. This, in
turn, can benefit from the increased productive and allocative efficiencies arising from improved
transport infrastructure. Hence, option C is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 33

6. Economic growth is negative when there is

A an increase in unemployment.
B no longer any increase in real output in the economy.
C a fall in the productive capacity of the economy.
D a rise in wage rates.

EXPLANATION: When economic growth is negative, the productive capacity and therefore the resulting
output is reduced. Hence, option C is the correct response.

7. The diagram below shows changes in the conditions in aggregate demand in an economy.

Price Level

AD2

AD1

Real National Output

The shift from AD1 to AD2 could be explained by a decrease in

A imports.
B the costs of production.
C the price level.
D consumption.

EXPLANATION: A shift to the right in aggregate demand can reflect an increase in consumption,
investment, government spending, or exports, or a fall in imports, which will increase net exports. Hence,
option A is the correct response.

EXPLANATION: Inflation is more likely to occur if an increase in aggregate supply is increasing less than
any increase in aggregate demand. Hence, option D is the correct answer.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 34

EXPLANATION: An increase in the productive capacity of an economy will always result in equilibrium at a
higher level of real output. However, the impact on the price level will depend upon the extent to which
the productive capacity has increased, and the extent to which investment and, therefore, aggregate
demand has increased. Hence, option D is the correct response.

10. To calculate the level of aggregate demand, economists must NOT take account of
A imports.
B investment.
C net exports.
D transfer payments.

EXPLANATION: Aggregate demand is made up of consumption, investment, government spending, and

exports less imports (ie net exports). Transfer payments represent demand taken from tax payers and
awarded to benefit recipients and, therefore, largely cancel each other out. Thus, option D is the correct
response.

11. The accelerator theory of investment is concerned with how

EXPLANATION: This theory, which assumes a constant capital to output ratio, predicts that the level of
net investment will change in response to the rate of change of national output. Hence, option A is the
correct response.

12. UK consumption is defined as

EXPLANATION: Consumption is defined as household expenditure on goods and services over a period of
time. Hence, option A is the correct response.

13. Investment, a component of aggregate demand, includes expenditure

EXPLANATION: Investment is a component of aggregate demand and includes expenditure by firms on

replacing and adding to capital stock. Hence, option B is the correct response.

14. The level of government spending in any one year is determined by

A the amount of tax raised.
B the level of income.
C the decisions of politicians.
D spending on transfer payments.

EXPLANATION: While there will be a long-term relationship between the amount a government spends
and the amount it raises in taxes, year by year decisions reflect the priorities of politicians and their
willingness to incur deficits or surpluses. Hence, option C is the correct response.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 35

15. Calculating UK aggregate demand must take account of imports because

EXPLANATION: Expenditure on imports by government, consumers, and businesses, represents demand

for goods and services from overseas, and therefore would be included in the aggregate demand
quantities of those countries.

16. The multiplier can be used to demonstrate the way in which

EXPLANATION: The multiplier shows the extent to which national income changes as a result of a change
in any component of aggregate demand, for example, exports. Hence, option C is the correct response.

17. If exports were to increase by 3% and imports were to increase by 8%

EXPLANATION: A change in aggregate demand will lead to a multiple change in real output. Hence, when
imports increase by more than exports, aggregate demand falls, and real output falls by even more
(depending on the value of the multiplier). Therefore, option C is the correct response.

EXPLANATION: A short-run aggregate supply curve shifting to the right reflects the fact that producers
are now willing to produce the same amounts at lower price levels, perhaps because any one or more of
their factor costs have become cheaper. Hence, option D is the correct response.

19. If businesses can increase factor productivity, in the short-run

EXPLANATION: An increase in factor productivity will mean that business costs will fall, and businesses
will be prepared to supply more at each price level. Hence, there will be a rightward shift in the
aggregate supply curve in the short-run. This will result in a new equilibrium, at lower prices and higher
real output, ie option C.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 36

20. A long-run aggregate supply curve for an economy shows its

A potential output.
B level of employment.
C equilibrium price level.
D rate of economic growth.

EXPLANATION: The diagram shows the maximum level of output this economy could produce, whatever
the price level. Hence, option A is the correct response.

EXPLANATION: A shift to the right of the long-run aggregate supply curve reflects an increase in the
productive capacity of an economy. This can arise through an increase in the quality of the work force, or
an increase in the number joining the workforce (eg through higher participation or through net
immigration). An increase in aggregate demand, on its own, will translate exclusively into higher prices,
and have no impact on aggregate supply in the long-run. Hence, option B is the correct response.

22. The diagram below shows the conditions of aggregate demand and aggregate supply in the short and
long-run.

Price LRAS
Level
A SRAS

Real National Output

When this economy is operating at point A, it must be experiencing

A excess supply.
B labour unemployment.
C a high rate of economic growth.
D a rise in the rate of inflation.

EXPLANATION: At position A, this economy, although in short-run equilibrium, is operating temporarily

beyond its long-run aggregate supply curve and, therefore, beyond its long-run capacity. In these
circumstances, there is excess demand and the rate of inflation is rising. Hence, option D is the correct
response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 37

23. The Keynesian long-run aggregate supply curve assumes that

EXPLANATION: Keynes believed that unemployment could persist because those at work prevented
downward pressure on wages, thereby preventing labour markets from clearing. Hence, option B is the
correct response.

EXPLANATION: Using a vertical aggregate supply curve, classical economists assume that markets will
clear in any macroeconomic conditions and, therefore, with an increase in aggregate supply there will be
an extension of aggregate demand, greater output, and a lower price level. Hence, option A is the correct
response.

EXPLANATION: The assumption behind a long-run aggregate supply curve represented by a vertical line, is
that whatever the level of aggregate demand, equilibrium will, in due course, return to the long-run
position. Therefore, any attempt to increase real output by increasing aggregate demand beyond the
ability of the economy to supply, will result in a higher price level. Hence, option B is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 38

How the Macroeconomy Works - Test 2

1. In the model of the circular flow of income

A saving and exports are leakages.
B taxes and investment are injections.
C leakages equal exports.
D investment and exports are injections.

2. A shift of an aggregate demand curve to the left will result in

A lower output and a higher price level.
B lower output and a lower price level.
C a higher price level and high real GDP.
D a lower price level and higher output.

3. Changes in short-run aggregate supply can be caused by changes in

A the population.
B the quality of UK infrastructure.
C raw material prices.
D net immigration from the EU.

4. The UK government has been keen to invest in education because it will

A reduce aggregate demand, and increase economic output.
B increase short-run aggregate supply, and reduce the price level.
C lead to a shift to the right in the aggregate supply curve, thereby increasing economic growth.
D increase economic growth, by increasing government spending.

5. A demand shock will NOT result in

A a change in the price level.
B a movement along the aggregate demand curve.
C a shift in the aggregate demand curve.
D a change in real output.

6. A fall in the productivity of labour in an economy will lead to

A a decrease in the price level.
B movement down the aggregate demand curve.
C a leftward shift in the aggregate supply curve.
D a fall in the rate of growth of the labour force.

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7. Which of the following is most likely to shift the short-run aggregate supply curve to the left?
A An increase in investment
B A rise in money wages
C An increase in capital productivity
D An increase in unemployment

8. The diagram below illustrates the consequences of changes in the conditions of aggregate demand
and aggregate supply. Initially, equilibrium is a point E, where SRAS1 intersects with AD1.

Price
SRAS1
Level B
SRAS2
C
E

AD2

AD1

Real National Output

This economy experiences a 5% reduction in commodity prices, and investment increases by 5%. As a
result, equilibrium will

A move to point C.
B move to point B.
C remain at point E.
D move to point D.

9. Aggregate demand is defined as

A demand for a country’s goods and services over a period of time.
B demand for a country’s goods and services over a period of time, at a given price level.
C demand for a country’s goods and services over a range of price levels, over a period of time.
D none of the above.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 40

10. As a component of aggregate demand, investment is best defined as total expenditure in the
economy by
A businesses and government on all goods and services.
B businesses on all goods and services minus exports.
C businesses on capital goods.
D businesses on all goods and services.

11. A fall in the level of investment will most likely be caused by

A a fall in the exchange rate.
B a fall in company profits.
C a rise in consumption.
D a fall in the current account deficit.

12. The level of saving in an economy is NOT directly determined by

A the rate of inflation.
B the age profile of the population.
C the level of government spending.
D changes in real national income.

13. Which one of the following is a characteristic of consumption?

A It determines the level of exports
B It is a component of aggregate supply
C Its level is unrelated to the amount of wealth
D Its most important determinant is disposable income

14. The level of investment is NOT determined by

A the rate of inflation.
B the amount of retained profit held by firms.
C the rate of interest.
D the level of household saving.

15. If exports were to increase, but, over the same period, imports were to increase even more, an
economist would expect the economy to settle at a new equilibrium where
A the price level and real output were lower.
B real output was higher and the price level was lower.
C real output and the price level were higher.
D the price level was higher and real output was lower.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 41

16. The aggregate demand curve slopes downwards because at a higher price level
A interest rates tend to be higher, and this in turn reduces demand and therefore the output of
businesses making expensive goods.
B purchasing power is reduced and, therefore, less is bought and, therefore, made.
C foreign goods and services will become relatively cheaper, and there is less demand for UK output.
D all of the above.

17. The impact of the multiplier will be smaller when

A tax rates are higher.
B there is a deflationary gap.
C interest rates are low.
D the economy is closed.

18. Short-run aggregate supply is defined as the amount producers are willing to supply,
A over a range of price levels, over a given period.
B at a given price, over a given period, assuming constant factor costs.
C at a given price, over a given period.
D assuming variable factor costs, over a given period, at a given price.

19. A short-run supply curve will NOT shift if

A the productive capacity of the economy is reduced.
B factor costs remain unchanged.
C interest rates fall.
D the price level increases.

20. If a government were to increase factor mobility

A the long-run aggregate supply curve would shift to the right.
B more would be produced at a higher price level.
C aggregate demand would shift to the right.
D the horizontal section of the aggregate supply curve would shift downwards.

21. Long-run aggregate supply will increase when there is

A an increase in aggregate demand, and an increase in the labour force.
B a change in real output, and an increase in the labour force.
C an improvement in technology, and a reduction in the labour force.
D a constant price level.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 42

22. An increase in long-run aggregate supply depends on

A an efficient banking system.
B increases in aggregate demand.
C increasing employment.
D emigration being greater than immigration.

23. A fall in long-run aggregate supply can be caused by

A an increase in the price level.
B a slowdown in the rate of growth.
C an increase in net emigration.
D all of the above.

24. An increase in government spending on education will lead in the long-run to

A an increase in aggregate demand , but no change to aggregate supply.
B an unpredictable impact on aggregate demand, and an unpredictable impact on aggregate supply.
C a lower price level and an increase in aggregate demand.
D higher output but an unpredictable impact on the price level.

25. Refer to the diagram below.

Price
Level AD2 LRAS

AD1

Real Output
O
Y2
An increase in aggregate demand from AD1 to AD2 will mean that
A employment will increase, and aggregate supply will become more elastic.
B output, unemployment, and the price level will increase.
C there will be an increase in the price level, employment, and real output.
D neither output nor employment can increase beyond Y2.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 43

How the Macroeconomy Works - Test 2 - Answers

1. In the model of the circular flow of income

A saving and exports are leakages.
B taxes and investment are injections.
C leakages equal exports.
D investment and exports are injections.

EXPLANATION: In the circular flow model, not all income is spent; some leaks from the flow, specifically,
saving, imports, and taxes. Similarly, not all spending comes from households; some comes from
government, investment, and exports. Only option D identifies these features correctly.

2. A shift of an aggregate demand curve to the left will result in

A lower output and a higher price level.
B lower output and a lower price level.
C a higher price level and high real GDP.
D a lower price level and higher output.

EXPLANATION: A shift to the left in aggregate demand will result in movement down the aggregate
supply curve, a lower price level, and lower real GDP (ie output). Hence, option B is the correct response.

3. Changes in short-run aggregate supply can be caused by changes in

A the population.
B the quality of UK infrastructure.
C raw material prices.
D net immigration from the EU.

EXPLANATION: The main factors that affect aggregate supply, in the short-run, are related to changes in
the cost of production. Hence, option C, which affects the costs of manufacturers in particular, is the
correct response.

4. The UK government has been keen to invest in education because it will

EXPLANATION: By investing in education, the UK government hopes to improve the productive potential
of the UK labour force, which in turn will shift the long-run aggregate supply curve to the right, and
increase UK economic growth. Hence, option C is the correct response.

5. A demand shock will NOT result in

A a change in the price level.
B a movement along the aggregate demand curve.
C a shift in the aggregate demand curve.
D a change in real output.

EXPLANATION: A demand shock is an unanticipated event that affects aggregate demand at all price
levels, and therefore causes a shift in aggregate demand, and changes in the equilibrium price level and
real output. However, a movement along the aggregate demand curve will be caused by a shift in
aggregate supply. Hence, option B is correct.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 44

6. A fall in the productivity of labour in an economy will lead to

A a decrease in the price level.
B movement down the aggregate demand curve.
C a leftward shift in the aggregate supply curve.
D a fall in the rate of growth of the labour force.

EXPLANATION: A fall in the productivity of labour will be reflected in an increase in business costs, which
in turn can be illustrated with a leftwards shift in the short-run aggregate supply curve. Hence, option C
is the correct response.

EXPLANATION: A shift to the left in short-run aggregate supply means that businesses need a higher price
level to supply the same amount. This may have arisen because of an increase in money wages. Hence,
option B is the correct response.

8. The diagram below illustrates the consequences of changes in the conditions of aggregate demand
and aggregate supply. Initially, equilibrium is a point E, where SRAS1 intersects with AD1.

Price
SRAS1
Level B
SRAS2
C
E

AD2

AD1

Real National Output

This economy experiences a 5% reduction in commodity prices, and investment increases by 5%. As a
result, equilibrium will
A move to point C.
B move to point B.
C remain at point E.
D move to point D.

EXPLANATION: The 5% reduction in commodity prices will reduce business costs and thereby cause a shift
downwards in the SRAS curve down from SRAS1 to SRAS2. This is because business will be prepared to
supply the same amount of their products at lower market prices. At the same time, a 5% rise in
investment will shift the AD curve upwards from AD1 to AD2. This is because investment is a component
of aggregate demand. Taking both changes into account, the new equilibrium will be at point C. Hence,
the correct response is option A.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 45

9. Aggregate demand is defined as

EXPLANATION: Aggregate demand is the quantity of goods and services which consumers are willing and
able to buy over a period of time and at a given price level. Hence, option B is the correct response.

EXPLANATION: Since aggregate demand comprises consumption + investment + government spending +

exports – imports, investment must include all spending by businesses. This includes purchases of stocks
as well as fixed capital investment. Hence, option D is the correct response.

11. A fall in the level of investment will most likely be caused by

A a fall in the exchange rate.
B a fall in company profits.
C a rise in consumption.
D a fall in the current account deficit.

EXPLANATION: The level of investment in an economy will depend on the availability and price of capital
funds. Hence, a fall in profits, the most attractive source of funds, is most likely to reduce investment
overall. Additionally, a fall in profits will make investment less attractive. Thus, option B is the correct
response.

12. The level of saving in an economy is NOT directly determined by

A the rate of inflation.
B the age profile of the population.
C the level of government spending.
D changes in real national income.

EXPLANATION: The rate of saving can be affected by several factors, including options A, B, and D above.
The level of government spending has no impact on saving. Hence, option C is the correct response.

13. Which one of the following is a characteristic of consumption?

A It determines the level of exports
B It is a component of aggregate supply
C Its level is unrelated to the amount of wealth
D Its most important determinant is disposable income

EXPLANATION: The level of consumption is determined by wealth, but, most significantly, is determined
by its positive relationship with the level of income available for spending. Hence, option D is the correct
response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 46

14. The level of investment is NOT determined by

A the rate of inflation.
B the amount of retained profit held by firms.
C the rate of interest.
D the level of household saving.

EXPLANATION: The level of investment reflects the factors featured in options A, B, and C. Although
saving (a leakage) may be channelled into bank lending to businesses for investment (an injection), these
2 variables are independently determined. Hence, option D is the correct response.

EXPLANATION: The level of exports and imports both affect the level of aggregate demand. If exports
were to rise but imports were to rise even more, aggregate demand would fall at all price levels – a shift
to the left in the aggregate demand curve. As a result, the price level and real output would be lower at
the new equilibrium. Hence, option A is the correct answer.

EXPLANATION: The reasons given in options A, B, and C are all valid, thus, option D is the correct
response.

17. The impact of the multiplier will be smaller when

A tax rates are higher.
B there is a deflationary gap.
C interest rates are low.
D the economy is closed.

EXPLANATION: The impact of the multiplier depends on the extent to which there are leakages from the
circular flow. When taxes are increased, leakage is greater and, therefore, the multiplier impact is
reduced. Hence, option A is the correct response.

EXPLANATION: Short-run aggregate supply is defined as the quantity that producers are willing to supply
at a given price, over a given period, assuming constant factor costs. Hence, option B is the correct
response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 47

19. A short-run supply curve will NOT shift if

A the productive capacity of the economy is reduced.
B factor costs remain unchanged.
C interest rates fall.
D the price level increases.

EXPLANATION: The short-run aggregate supply curve will not shift unless factor costs, such as wage costs
change, or interest rates change. Hence, option B is the correct response.

20. If a government were to increase factor mobility

EXPLANATION: By increasing factor mobility, factors are likely to be employed in more productive activity,
attracted by higher income. This will result in higher real output in the long-run, which is represented by
a rightward shift in long-run aggregate supply ie option A.

21. Long-run aggregate supply will increase when there is

EXPLANATION: Real output will only increase when both the potential for increased output is available (ie
an increase in the labour force), but also when aggregate demand is sufficient. Hence, option A is the
correct response.

22. An increase in long-run aggregate supply depends on

A an efficient banking system.
B increases in aggregate demand.
C increasing employment.
D emigration being greater than immigration.

EXPLANATION: An efficient banking system ensures that competitively priced investment funds are
available to maintain and increase productive capacity. Hence, option A is the correct response.

23. A fall in long-run aggregate supply can be caused by

A an increase in the price level.
B a slowdown in the rate of growth.
C an increase in net emigration.
D all of the above.

EXPLANATION: A fall in long-run aggregate supply can occur if the quality or quantity of a country’s
productive resources falls. Net emigration, where more people are leaving a country than are coming
into it, means that the quantity of productive labour resources falls, and this will result in a leftward shift
in the long-run aggregate supply curve. Hence, option C is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 48

24. An increase in government spending on education will lead in the long-run to

EXPLANATION: An increase in education spending will have an immediate impact on aggregate demand
and lead to a higher price level, but a more educated workforce can be expected to be more productive
and efficient, reducing short-run aggregate supply. This will allow long-run equilibrium to settle at a
higher level of output. However, the impact on the price level cannot be predicted because it depends on
the relative strength of the increase in aggregate demand, and the later reduction in short-run aggregate
supply. Hence, option D is the correct response.

25. Refer to the diagram below.

Price
Level AD2 LRAS

AD1

Real Output
O
Y2

An increase in aggregate demand from AD1 to AD2 will mean that

A employment will increase, and aggregate supply will become more elastic.
B output, unemployment, and the price level will increase.
C there will be an increase in the price level, employment, and real output.
D neither output nor employment can increase beyond Y2.

EXPLANATION: A shift in aggregate demand to AD2 means that this economy is in equilibrium at the point
of full capacity. Output and, therefore, employment will have increased, as will the price level. Hence,
option C is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 49

Economic Performance

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 50

Economic Performance - Test 1

1. Many economists believe that governments should be primarily concerned with increasing the
growth potential of the economy, because achieving this objective is likely to
A reduce short-term business costs.
B lead to deflation.
C improve living standards.
D increase output.

2. Price stability is a key government objective primarily because it

A reduces menu costs.
B leads to reductions in unemployment.
C creates a better decision making environment for businesses and consumers.
D requires fewer interventions by the Bank of England.

3. The UK government will want businesses to invest more in training their employees. In this way
A inflation will be lower and unemployment will be higher.
B our businesses will produce better products and any current account surplus will be smaller.
C our budget surplus will be greater and our businesses will be more efficient.
D these businesses will be more competitive and any current account deficit will be smaller.

4. A government will always find price stability a very challenging objective because
A inflation will not always be anticipated.
B it cannot influence changes in the cost of imported goods.
C the ways of measuring inflation are not very accurate.
D it cannot control the level of unemployment.

5. An improvement in an economy’s factor productivity performance, all other things being equal, will
contribute to
A an increase in imports and an increase in a trade surplus.
B an increase in exports and a reduction in a trade deficit.
C a decrease in imports and an increase in the trade deficit.
D an increase in exports and a reduction in the budget deficit.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 51

6. Long-run economic growth can be defined as

A a change in the output of goods and services, measured in nominal terms.
B an increase in the potential output of an economy, and is measured by a sustained increase in real
national income.
C the potential output of an economy, defined by any point on a production possibility frontier.
D an increase in output up to a production possibility frontier.

7. Investment in education and training can contribute to economic growth because

A economic growth depends on increased government spending.
B it increase business costs.
C it increases business dependency on its workforce.
D it improves labour productivity.

8. The diagram below illustrates the effects of an increase in aggregate demand from AD1 to AD2.

Price
LRAS
Level
1 2
AD AD
SRAS2

Real National Output

As a result
A income will increase, prices will rise, but output potential will remain unchanged.
B output will increase to a sustainable level and prices will fall.
C the productive capacity of the economy will fall, output will rise, and prices will rise.
D there will be long-run economic growth, which corresponds to the increase in aggregate demand.

9. Real GDP may decrease in the short-run when

A an economy decreases its demand for imports.
B there is an increase in wage rates.
C there is a recession in overseas markets.
D tax revenue is less than government spending.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 52

10. An increase in long-run economic growth can take place when

A fewer working people leave a country than enter it.
B there is a greater use of more efficient machinery.
C more mothers join the workforce.
D all of the above occur.

11. An increase in aggregate demand, at full employment, will lead to

A a fall in the price level, and a rise in short and long-run output.
B a rise in short and long-run output, and a rise in the price level.
C a rise in the price level, a rise in output in the short-run, and no rise in output in the long-run.
D a fall in output in the short-run, a rise in prices, and a rise output in the long-run.

12. Deflation has the effect of

A decreasing the value of money.
B discouraging consumption.
C penalising those on fixed incomes.
D all of the above.

13. The diagram below shows the conditions of aggregate demand and supply in the short-run.

Price
SRAS1
Level
SRAS2
1
P
P2

AD
Real National Output

The fall in the price level from P1 to P2 is most likely to have been caused by
A an increase in aggregate demand.
B a period when interest rates have stayed low.
C a growing budget surplus.
D productivity increasing faster than money wage increase.

14. The Claimant Count includes all those members of the labour force who are
A claiming benefits.
B unemployed according to the labour force survey.
C capable of, and available for work.
D entitled to Jobseeker’s Allowance.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 53

15. During periods of full employment, supply-side policies will generate benefits such as
A greater control of the money supply.
B increase in the excess of government spending over tax revenue.
C greater output without increased inflation.
D increased welfare for those on low incomes.

16. Unemployment arising from the natural tendency for economic growth to vary over several years is
called
A seasonal unemployment.
B cyclical unemployment.
C structural unemployment.
D frictional unemployment.

17. A positive output gap is usually associated with

A full employment.
B cyclical unemployment.
C structural unemployment.
D frictional unemployment.

18. Over recent years, many workers have come to the UK from Eastern Europe. Over much of this
period, economic growth was strong and unemployment has changed very little. This can be
explained by the fact that
A these Eastern European workers were more productively efficient than UK workers.
B UK workers earned less than Eastern European workers.
C UK workers were more productive than Eastern European workers.
D economic growth was unrelated to the arrival of workers from Eastern Europe.

19. In order to reduce levels of frictional unemployment, there need to be

A public work projects in areas that have depended on manufacturing.
B incentives to encourage businesses to update the skills of their staff.
C improvements in the quality of information about job opportunities.
D none of the above.

20. A deflationary output gap could be associated with

A slower economic growth and cyclical unemployment.
B seasonal unemployment and falling prices.
C excess demand and structural unemployment.
D falling prices and increasing employment.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 54

21. The current account of the UK balance of payments will exclude

A a business’s purchase of production machinery from overseas.
B a shop buying clothes from China.
C a UK citizen buying a package holiday to Spain.
D dividend paid to a UK resident who owns shares in German car maker.

22. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including the components of the current account.

Component Exports / Credits (£bn.) Imports / Debits (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

Over this period, the data from the current account of the balance of payments shows Exports worth
A £1000 bn.
B £1235 bn.
C £1285 bn.
D £1360 bn.

23. If the current account of the UK balance of payments were to show a growing deficit, all other things
being equal, this could reflect the fact that
A factor incomes from investment overseas were increasing.
B goods manufactured in the UK were becoming relatively competitive.
C many more UK citizens were holidaying in the UK.
D many of our export markets were suffering a prolonged recession.

24. If the UK becomes a more attractive holiday destination, all other things being equal, we can expect
that
A a deficit on the current account of our balance of payments to decrease.
B a surplus on the current account of our balance of payments to decrease.
C a deficit on the current account of our balance of payments to increase.
D none of the above.

25. Transfers on the current account of the balance of payments exclude

A payments made by the UK to help cover the cost of running EU institutions.
B social security payments to UK citizens living overseas.
C aid for infrastructure development in East Africa.
D dividend payments to French citizens who own shares in UK businesses.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 55

Economic Performance - Test 1 - Answers

EXPLANATION: Economists are concerned with maximising economic welfare, which in turn is secured by
increasing real incomes. Increased real incomes make improved living standards possible. Hence, option
C is the correct response.

2. Price stability is a key government objective primarily because it

A reduces menu costs.
B leads to reductions in unemployment.
C creates a better decision making environment for businesses and consumers.
D requires fewer interventions by the Bank of England.

EXPLANATION: Price stability is a key government objective because it creates an economic environment
in which households and businesses are faced with less uncertainty and, therefore, can make better
economic decisions. Hence, option C is the correct response.

EXPLANATION: By investing more in training, UK businesses are more likely to produce better products at
lower cost. This will improve our international competitiveness and reduce any trade deficit we may be
suffering. Both outcomes will contribute to the government meeting its wider macroeconomic
employment and trade objectives. Hence, option D is the correct response.

EXPLANATION: While governments and central banks can create an environment where price volatility is
reduced, some product prices are affected by the cost of imported goods and services, and are therefore
beyond the powers of government to control. Hence, option B is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 56

EXPLANATION: An improvement in an economy’s factor productivity reduces average costs, and thereby
allows goods and services to be more competitively priced. Exports are more attractive to foreign buyers,
and imports are relatively less attractive to domestic buyers. As a result, the trade balance will improve -
for example - by reducing a trade deficit. Hence, option B is the correct response.

6. Long-run economic growth can be defined as

EXPLANATION: Long-run economic growth is an increase in the potential output of an economy. This
means that aggregate demand can be increased and supply can be accommodated, without any
inflationary impact. Therefore, there is no need for intervention to suppress excessive aggregate
demand, which might arrest any increase in the flow of national income (ie real output). Hence, option B
is the correct response.

7. Investment in education and training can contribute to economic growth because

A economic growth depends on increased government spending.
B it increase business costs.
C it increases business dependency on its workforce.
D it improves labour productivity.

EXPLANATION: Investment in education and training improve a business’s productivity, reduces business
costs, which in turn increase competitiveness. This increases growth in businesses and, therefore, the
wider economy. Hence, option D is the correct response.

8. The diagram below illustrates the effects of an increase in aggregate demand from AD1 to AD2.

Price
LRAS
Level
AD1 AD2
SRAS2

Real National Output

EXPLANATION: The diagram illustrates an increase in aggregate demand, and will lead to an increase in
prices and an increase in output, which can be accommodated within the established productive potential
of this economy. Hence, option A is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 57

9. Real GDP may decrease in the short-run when

A an economy decreases its demand for imports.
B there is an increase in wage rates.
C there is a recession in overseas markets.
D tax revenue is less than government spending.

EXPLANATION: Exports are a component of aggregate demand. Therefore, when demand falls in
overseas markets, aggregate demand overall shifts to the left. This results in a fall in equilibrium level of
real GDP. Hence, option C is the correct response.

10. An increase in long-run economic growth can take place when

A fewer working people leave a country than enter it.
B there is a greater use of more efficient machinery.
C more mothers join the workforce.
D all of the above occur.

EXPLANATION: Option A, B, and C will each add to the productive potential of the economy and, thus, will
contribute to an increase in long-run economic growth.

11. An increase in aggregate demand, at full employment, will lead to

EXPLANATION: An attempt to increase output at full employment by increasing aggregate demand, will
lead to a temporary short-term increase in output and increase in prices, and then a fall in output back to
the long-run level. Therefore, option C is the correct answer.

12. Deflation has the effect of

A decreasing the value of money.
B discouraging consumption.
C penalising those on fixed incomes.
D all of the above.

EXPLANATION: Deflation will increase the value of money and benefit those on fixed incomes. However,
it will discourage consumption while buyers wait for prices to fall. Hence, option B is the correct
response.

13. The diagram below shows the conditions of aggregate demand and supply in the short-run.

Price
SRAS1
Level
SRAS2
1
P
P2

Real National Output

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 58

EXPLANATION: The fall in the price level has been caused by a fall in business costs, as indicated by a shift
to the right in the short-run aggregate curve. This can arise if labour productivity increases more than the
costs of employing this labour. Hence, option D is the correct response.

EXPLANATION: The Claimant Count is one measure of unemployment, and included in this count are
those who have declared that they are out of work, capable of, available for, and are seeking work. They
are then entitled to Jobseeker’s Allowance. Hence, option D is the correct response.

EXPLANATION: When there is full employment, any attempt to increase output is in danger of increasing
inflation. This is avoided by securing more output from existing resources. Hence, option C is the correct
answer.

EXPLANATION: The variation in the rate of economic growth is called the business cycle, and
unemployment associated with the periods of slower or negative growth is called cyclical unemployment.
Hence, option B is the correct response.

17. A positive output gap is usually associated with

A full employment.
B cyclical unemployment.
C structural unemployment.
D frictional unemployment.

EXPLANATION: A positive output gap occurs when actual output is temporarily greater than an
economy’s long-term potential level. In such circumstances, there will be close to full employment.
Hence, option A is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 59

EXPLANATION: The wages paid to Eastern European workers generated a higher level of output, than the
same wages which would be paid to average UK workers. It was often in economic activities which UK
unemployed workers were unwilling to undertake anyway. Hence, option A is the correct response.

19. In order to reduce levels of frictional unemployment, there need to be

EXPLANATION: Frictional unemployment arises temporarily when workers leave one job and before they
start the next. Option C is the correct response because this short period could be reduced with more and
better information about new job opportunities.

20. A deflationary output gap could be associated with

A slower economic growth and cyclical unemployment.
B seasonal unemployment and falling prices.
C excess demand and structural unemployment.
D falling prices and increasing employment.

EXPLANATION: A deflationary (or negative) output gap occurs where there is insufficient aggregate
demand, slower economic growth and, therefore, cyclical unemployment. Hence, option A is the correct
response.

21. The current account of the UK balance of payments will exclude

EXPLANATION: The current account excludes transactions involving capital goods bought and sold by
businesses. Hence, option A is the correct response.

22. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including the components of the current account.

Component Exports / Credits (£bn.) Imports / Debits (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 60

Over this period, the data from the current account of the balance of payments shows Exports worth
A £1000 bn.
B £1235 bn.
C £1285 bn.
D £1360 bn.

EXPLANATION: The current account only includes trade in goods and services, factor incomes, and
government transfers. These 4 export categories add up to £1235 bn., which is option B.

EXPLANATION: A growing current account deficit will reflect either a relative fall in export value, or a
relative rise in import value. With a fall in exports from our overseas markets, resulting in a fall in export
value, only option D would cause a growing deficit.

EXPLANATION: Income from foreign tourists visiting the UK is an (invisible) export. Therefore, any
increase in their number would cause a deficit to decrease. Hence, option A is the correct response.

25. Transfers on the current account of the balance of payments exclude

EXPLANATION: Transfers are mainly transactions between governments and, therefore, exclude factor
incomes. Hence, option D is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 61

Economic Performance - Test 2

1. Governments have a key role to play in raising the growth potential of the economy. Which of the
following measures is least likely to achieve this objective?
A Controlling inflation
B Improving our international competitiveness
C Investing in health promotion
D Increasing taxes on business profits

2. Governments are keen to see higher levels of employment because this enables
A more government spending and more aggregate demand.
B higher levels of output and higher tax revenues.
C higher output levels and lower prices.
D higher business investment and higher prices.

3. By allowing aggregate demand to increase, as a means of reducing unemployment, a government

may find that
A wage rates fall and output increases.
B the inflation rate stops falling and a trade deficit increases.
C the budget deficit increases and output falls.
D economic growth increases and the rate of inflation falls.

4. A government is more likely to have some success in minimising unemployment if

A inflation is persistently high.
B businesses are increasingly capital-intensive.
C labour markets are deregulated.
D out of work benefits are generous.

5. Managing an economy is difficult because attempts to reduce inflationary pressure will result in
A reduced demand for capital goods, higher employment, and lower economic growth.
B lower employment, higher investment, and higher economic growth.
C higher economic growth, higher unemployment, and less investment.
D increasing unemployment, reduced consumer demand, and lower economic growth.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 62

6. Long-run economic growth occurs when

A an economy is recovering from a recession.
B aggregate demand is greater than short-run aggregate supply.
C nominal output increases.
D none of the above.

7. If an economy is operating inside its production possibility curve, but is in macro-equilibrium, it must
be experiencing
A Inflation.
B a low rate of trend economic growth.
C unemployment.
D a budget deficit.

8. Refer to the diagram below.

Quantity of
Capital Goods

B D

Quantity of
Consumer Goods

Long-run economic growth can be illustrated by a movement from

A point C to point D.
B point B to point D.
C point A to point C.
D point D to point A.

9. When there is a fall in business costs, all other things being equal, there will be a short-run
A fall in nominal GDP and a rise in the price level.
B rise in real GDP and a rise in the price level.
C rise in the price level and rise in real GDP.
D fall in the price level and rise in real GDP.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 63

10. Movement along the long-run aggregate supply curve to a new equilibrium position could be caused
by
A an increase in business costs.
B an improvement in labour productivity.
C an increase in imports.
D an increase in the birth rate.

11. A higher rate of price Inflation is considered undesirable because

A it increases the cost of transactions and slows long-term growth.
B it increase employment and causes interest rates to rise.
C it increases aggregate demand and increases exports.
D it reduces a country’s international competitiveness and redistributes income.

12. The diagram below shows an equilibrium position where the price level is P1 and output is Y1.
However, changes in the economy have resulted in a new equilibrium where the price level is now P2
and the new output level is now Y2.

Price
Level
SRAS1

P1 SRAS2

P2
AD1
AD2

O Real National Output

Y2 Y1

Which of the following best explains this change?

A A fall in interest rates and a fall in money wages
B A rise in interest rates and a fall in money wages
C A fall in interest rates and a rise in money wages
D A rise in interest rates and a rise in money wages

13. When unemployment is structural, it is more likely to be caused by

A the unemployed not possessing the skills in demand.
B the fact that there are always some people who are between jobs.
C a slowdown in economic growth.
D a period or recession.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 64

14. One of the problems of using the Claimant Count as a way of measuring unemployment is that
A it excludes people who are not capable of work.
B it includes people who are not seeking work.
C it excludes women who are returning to work after childbirth.
D it includes some people who want to work.

15. A decrease in imports, all other things being equal, will

A increase aggregate demand and reduce unemployment.
B increase employment and reduce aggregate demand.
C decrease aggregate supply and reduce unemployment.
D decrease employment and increase aggregate demand.

16. Many supply-side policies focus on

A increasing unemployment benefits and cutting unemployment.
B increasing labour efficiency and reducing employment.
C decreasing business costs, and shifting short-run aggregate supply to the left.
D increasing employment and labour efficiency.

17. Seasonal unemployment occurs because

A there are many students available for work in the summer.
B the weather prevents some types of outdoor work from being completed.
C some workers leave one job before they start the next.
D none of the above.

18. An increase in the productive potential of an economy, operating within its productive potential, will
A increase an inflationary output gap and reduce the level of unemployment.
B increase structural unemployment and increase a positive output gap.
C increase a negative output gap and have no impact on employment levels.
D raise employment levels and decrease a deflationary gap.

19. Cyclical unemployment occurs during

A the recovery phase of the business cycle because businesses are keen to take on new staff.
B periods of excess aggregate supply and aggregate demand is increasing.
C periods of excess aggregate demand because the rate of inflation is increasing.
D a recession because there is insufficient aggregate demand.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 65

20. Unemployment could be significant when an economy is in macroeconomic equilibrium because

A aggregate demand is low, and workers are not prepared to accept lower wages.
B both structural and cyclical unemployment have increased.
C there is insufficient aggregate demand and the rate of inflation is increasing.
D aggregate supply is too high and the rate of inflation is increasing.

21. The current account of the UK balance of payments shows

A the value of transactions in goods and services between UK residents and the rest of the world.
B transactions in physical capital between UK residents and the rest of the world.
C trade in goods between UK residents and the rest of the world.
D a summary of all money moving into and out of a country.

22. A decrease in aggregate demand is likely to cause

A an increase in exports.
B an increase in inflation.
C a decrease in imports.
D a budget surplus.

23. All other things being equal, if there was an increase in the rate of inflation in the UK, we could
expect
A a deficit on the current account of our balance of payments to increase.
B a surplus on the current account of our balance of payments to increase.
C a deficit on the current account of our balance of payments to fall.
D none of the above.

24. If the current account of the UK balance of payments were to show a growing surplus, all other
things being equal, this could reflect the fact that
A overseas financial markets were becoming more competitive.
B foreign made manufactured goods were improving in quality.
C labour productivity in the UK was improving.
D there was a recession in the UK.

25. Investment Income on the current account of the balance of payments excludes
A money earned in the UK and sent to relatives abroad.
B rental income payable by a UK business to a German land owner.
C dividend payments to UK citizens who own shares in US businesses.
D interest payments made by a UK business to a Spanish bank.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 66

Economic Performance - Test 2 - Answers

EXPLANATION: Options A, B, and C are measures which will increase our growth potential. Option D, the
correct response, will discourage investment in innovation and new technologies, which in turn will
reduce the growth potential of an economy.

EXPLANATION: Only higher output levels and tax revenues are positive consequences, which the
government would expect and wish to achieve from higher levels of employment. Hence, option B is the
correct response.

3. By allowing aggregate demand to increase, as a means of reducing unemployment, a government

EXPLANATION: A government will be anxious to see a reduction in unemployment and, therefore, may
choose to allow aggregate demand to rise. However, such an approach is in danger of increasing
inflationary pressure, particularly if the economy is already close to full employment, and any subsequent
reduction in competitiveness will result in a deterioration in the current account of the balance of
payments. Hence, option B is the correct response.

4. A government is more likely to have some success in minimising unemployment if

A inflation is persistently high.
B businesses are increasingly capital-intensive.
C labour markets are deregulated.
D out of work benefits are generous.

EXPLANATION: Unemployment is persistent, often because employers are penalised when they reduce
their workforce. They are therefore reluctant to take on staff when economic and market conditions
improve. Deregulation of labour markets has some effect in increasing employment at competitive
market rates. Hence, option C is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 67

EXPLANATION: Governments may attempt to reduce inflationary pressure by suppressing aggregate

demand. This will have the undesired side-effects of increasing unemployment, reducing consumer
demand, and reducing economic growth. Hence, option D is the correct response.

6. Long-run economic growth occurs when

A an economy is recovering from a recession.
B aggregate demand is greater than short-run aggregate supply.
C nominal output increases.
D none of the above.

EXPLANATION: Long-run economic growth refers to an increase in the productive potential of an

economy and, therefore, can be confirmed only by a sustained increase in real output over a time period.
As a long-run feature, it can only be illustrated by a shift in the long-run aggregate supply curve. Any
increase in real output within a production possibility curve can be best defined as economic recovery, or
short-run economic growth. Hence, option D is the correct response.

EXPLANATION: Operating within a production possibility curve means that an economy is not fully
employing the factors at its disposal, for example its labour force. Therefore, output is less than it might
otherwise be. These circumstances can arise in macroeconomic equilibrium. Hence, option C is the
correct answer.

8. Refer to the diagram below.

Quantity of
Capital Goods

B D

Quantity of
Consumer Goods

Long-run economic growth can be illustrated by a movement from

A point C to point D.
B point B to point D.
C point A to point C.
D point D to point A.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 68

EXPLANATION: Long-run economic growth can be represented by a parallel shift to the right in the
production possibility frontier. Hence, the choices available at point D compared to point B have been
due to an increase in long-run economic growth. Hence, option B is the correct response.

EXPLANATION: A fall in business costs will cause a rightward shift in short-run aggregate supply, which in
turn will lead to a rise in real GDP and a fall in the price level. Hence, option D is the correct response.

EXPLANATION: Movement along the long-run aggregate supply curve to a new equilibrium will arise
when the conditions of aggregate demand change (a shift to the right or left). This may arise if there is a
change to any of the components of aggregate demand - for example - imports. Hence, option C is the
correct response.

11. A higher rate of price Inflation is considered undesirable because

EXPLANATION: A higher rate of price inflation will increase so-called leather and menu costs, which
undermine the transaction process. It also redistributes income away from those on fixed incomes, and
creates uncertainty, which in turn discourages consumption and investment and, therefore, economic
growth. Hence, option A is the correct response.

Price
Level
SRAS1

P1 SRAS2

P2
AD1
2
AD

O Real National Output

Y2 Y1

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 69

Which of the following best explains this change?

EXPLANATION: A shift to the left in aggregate demand can be caused by a rise in interest rates, and a
shift to the right in the short-run aggregate supply curve can be caused by a fall in business costs, such as
money wages. Hence, option A is the correct response.

13. When unemployment is structural, it is more likely to be caused by

A the unemployed not possessing the skills in demand.
B the fact that there are always some people who are between jobs.
C a slowdown in economic growth.
D a period or recession.

EXPLANATION: Structural unemployment occurs when those who have lost jobs do not have the skills that
employers now need. Hence, option A is the correct response.

EXPLANATION: The Claimant Count measure of unemployment includes some people who are actually not
seeking work, but excludes some who are seeking work but cannot claim Jobseeker’s Allowance. Hence,
option B is the correct response.

15. A decrease in imports, all other things being equal, will

EXPLANATION: The level of imports affects the overall level of aggregate demand. A decrease will
increase aggregate demand and thereby decrease unemployment. Hence, option A is the correct
response.

16. Many supply-side policies focus on

EXPLANATION: Supply-side policies are concerned with increasing the productive potential of an economy
and, therefore, aim to increase the quantity and efficiency of labour available to businesses. Hence,
option D is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 70

17. Seasonal unemployment occurs because

EXPLANATION: The weather prevents some types of outdoor work from being completed. Thus, in the
late autumn and winter, unemployment for seasonal reasons tends to rise. Hence, option B is the correct
response.

EXPLANATION: Where an output gap exists, an increase in the productive potential of an economy will
increase a negative output gap, with no impact on employment levels, or will reduce a positive (or
inflationary) output gap and increase in employment. Hence, option C is the correct response.

19. Cyclical unemployment occurs during

EXPLANATION: Cyclical unemployment is associated with periods in the business cycle when there has
been inadequate aggregate demand, producing a lagged effect on unemployment. Hence, option D is the
correct response.

20. Unemployment could be significant when an economy is in macroeconomic equilibrium because

EXPLANATION: Keynesian economists in particular draw attention to the fact that unemployment can
remain significant even when the economy is in equilibrium. They believe that there is insufficient
demand from consumers and businesses, and an inclination amongst those who are still employed, to
resist reductions in wage rates. Hence, option A is the correct response.

21. The current account of the UK balance of payments shows

EXPLANATION: The current account of the UK balance of payments summarises all transactions in goods
and services between UK residents and the rest of the world. Hence, option A is the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 71

22. A decrease in aggregate demand is likely to cause

A an increase in exports.
B an increase in inflation.
C a decrease in imports.
D a budget surplus.

EXPLANATION: A decrease in aggregate demand is likely to reduce demand for imported goods
(particularly those with positive income elasticity of demand), as well as domestically produced goods.
Hence, option C is the correct response.

EXPLANATION: An increase in the rate of inflation would make our exports less competitive, and imported
goods more competitive. Both consequences could cause any deficit to increase. Hence, option A is the
correct response.

EXPLANATION: A growing current account surplus may indicate that the UK is becoming relatively more
competitive, for example, in the context of labour productivity. Hence, option C is the correct response.

EXPLANATION: Investment Income includes all payments into and out of the UK associated with
ownership of factors of production, as exemplified by options B, C, and D. Hence, option A is the correct
response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 72

Macroeconomic Policy

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 73

Macroeconomic Policy - Test 1

1. Fiscal policy is defined as a method of managing the economy through changes in

A government spending and taxation.
B interest rates.
C exchange rates.
D aggregate supply.

2. A government anticipates a balanced budget compared with a budget surplus the year before.
Which one of the following would bring about this change?
A A fall in public spending and an increase in taxation
B A rise in public spending and a fall in tax revenue
C An increase in public spending and a fall in tax revenue
D A fall in public spending and a decrease in public spending

3. A government, wishing to increase aggregate demand, may use fiscal policy and therefore
A reduce government spending.
B increase interest rates.
C reduce income tax.
D increase exchange rates.

4. An increase in income tax will

A make work less attractive, and increase unemployment levels.
B make work more attractive and increase employment levels.
C have uncertain effects on the attractiveness of work and on employment levels.
D none of the above.

5. By increasing spending on road infrastructure, the government can use fiscal policy to increase long-
run aggregate supply. Specifically this policy will
A increase aggregate demand and thereby increase unemployment.
B reduce business costs and increase our international competitiveness.
C decrease tax income and allow more spending on education.
D prolong a boom, which will enable prices to fall.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 74

6. Which one of the following is most likely to be an example of a contractionary fiscal policy?
A An increase in interest rates
B An increase in income tax
C An increase in state pensions
D A reduction in Corporation Tax

7. The diagram below shows the conditions of long-run aggregate supply and aggregate demand in an
economy.
Price
Level LRAS1 LRAS2

Y
P
X
AD2
AD1
Real National
O 1 2 Output
Y Y
Which of the following examples of government fiscal policy is most likely to result in a change in
equilibrium from X to Y?
A Increased spending on health promotion
B Increase in vat
C A reduction in interest rates
D Increased spending on the justice system

8. The objective of UK monetary policy is currently to

A reduce the money supply.
B increase employment.
C secure a target rate of inflation.
D minimise inflation.

9. Which of the following circumstances might prompt the Bank of England to reduce interest rates?
A There is strong growth in GDP and the trade deficit has fallen
B The rate of inflation has stabilised at 3% and export revenue is increasing
C Unemployment is falling and the economy is booming
D Growth is below trend and retail sales are no longer increasing

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 75

10. Following a depreciation of the exchange rate, export volumes fall. This can be explained by
A a fall in export prices.
B high relative inflation in the UK.
C a fall in the price of imported goods.
D a boom in export markets.

11. An economy is suffering from increasing inflation and a growing surplus on the current account of its
balance of payments. These problems can best be addressed by
A allowing the exchange rate to rise, and raising interest rates.
B raising interest rates, and allowing the exchange rate to fall.
C lowering interest rates, and increasing government spending.
D reducing government spending, and increasing interest rates.

12. A rise in interest rates is likely to have an uneven impact across the economy because
A it affects imports more than exports.
B it has less impact on some consumers than others.
C it affects tax revenue more than government spending.
D it affects the output of cheaper goods more than that of more expensive goods.

13. A reduction in money supply can affect the rate of inflation by

A reducing the amount of liquidity available in the banking system.
B increasing interest rates.
C discouraging consumption and investment.
D all of the above.

14. The monetary authorities may be reluctant to use exchange rates as a means of controlling inflation
because
A any changes in exchange rates will adversely affect the current account of the balance of payments.
B they have limited ability to determine a particular rate.
C they wish to maintain our international competitiveness.
D the impact of changes in interest rates and the money supply are more predictable.

15. The demand for imports into the UK from the euro area will rise if
A sterling appreciates against the euro.
B the UK suffers a period of recession.
C the euro appreciates against sterling.
D UK-based businesses have become more competitive.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 76

16. Expansionary monetary policy is most likely to

A shift the short-run aggregate supply curve to the left.
B be caused by reduced government spending.
C reduce a deficit on the current account of the balance of payments.
D shift the aggregate demand curve to the right.

17. A UK motor manufacturer buys components from the euro area, and sells its output in US markets.
Therefore, this manufacturer will benefit most when the pound is
A strong against the US dollar, and weak against the euro.
B weak against the US dollar, and weak against the euro.
C weak against the US dollar, and strong against the euro.
D strong against the US dollar, and strong against the euro.

18. Supply-side policies are typically concerned with influencing

A the levels of consumption in the short-run.
B the short-run fluctuations in the rate of inflation.
C short-run changes in the exchange rate.
D the long-run trend rate of economic growth.

19. Which one of the following policies is most likely to be successful in maintaining lower levels of
inflation?
A An increase in VAT
B Restrictions on economic immigration
C A reduction in unemployment benefit
D Depreciation of the currency

20. A government may recognise that the underlying trend rate of economic growth can be increased by
A reducing business taxes.
B increasing spending on defence.
C reducing interest rates.
D increasing the exchange rate.

21. Independently of government, businesses may implement policies and strategies that have supply-
side effects. These policies and strategies will exclude
A training employees more intensively.
B advertising new products.
C subcontracting non-core activities.
D investing in more production processes.
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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 77

22. Supply-side and monetary policies may complement each other because they may both lead to
A reduced inflation.
B increased trend output.
C reduced employment.
D lower interest rates.

23. Supply-side policies can increase the level of employment by

A reducing inflationary pressure, through increased government spending.
B increasing output, through changes to the exchange rate.
C increasing international competitiveness, through increases in aggregate demand.
D increasing the incentive to work, through the tax system.

24. Which of the following is NOT a supply-side policy, designed to increase employment?
A Improved information about job opportunities
B Increasing the tax allowance on child care costs
C Removing the lowest paid from paying income tax
D Privatisation of healthcare

25. Supply-side policies differ from fiscal and monetary policies because they exclusively aim to improve
macroeconomic performance by
A reducing inflationary expectations.
B improving the performance of particular markets.
C limiting government influence in economic decision-making.
D increasing employment levels, through aggregate demand.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 78

Macroeconomic Policy - Test 1 - Answers

1. Fiscal policy is defined as a method of managing the economy through changes in

A government spending and taxation.
B interest rates.
C exchange rates.
D aggregate supply.

EXPLANATION: Fiscal policy is defined as the use of government spending and taxation as a means of
managing the economy. Hence, option A is the correct response.

EXPLANATION: A budget surplus occurs when public spending is less than tax revenue, and in order for
there to be a balance budget the following year, either public spending has increased, or tax revenue has
fallen, or both. Hence, option C is the correct response.

3. A government, wishing to increase aggregate demand, may use fiscal policy and therefore
A reduce government spending.
B increase interest rates.
C reduce income tax.
D increase exchange rates.

EXPLANATION: Fiscal policy involves changes in government spending and taxation to manage the
economy. Therefore, if the government wishes to increase aggregate demand it can reduce income tax,
which will stimulate consumption. Hence, option C is the correct response.

4. An increase in income tax will

EXPLANATION: An increase in income tax will discourage employment for some, because the benefit of
working is reduced. However, others, who are anxious to secure a target income to cover their
commitments, may choose to work harder. Hence, including the varying impacts on disposable incomes
and therefore aggregate demand, the overall impact of an increase in income tax on working and
employment is uncertain. Option C is, therefore, the correct response.

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APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 79

EXPLANATION: Increased spending on road infrastructure will allow materials, components, and
resources to move to where they are needed more easily and more quickly. This will reduce UK business
costs, make our finished goods more competitive, and encourage an increase in output potential. Hence,
option B is the correct response.

EXPLANATION: A contractionary fiscal policy involves the use of changes in the levels of taxation and
government spending to reduce aggregate demand in the economy. For example, an increase in income
tax will result in reduced aggregate demand and is, therefore, an example of a contractionary policy.
Hence, option B is the correct response.

7. The diagram below shows the conditions of long-run aggregate supply and aggregate demand in an
economy.
Price
Level LRAS1 LRAS2

Y
P
X
AD2
AD1
Real National
O 1 2 Output
Y Y

Which of the following examples of government fiscal policy is most likely to result in a change in
equilibrium from X to Y?
A Increased spending on health promotion
B Increase in vat
C A reduction in interest rates
D Increased spending on the justice system

EXPLANATION: An increase in spending on health promotion will add to aggregate demand and, in the
longer term, will reduce illness absence from work, thereby increasing an economy’s potential output.
Hence, option A is the correct response, since it is the only one that will shift both AD and LRAS.

8. The objective of UK monetary policy is currently to

A reduce the money supply.
B increase employment.
C secure a target rate of inflation.
D minimise inflation.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 80

EXPLANATION: The objective of monetary policy is to achieve a target rate of inflation. This target rate,
currently at 2%, is judged to best deliver low interest rates and economic stability, without imposing the
unacceptable contractions of aggregate demand and employment that might arise with a lower target
rate. Hence, option C is the correct response.

EXPLANATION: The Bank of England will reduce interest rates when they feel inflation is on course to
meet the target rate of 2%. This is more likely to be the case when economic growth is below trend and
retail sales have stagnated. Hence, option D is the correct response.

EXPLANATION: A depreciation of the exchange rate would, all other things being equal, reduce the price
of UK exports. Therefore, the cause of a fall in export volumes would be unrelated to changes in
exchange rates - for example - as a result of increased UK inflation, which made UK exports relatively
uncompetitive. Hence, option B is the correct response.

EXPLANATION: A rise in the exchange rate will reduce demand for our exports, and a rise in interest rates
will reduce demand domestically and, by making imports cheaper, will further reduce inflationary
pressure. Hence, option A is the correct response.

EXPLANATION: A rise in interest rates will have a smaller effect on consumers with no mortgage or other
borrowing, and with few savings on deposit. Hence, option B is the correct response.

13. A reduction in money supply can affect the rate of inflation by

A reducing the amount of liquidity available in the banking system.
B increasing interest rates.
C discouraging consumption and investment.
D all of the above.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 81

EXPLANATION: The money supply is defined as the total amount of purchasing power in the economy
and, therefore, includes both cash and financial assets which can be turned into cash. Options A, B, and C
represent direct and indirect ways in which a reduction in money supply reduces aggregate demand and
hence the rate of inflation. Hence, option D is the correct response.

EXPLANATION: Changes in exchange rate will affect the level of aggregate demand and inflation in the
economy. However, given that several factors can determine exchange rates, the ability of monetary
authorities to use them to control inflation is limited and unpredictable. Hence, option B is the correct
response.

EXPLANATION: UK demand for imported products will depend on the state of the economy, the relative
competitiveness of UK goods and services, and the exchange rate. For example, if sterling appreciates
against the euro, imports will be cheaper and demand for them will increase. Hence, option A is the
correct response.

16. Expansionary monetary policy is most likely to

EXPLANATION: An expansionary monetary policy will be reflected in an increase in aggregate demand at

all price levels. Hence, option D is the correct response.

EXPLANATION: Components from the euro area will be relatively cheaper if sterling is stronger against
the euro, and the finished cars will be relatively cheaper if the sterling is weaker against the US dollar.
Hence, option C is the correct response.

18. Supply-side policies are typically concerned with influencing

A the levels of consumption in the short-run.
B the short-run fluctuations in the rate of inflation.
C short-run changes in the exchange rate.
D the long-run trend rate of economic growth.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 82

EXPLANATION: Supply-side policies are designed to improve the long-run trend rate of economic growth.
Hence, option D is the correct response.

EXPLANATION: A reduction in unemployment benefits makes work relatively more attractive, and
increases employment at lower wages. This increases real GDP, and reduces business costs, both of
which reduce inflationary pressure. Hence, option C is the correct response.

EXPLANATION: In order to increase the trend rate of economic growth, the government needs to create
an economic environment in which businesses are more likely to innovate and invest. Reduced taxes on
profits provide at least some of the finance that makes this possible. Hence, option A is the correct
response.

21. Independently of government, businesses may implement policies and strategies which have supply-
side effects. These policies and strategies will exclude
A training employees more intensively.
B advertising new products.
C subcontracting non-core activities.
D investing in more production processes.

EXPLANATION: Options A, B, and D are policies which will improve business efficiency and, therefore,
have supply-side effects for the economy as a whole. Option B, the correct response, is a strategy
designed to increase demand rather than supply.

22. Supply-side and monetary policies may complement each other because they may both lead to
A reduced inflation.
B increased trend output.
C reduced employment.
D lower interest rates.

EXPLANATION: Both supply-side and monetary policies aim to reduce inflationary pressure, either directly
through lower interest rates, or by improving efficiency and reducing costs. Hence, option A is the correct
response.

23. Supply-side policies can increase the level of employment by

EXPLANATION: Only option D, the correct response, accurately summarises the measure and mechanism
by which supply-side policies can contribute to increased employment.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 83

EXPLANATION: Options A to C are measures designed to increase the chances of working for those
unemployed. Option D, the correct response, is a supply-side measure because it may lead to increased
efficiency, but is likely to lead to a shedding of excess labour.

EXPLANATION: Supply-side policies aim exclusively at making markets work better, in order to deliver
greater productive and allocative efficiency. This outcome has wider beneficial macroeconomic
consequences. Hence, option B is correct.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 84

Macroeconomic Policy - Test 2

1. The purpose of fiscal policy is to

A ensure that government spending and taxation are equal.
B control the level of aggregate demand.
C manage aggregate supply.
D avoid a budget deficit.

2. The rate of growth in an economy is expected to fall below trend growth. Which of the following
policy changes is most likely to restore growth?
A A reduction in the target rate of inflation
B A rise in government spending
C An increase in out-of work benefits
D A rise in interest rates

3. Changes in fiscal policy can increase economic growth by

A reducing inflationary pressure and thereby encourage investment.
B creating a budget deficit, which will reduce employment.
C increasing interest rates and thereby encourage investment.
D decreasing aggregate supply and in this way increase GDP.

4. An increase in government spending on NHS hospitals will affect

A output of health services.
B employment in construction.
C employment where the hospitals are built.
D all of the above.

5. Governments can use fiscal policy decisions to help meet supply-side objectives. For example
A extending VAT to food, and increasing defence spending.
B reducing National Insurance, and reducing spending on the NHS.
C reducing the rate of Corporation Tax, and increasing spending on higher education.
D increasing state pensions, and reducing the top rate of income tax.

6. All other things being equal, a reduction in government spending may result in
A an extension of a period of boom.
B a larger positive output gap.
C an increase in a negative output gap.
D an end to recession.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 85

7. Automatic stabilisers are defined as changes in

A government spending or taxation, which thereby reduces aggregate demand.
B non-discretionary spending and taxation, which offset changes in aggregate demand.
C discretionary government spending and taxation, which arises from the effects of recession.
D none of the above.

8. Monetary policy includes those measures which

A help manage the government’s budget.
B control the money supply.
C control the level of taxation.
D determine prices and incomes.

9. A rise in the exchange rate is likely to lead to

A lower demand for exports.
B a fall in the price of exports.
C lower demand for imports.
D a rise in the price of imports.

10. A central bank chooses not to intervene when it notes that aggregate demand is forecast to increase
by 4.5%, against trend growth of 3%. In these circumstances the economy may experience
A a negative output gap, a fall in output, and a falling rate of inflation.
B a sustained rise in output, a deflationary gap, and rising rate of inflation.
C a falling rate of inflation, a positive output gap, and a fall in output.
D an increase in output, a positive output gap and increase in the inflation rate.

11. Interest rates are an important means of managing the UK economy because they affect
A levels of consumption and investment.
B expectations about inflation.
C the rate of exchange.
D all of the above.

12. An increase in the money supply will mean that

A interest rates will rise.
B the government prints less money.
C it is easier for banks to lend more money.
D the exchange rate will rise.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 86

13. A rise in the exchange rate can affect the rate of inflation because it can
A increase demand for cheaper imports and reduce demand for more expensive exports.
B decrease demand for cheaper imports and increase demand for more expensive exports.
C decrease demand for cheaper imports and decrease demand for cheaper exports.
D none of the above.

14. The £ exchange rate rises from $1.50 to $1.60. As a result

A the price of imports from the US would rise, and a deficit on the current account would increase.
B the price of imports from the US would fall and demand for them would therefore fall.
C demand for goods from the US would rise, and the price of exports to the US would fall.
D the price of exports to the USA would rise, but the impact on the current account is uncertain.

15. The impact on inflation of any change in interest rates by the Bank of England Monetary Committee
is uncertain because
A it takes several months for any change to affect aggregate demand and inflation.
B changes in interest rates do not affect exchange rates, nor inflation.
C inflation can be measured in more than one way.
D the data on which interest rate judgements are made are not reliable.

16. A contractionary monetary policy may be used to

A reduce a budget deficit.
B increase aggregate demand.
C reduce a positive output gap.
D increase the productive potential of an economy.

17. Which one of the following uses of monetary policy is least likely to be successful in helping to
increase real GDP?
A an increase in the exchange rate.
B an increase in interest rates.
C a decrease in the money supply.
D a decrease in the exchange rate.

18. Supply-side policies which aim to reduce unemployment would include

A a reduction in the rate of income tax.
B an increase in Jobseeker’s Allowance.
C an increase in interest rates.
D an increase in the money supply.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 87

19. The diagram below illustrates the consequences of the government increasing aggregate demand
from AD1 to AD2.

Price
LRAS
Level
R
1
P S

AD2
AD1
Real National
O 1 2 Output
Y Y

Which of the following policies is most likely to result in a sustainable increase in long-run aggregate
supply, from point R to point S?
A An expansionary monetary policy
B Improved factor mobility
C Increasing the Jobseeker’s Allowance
D Allowing the exchange rate to fall

20. The government may be pleased to see businesses investing more heavily in employee training
because it
A makes employees more productive and reduces labour turnover.
B reduces employment and cost push inflation.
C increases the productive potential of the economy and reduces inflationary pressure.
D increases the budget deficit and reduces tax revenues.

21. An economy is in macroeconomic equilibrium but below its productive potential. As a result of
implementing a series of supply-side policies, the government should expect
A an increase in real output, and a fall in the price level.
B no change to output, but a decrease in the price level.
C an increase in real output, but no change to the price level.
D no change to the price level, nor to the output level.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 88

22. Supply-side policies can contribute to an improved current account performance because they may
A reduce exports and thereby increase employment.
B increase output and thereby increase demand.
C reduce inflation and thereby reduce employment.
D lower business costs and thereby improve competitiveness.

23. Privatisation can have significant supply-side consequences - for example - it can mean
A increased output, and therefore more employment.
B lower profits, and therefore more investment.
C greater business efficiency, and therefore more output.
D more innovative products, and therefore increased productivity.

24. UK Government support for new firms may have consequences for the current account of the
balance of payments. For example, this policy
A increases market competitiveness, and therefore reduces a trade deficit.
B reduces business costs, and therefore increases the exchange rate.
C increases innovation, and therefore reduces a trade surplus.
D increases investment, and therefore increases a budget deficit.

25. Which of the following is NOT a supply-side policy?

A Reduced trade union power where it maintains high wages
B Subsidies to businesses to improve access for disabled employees
C The national minimum wage
D Grants for vocational higher education

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 89

Macroeconomic Policy - Test 2 - Answers

1. The purpose of fiscal policy is to

A ensure that government spending and taxation are equal.
B control the level of aggregate demand.
C manage aggregate supply.
D avoid a budget deficit.

EXPLANATION: Fiscal policy, through changes in government spending and taxation, is one of the three
main ways that governments can influence economic activity. Whilst specific measures may have supply-
side effects, these changes overall can be used to help control aggregate demand. Hence, option B is the
correct response.

EXPLANATION: If an economy is growing at a rate below trend, this suggests that there is a deficiency of
demand. By increasing government spending, aggregate demand will be increased, leading to a higher
rate of sustainable growth within trend. Hence, option B is the correct response.

3. Changes in fiscal policy can increase economic growth by

EXPLANATION: Changes in fiscal policy will affect the level of aggregate demand in the economy, and in
so doing, affect demand pull inflation. Changes in inflation will in turn, affect general economic stability,
and thereby impact on a business’s decision to invest. Hence, option A is the correct response.

4. An increase in government spending on NHS hospitals will affect

A output of health services.
B employment in construction.
C employment where the hospitals are built.
D all of the above.

EXPLANATION: An increase in government spending on specific priorities like hospitals will, through the
multiplier effect, have an impact on output and employment, not only in health and construction, but also
in many other business sectors, especially those which are local. Since options A, B, and C are all correct,
option D is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 90

EXPLANATION: The objective of supply-side policies is to increase the productive potential of the
economy. By reducing the rate of corporation tax, investment in business capacity is commercially more
attractive, and output potential is thereby increased. By spending more on higher education, young
people coming into the workforce are likely to be more productive, thereby also increasing productive
potential of the economy. Hence, option C is the correct response.

EXPLANATION: A reduction in government spending will reduce the level of aggregate demand. Where
an economy is operating below its productive potential, any reduction in aggregate demand will increase
an established negative output gap. Hence, option C is the correct response.

7. Automatic stabilisers are defined as changes in

EXPLANATION: Automatic stabilisers are a feature of changes in the level of economic activity. For
example, as activity reduces, so government automatically takes less tax revenue and spends more on
benefits. This has the effect of offsetting to some extent the effects on aggregate demand, output, and
employment of any slowdown. Hence, option B is the correct response.

8. Monetary policy includes those measures which

A help manage the government’s budget.
B control the money supply.
C control the level of taxation.
D determine prices and incomes.

EXPLANATION: Monetary policy includes the control of interest rates, exchange rates, and money supply.
Hence, option B is the correct response.

9. A rise in the exchange rate is likely to lead to

A lower demand for exports.
B a fall in the price of exports.
C lower demand for imports.
D a rise in the price of imports.

EXPLANATION: A rise in the exchange rate will make imports cheaper and exports more expensive. As a
result, demand for exports will fall, and demand for imports will rise. Hence, option A is the correct
response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 91

EXPLANATION: If an increase in aggregate demand cannot be absorbed within the trend growth in
output, the economy will experience a temporary increase in output, potentially a positive output gap,
and an increasing inflation rate. Hence, option D is the correct response.

EXPLANATION: Any change in interest rates will affect the price of borrowing and, therefore, affect
consumer attitudes to spending, and business attitudes to investing. Also, any change in interest rates
will signal how the monetary authorities perceive the prospects for inflation. This, in turn, will affect
general expectations about future inflation. Additionally, the interest rate represents the rate of return
for holding sterling deposits. Therefore, any change will affect demand for sterling generally and, thus,
the exchange rate. Hence, option D is the correct response.

12. An increase in the money supply will mean that

A interest rates will rise.
B the government prints less money.
C it is easier for banks to lend more money.
D the exchange rate will rise.

EXPLANATION: The monetary authorities can increase the money supply by printing more money, or by
making it easier for banks to lend. As a result, interest rates will fall. Hence, option C is the correct
response.

EXPLANATION: A rise in the exchange rate is likely to make exports more expensive and hence reduce
demand for them. Conversely, imports will be cheaper and therefore demand for them is likely to
increase. Hence, option A is the correct response.

14. The £ exchange rate rises from $1.50 to $1.60. As a result

EXPLANATION: An appreciation of the sterling exchange rate from $1.50 to $1.60 would make UK exports
in US markets more expensive. However, the impact on the current account would be uncertain because
the value of exports would depend on price elasticity of demand of the goods and services concerned.
Hence, option D is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 92

EXPLANATION: The impact on inflation of any change in interest rates by the Bank of England Monetary
Committee is uncertain, because it takes several months for the full impact of a change to affect
aggregate demand and inflation. What is more, other factors may be simultaneously adding further
upward or downward pressure on inflation. Hence, option A is the correct response.

16. A contractionary monetary policy may be used to

A reduce a budget deficit.
B increase aggregate demand.
C reduce a positive output gap.
D increase the productive potential of an economy.

EXPLANATION: A contractionary monetary policy aims to reduce aggregate demand, typically to address
excess inflationary pressure. The policy will thereby reduce a positive output gap which may have arisen.
Hence, option C is the correct response.

EXPLANATION: Increasing interest rates will have a very significant impact on reducing demand for
consumption and for investment. Therefore, it is least likely to have any positive impact on raising
aggregate demand. The impact on GDP of any equivalent changes in exchange rates and the money
supply are much harder to determine, because the impact is likely to be smaller, and other factors outside
the control of the monetary authorities may also affect the impact of these two policy instruments and,
therefore, would be unreliable as a means of increasing GDP. Hence, option B is the correct response.

18. Supply-side policies which aim to reduce unemployment would include

A a reduction in the rate of income tax.
B an increase in Jobseeker’s Allowance.
C an increase in interest rates.
D an increase in the money supply.

EXPLANATION: A reduction in the rate of income tax will make work more financially rewarding, thereby
increasing employment. This, in turn, will result in higher levels of sustainable output, the objective of
supply-side policies. Hence, option A is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 93

19. The diagram below illustrates the consequences of the government increasing aggregate demand
from AD1 to AD2.

Price
LRAS
Level
R
1
P S

AD2
AD1
Real National
O 1 2 Output
Y Y

EXPLANATION: By improving job mobility, employment should rise resulting in higher sustainable output,
without any impact on the price level. Hence, option B is the correct response.

EXPLANATION: With better trained employees, the economy as a whole benefits from more output from
labour resources, and this in turn enables more aggregate demand to be accommodated without
inflationary pressure. Hence, option C is the correct response.

EXPLANATION: When an economy is in macroeconomic equilibrium but below its productive potential, it
is suffering from a deficiency of demand. Therefore, the implementation of a series of supply-side policies
will simply make that deficiency greater, and have no effect on the price level, or on the output level.
Hence, option D is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 94

EXPLANATION: Only option D identifies the key business benefit of supply-side policies, and its
consequences for the current account performance.

EXPLANATION: Only option C accurately summarises the consequences of privatisation.

EXPLANATION: Only option A is correct because it identifies an accurate consequence and how this might
affect the current account of the UK balance of payments.

25. Which of the following is NOT a supply-side policy?

A Reduced trade union power where it maintains high wages
B Subsidies to businesses to improve access for disabled employees
C The national minimum wage
D Grants for vocational higher education

EXPLANATION: The national minimum wage may maintain wage rates above market equilibrium, and
thereby reduce business investment in the UK, and keep business costs higher than they would otherwise
be. Hence, option C is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 95

End of Unit Tests

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 96

End of Unit Test 1

1. National economic performance can be assessed by examining macroeconomic variables such as

A the current account balance.
B output in agriculture.
C tax revenue from alcohol.
D the level of atmospheric pollution in a country.

2. The rate of inflation is more likely to rise if the economy

A is in recession.
B is below its long-term trend rate of growth.
C is in a boom.
D none of the above.

3. Government spending is included in the circular flow of income because it represents

A a leakage from income.
B an injection into income.
C an injection into expenditure.
D a leakage from expenditure.

4. A shift to the left in aggregate demand can be caused by

A an increase in interest rates.
B an increase in the population.
C an increase in commodity prices.
D an increase in investment.

5. Economic growth, all other things remaining equal, is most likely to result in
A a lower price level, but an uncertain impact on employment and output.
B a higher level of output, and a lower price level, but an uncertain impact on employment.
C a higher level of output, more employment, and a lower price level.
D an uncertain impact on output, employment, and price level.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 97

6. Refer to the diagram below.

Price AD AS
Level

Real GDP
O
Y1 Y2

In the diagram there exists

A demand-deficient unemployment
B a positive output gap
C an inflationary gap
D none of the above

7. Government spending, as a component of aggregate demand, excludes spending on

A the police service.
B health care.
C council leisure facilities.
D state pensions.

8. Saving equals investment when the economy is in equilibrium and

A consumption equals leakages.
B government spending and exports equal tax and imports.
C there is no unemployment.
D the economy is producing up to its full capacity.

9. When an economy is exploiting fully its productive capacity, an increase in aggregate demand will
lead to
A an increase in national income, reflecting the marginal rate of leakages.
B a temporary increase in national income, and an increase in the price level.
C no increase in national income.
D none of the above.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 98

10. When interest rates increase, the short-run aggregate supply curve will
A shift to the left.
B remain unchanged.
C shift to the right.
D become steeper.

11. In the long-run, the aggregate supply curve is assumed to be horizontal at low levels of real output
because
A the productivity of factors of production is insufficient and output is low.
B money wage rates are too low.
C aggregate demand is too low.
D any increase in output can be delivered without an increase in the price level.

12. If a government’s primary objective is to increase the growth potential of an economy, it might also
simultaneously
A aim to balance its spending and tax revenues over the longer term.
B allow an increase in aggregate demand and an increase in employment.
C accept an increase in business costs and an increase in investment.
D reduce spending on health care and increase spending on education.

13. Long-run economic growth is less likely to occur when

A there is fall in short-run aggregate supply.
B innovation is discouraged.
C businesses invest in training.
D long-run aggregate supply grows faster than aggregate demand.

14. There has been an increase in consumption and a decrease in investment. As a result, in the short-
run, there will be
A an increase in real GDP and a fall in the price level.
B a fall in price level and a fall in real GDP.
C a rise in the price level and an increase in real GDP.
D an unknown impact on real GDP and the price level.

15. The UK economy is experiencing an increasing current account deficit on the balance of payments.
This may have arisen because
A UK cost push inflation has fallen further than elsewhere.
B the rate of deflation has fallen further than elsewhere.
C prices are falling faster than elsewhere.
D none of the above.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 99

16. The Labour Force Survey is based on a sample and is used as a measure of unemployment because
A it includes those who are entitled to the Jobseeker’s Allowance.
B it excludes those seeking work after childbirth.
C it includes those who say that they are looking for work.
D it includes those who can work immediately.

17. Frictional unemployment refers to unemployment occurring when

A workers are in between jobs.
B deteriorating weather reduces the need for work outdoors.
C businesses anticipate a recession.
D certain industries and occupations are suffering long-term decline.

18. When there is a high level of unemployment, the economy may be experiencing
A a positive output gap.
B a negative output gap.
C an inflationary gap.
D excess aggregate demand.

19. The current account of the balance of payments will not include
A a UK resident buying a book from an Australian publisher.
B UK government transfers to the EU.
C an American buying shares in a UK bank.
D pension payments to UK citizens living in Spain.

20. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including the components of the current account.

Component Exports (£bn.) Imports (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

Over this period, the data from the current account of the balance of payments shows that there is
A an overall deficit of £100 bn.
B an overall surplus of £120 bn.
C an overall deficit of £50 bn.
D an overall surplus of £20 bn.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 100

21. A contractionary fiscal policy is characterised by

A an increase in government spending.
B a reduction in VAT.
C a balanced budget.
D an increase in a budget surplus.

22. A fall in the exchange rate is likely to help UK government policies which aim at
A increasing aggregate demand.
B reducing the rate of inflation.
C increasing the level of imports.
D reducing business costs.

23. Following a depreciation of sterling, the UK government should expect

A lower inflation thanks to cheaper imports.
B demand for imports to rise, and for exports to fall.
C the price of imports to increase, and higher levels of inflation.
D cheaper imports, but an uncertain impact on the current account.

24. Which one of the following is most likely to be represented as a supply-side policy?
A An increase in the exchange rate
B A reduction in tax on company profits
C A decrease in subsidies on socially desirable transport routes
D A reduction in the government budget deficit

25. In an economy which is already benefiting from full employment, a government may be attracted to
supply-side policies because they
A reduce a current account deficit on the balance of payments.
B enable a government to reduce income taxes.
C help to control money supply.
D can increase output without adding to inflation.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 101

End of Unit Test 1 - Answers

1. National economic performance can be assessed by examining macroeconomic variables such as

A the current account balance.
B output in agriculture.
C tax revenue from alcohol.
D the level of atmospheric pollution in a country.

EXPLANATION: The current account balance refers to the difference between visible and invisible imports,
and visible and invisible exports, shown in the current account of the balance of payments. As such, it is
clearly a macroeconomic variable and, therefore, option A is correct. The other options are either non-
economic, or only relevant in a microeconomic context.

2. The rate of inflation is more likely to rise if the economy

A is in recession.
B is below its long-term trend rate of growth.
C is in a boom.
D none of the above.

EXPLANATION: Changes in the rate of inflation are, in part, affected by changes in the level of demand
across the whole economy. During a boom, demand is high, particularly in relation to the ability of
businesses to respond, and therefore demand-led inflation is likely to be more significant. Hence, option
C is the correct response.

3. Government spending is included in the circular flow of income because it represents

A a leakage from income.
B an injection into income.
C an injection into expenditure.
D a leakage from expenditure.

EXPLANATION: Government spending is an injection into the circular flow, and is clearly part of total
expenditure. Hence, option C is the correct response.

4. A shift to the left in aggregate demand can be caused by

A an increase in interest rates.
B an increase in the population.
C an increase in commodity prices.
D an increase in investment.

EXPLANATION: A shift to the left in the aggregate demand curve means that less will be demanded at all
price levels. This can be prompted by an increase in interest rates, which will depress consumer and
investment demand. Hence, option A is the correct response.

EXPLANATION: Using AD/AS analysis, economic growth will lead to a shift to the right of the aggregate
supply curve. With AD remaining unchanged, equilibrium will be re-established at a lower price level,
higher output, and therefore at higher employment levels. Hence, option C is the correct response.
© APT Initiatives Ltd, 2011
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 102

6. Refer to the diagram below.

Price AD AS
Level

Real GDP
O
Y1 Y2

In the diagram there exists

A demand-deficient unemployment
B a positive output gap
C an inflationary gap
D none of the above

EXPLANATION: This diagram shows an economy in equilibrium, with a real GDP at OY1. However, this
economy is capable of securing equilibrium output at OY2, as defined by the vertical section of the
aggregate supply curve. Since output is below potential output, there exists demand-deficient
unemployment. Hence, option A is the correct response.

7. Government spending, as a component of aggregate demand, excludes spending on

A the police service.
B health care.
C council leisure facilities.
D state pensions.

EXPLANATION: Only government spending, which involves the buying of goods or services is included in
aggregate demand. State pensions are awarded without there being any corresponding output and are
treated as transfer payments. Hence, option D is the correct response.

8. Saving equals investment when the economy is in equilibrium and

A consumption equals leakages.
B government spending and exports equal tax and imports.
C there is no unemployment.
D the economy is producing up to its full capacity.

EXPLANATION: Macroeconomic equilibrium occurs when all the injections into the circular flow equal all
the leakages. Hence, if government spending and exports equal tax and imports, equilibrium is achieved
if saving equals investment. Therefore, option B is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 103

EXPLANATION: When an economy is fully exploiting its productive capacity, any attempt to increase
aggregate demand further, beyond long-run aggregate supply, will increase prices and can only generate
a temporary increase in output. Hence, option B is the correct response.

10. When interest rates increase, the short-run aggregate supply curve will
A shift to the left.
B remain unchanged.
C shift to the right.
D become steeper.

EXPLANATION: Interest rates are a business cost. Therefore, when they increase, producers will need a
higher price level to supply the same amount: a shift to the left in the short-run aggregate supply curve.
Hence, option A is the correct response.

EXPLANATION: When there is spare capacity in the economy, any increase in aggregate demand can be
accommodated and output will increase without any pressure on prices. Hence, option D is the correct
response.

EXPLANATION: Options B, C, and D will have an unpredictable impact on inflation, and thereby contribute
to business and consumer uncertainty about investing and spending. This, in turn, will reduce the growth
potential of the economy. Only option A will create a more predictable economic environment, and
therefore encourage saving and investment, which in turn will increase the growth potential of the
economy.

13. Long-run economic growth is less likely to occur when

A there is fall in short-run aggregate supply.
B innovation is discouraged.
C businesses invest in training.
D long-run aggregate supply grows faster than aggregate demand.

EXPLANATION: Trend economic growth refers to the rate of growth an economy can sustain over the
economic cycle. Innovation is a source of productive and allocative efficiency and, therefore, economic
growth. When discouraged, this trend will be reduced. Hence, option B is the correct response.
© APT Initiatives Ltd, 2011
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 104

EXPLANATION: Option D is the correct response because an increase in consumption will counteract a
decrease in investment, but the extent of the changes are unknown. Therefore, the impact on equilibrium
real GDP and the price level are also unknown.

EXPLANATION: A growing deficit suggests that the economy is less internationally competitive, which
may in turn be because UK prices are decreasing relatively less than those of our trading partners. In this
context, only option B could cause a deterioration in our price competitiveness and is, therefore, the
correct response.

EXPLANATION: The Labour Force Survey, which is used to compose the ILO unemployment rate, asks a
cross section of those in the labour force whether or not they are available for and are seeking work.
Hence, option C is the correct response.

17. Frictional unemployment refers to unemployment occurring when

A workers are in between jobs.
B deteriorating weather reduces the need for work outdoors.
C businesses anticipate a recession.
D certain industries and occupations are suffering long-term decline.

EXPLANATION: Frictional unemployment occurs in the short-term, in the period after workers leave one
job and before they start the next. Hence, option A is the correct response.

18. When there is a high level of unemployment, the economy may be experiencing
A a positive output gap.
B a negative output gap.
C an inflationary gap.
D excess aggregate demand.

EXPLANATION: Higher levels of unemployment are typically associated with an economy operating below
its productive potential and, therefore, experiencing a negative output gap. Hence, option B is the correct
response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 105

EXPLANATION: International purchases of financial assets are included in the financial account of the
balance of payments and are, therefore, excluded from the current account. Hence, option C is the
correct response.

20. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including the components of the current account.

Component Exports (£bn.) Imports (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

EXPLANATION: The current account only includes trade in goods and services, factor incomes, and
government transfers. Trade in financial assets and capital investment appears elsewhere in the balance
of payments. Since the sum of export values of the current account categories is £1235 bn. and the
corresponding imports is £1115 bn., there is a current account surplus of £120 bn. Hence, option B is the
correct response.

21. A contractionary fiscal policy is characterised by

A an increase in government spending.
B a reduction in VAT.
C a balanced budget.
D an increase in a budget surplus.

EXPLANATION: A contractionary fiscal policy aims to reduce aggregate demand and will involve
increasing taxation, or reducing government spending. Such an approach will increase a budget surplus.
Hence, option D is the correct response.

EXPLANATION: A fall in the exchange rate will make UK exports more competitive and make UK imports
less competitive. As a result, demand for UK-made goods will increase. Hence, option A is the correct
response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 106

23. Following a depreciation of sterling, the UK government should expect

EXPLANATION: Depreciation of sterling will make exports cheaper and imports more expensive. As a
result, there will be greater inflationary pressure. Hence, option C is the correct response.

EXPLANATION: A supply-side policy is defined as one which increases the productive potential of an
economy. By benefiting from reduced taxes on company profits, businesses are more likely to invest in
increasing the productive potential of their businesses and, therefore, the economy as a whole. Hence,
option B is the correct response

EXPLANATION: Supply-side policies are defined as policies which increase the productive potential of an
economy. This enables more aggregate demand to be accommodated without adding to inflation.
Hence, option D is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 107

End of Unit Test 2

1. An economy’s economic growth cannot be caused by

A better quality land.
B increasing levels of imports.
C technological progress.
D more intensive use of machines.

2. The difference between an inflationary gap and deflationary gap is that

A an inflationary gap is associated with lower levels of employment, whereas a deflationary gap is
associated with higher levels of employment.
B a deflationary gap occurs typically during a recession, whereas an inflationary gap occurs typically
during a boom.
C a deflationary gap occurs typically during a period of faster growth, whereas an inflationary gap
occurs during a period of slower growth.
D an inflationary gap occurs when output grows at less then the trend rate, whereas a deflationary gap
occurs when output grows at more than the trend rate.

3. Leakages are defined as

A spending withdrawals from the circular flow.
B saving from factor incomes.
C expenditure on imports.
D expenditure of factor services.

4. A shift to the right in aggregate supply will result in

A lower real GDP, and a higher price level.
B a lower price level, and movement up the aggregate demand curve.
C a lower price level, and higher output.
D a higher price level, and lower employment.

5. This diagram below shows the conditions of aggregate demand and supply for an economy.

Price
Level
SRAS

P2
P1
AD2
AD1

O
Real National Output

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 108

The rise in the price level from OP1 to OP2, could be explained by
A a fall in interest rates
B a reduction in investment
C an improvement in labour productivity
D an increase in unemployment

6. Where the aggregate supply curve is perfectly elastic

A economic growth can be secured at higher levels of aggregate demand.
B higher levels of aggregate demand can be accommodated without any changes in the price level.
C any increase in economic growth will only shift the vertical section of the aggregate supply curve.
D aggregate supply is not sensitive to price.

7. Other things remaining constant, which one of the following would cause aggregate demand to fall?
A A fall in interest rates
B A decrease in taxation
C An increase in investment
D An increase in imports

8. Saving will fall if

A inflation is rising and the population profile is getting older.
B the population profile is getting younger and is confident about the future.
C interest rates and incomes are falling.
D the rate of inflation and incomes are rising.

9. All other things being equal, an increase in government spending leads to a larger increase in
national income. This illustrates
A how a deflationary gap can be created.
B how long-run aggregate supply can be increased.
C the operation of the multiplier.
D cost push inflation.

10. Producers will supply more in the short-run, at a higher price level, when
A wage rates increase.
B incomes are higher.
C imports are higher.
D factor costs increase.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 109

11. In the long-run, according to classical theorists, any attempt to change aggregate demand will result
in
A a change in real output.
B a change in the price level.
C a change in the price level and in real output.
D none of the above.

12. By increasing the growth potential of an economy, all other things being equal, the government can
look forward to
A full employment, deflation, and increased labour productivity.
B lower price levels, higher employment, and constant levels of economic growth.
C increased factor productivity, full employment, and higher government spending.
D higher real output, higher real wages, and higher levels of tax revenue.

13. The underlying rate of growth of an economy is more likely to increase, all other factors remaining
unchanged, when there is growth of
A unemployment
B consumer income
C inflation
D factor productivity

14. Long-run economic growth would improve if there were

A more occupational mobility.
B less frictional unemployment.
C lower out of work benefits.
D all of the above.

15. Which of the following, all other things being equal, is least likely to lead to a decrease in inflationary
pressure?
A A decrease in saving
B A decrease in the cost of oil
C A growing budget deficit
D A falling current account deficit

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 110

16. The International Labour Organisation measure of unemployment differs from the Claimant Count
measure in that it
A excludes those not claiming Jobseeker’s Allowance.
B excludes women who are returning to work after childbirth.
C is based on a representative sample of those who are unemployed.
D is less attractive to economists as an accurate measure of unemployment.

17. Unemployment arising from the long-term decline of traditional industries is called
A seasonal unemployment.
B cyclical unemployment.
C structural unemployment.
D frictional unemployment.

18. A rise in the price level may have occurred, because an economy is experiencing
A a positive output gap.
B a negative output gap.
C a deflationary gap.
D cyclical unemployment.

19. The current account of the balance of payments will not include
A the value of goods exported.
B the value of services we buy from overseas providers.
C income from UK investments overseas.
D money invested in the UK by foreigners.

20. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including data to complete the current account.

Component Exports / Credits (£bn.) Imports / Debits (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

This shows that there is

A a £50 bn. deficit in capital investment, and a £25 bn. deficit on trade in financial assets.
B a £500 bn. surplus on trade in services, and a £20 bn. surplus in factor incomes.
C a £100 bn. deficit on government transfers, and a £500 bn. surplus on trade in goods.
D none of the above.
© APT Initiatives Ltd, 2011
APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 111

21. Which of the following government decisions is an example of fiscal policy?

A Increasing interest rates
B Decreasing a budget surplus
C Allowing increases in tuition fees
D Decreasing the exchange rate

22. Which of the following policy combinations will most successfully contribute to reducing inflation?
A Increasing taxes, increasing interest rates, and reducing government expenditure
B Reducing interest rates, reducing government expenditure, and increasing taxes
C Increasing government expenditure, reducing taxes, and increasing interest rates
D Reducing taxes, increasing government expenditure, and reducing interest rates

23. An appreciation of sterling, all other things being equal, is likely to result in
A higher export prices, and a deterioration in the current account of the balance of payments.
B lower export prices, but an uncertain impact on the current account of the balance of payments.
C higher import prices, and an improvement in the current account of the balance of payments.
D lower import prices, but an uncertain impact on the current account of the balance of payments.

24. Supply-side policies would include

A allowing the exchange rate to fall.
B increasing income tax.
C investing more heavily in new infrastructure.
D subsidising essential products.

25. Keynesian economists believe that interventions on the supply-side should primarily aim to
A ensure there is sufficient aggregate demand, and thereby maximise output.
B encourage investment, and thereby increase aggregate demand.
C reduce factor costs, and thereby increase productive potential.
D correct market failure, and thereby increase economic welfare.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 112

End of Unit Test 2 - Answers

1. An economy’s economic growth cannot be caused by

A better quality land.
B increasing levels of imports.
C technological progress.
D more intensive use of machines.

EXPLANATION: Economic growth refers to an increase in the productive capacity of an economy, and the
increase in the output in goods and services that will flow from it. Options A, C, and D represent sources
of increased productive capacity and, therefore, of economic growth. Option B, the correct response, is
not a cause of economic growth, but represents the output of goods and services of other countries.

2. The difference between an inflationary gap and deflationary gap is that

EXPLANATION: An inflationary gap occurs when output is temporarily at a level greater than the
productive potential of the economy, such as during the boom period of the economic cycle. Conversely,
a deflationary gap occurs when output is below the productive potential of the economy, such as during a
period of recession. Hence, option B is the correct response.

3. Leakages are defined as

A spending withdrawals from the circular flow.
B saving from factor incomes.
C expenditure on imports.
D expenditure of factor services.

EXPLANATION: Leakages are withdrawals of possible spending from the circular flow. Hence, option A is
the correct response.

4. A shift to the right in aggregate supply will result in

A lower real GDP, and a higher price level.
B a lower price level, and movement up the aggregate demand curve.
C a lower price level, and higher output.
D a higher price level, and lower employment.

EXPLANATION: A shift to the right in aggregate supply will result in movement down the aggregate
demand curve, a lower price level, and higher output. Hence, option C is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 113

5. This diagram below shows the conditions of aggregate demand and supply for an economy.

Price
Level
SRAS

AD2

AD1

O
Real National Output

The rise in the price level from OP1 to OP2, could be explained by
A a fall in interest rates
B a reduction in investment
C an improvement in labour productivity
D an increase in unemployment

EXPLANATION: The diagram shows more aggregate demand at each price level. Of the options available,
this can arise only as a result of a fall in interest rates, ie option A.

6. Where the aggregate supply curve is perfectly elastic

EXPLANATION: Using the Keynesian macroeconomic model, when an economy is producing at levels of
output which are well below its productive capacity, any subsequent increases in aggregate demand can
initially be accommodated within the existing capacity of the economy, and therefore there is no reason
for prices to rise. This feature explains the horizontal section of a long-run aggregate supply curve.
Hence, option B is the correct response.

EXPLANATION: Aggregate demand is made up of Consumption + Investment + Government Spending +

Exports – Imports. Hence, it will fall if a country imports more goods and services. Therefore, Option D is
the correct response. The other options represent various sources of increased aggregate demand.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 114

8. Saving will fall if

EXPLANATION: Saving will tend to fall when the population profile is older, people are confident about
the future, and when interest rates and incomes are falling. Hence, option C is the correct response.

EXPLANATION: If there is a change in any component of aggregate demand, there will be a multiplier
effect in the same direction on national income. This illustrates the operation of the multiplier. Hence,
option C is the correct response.

10. Producers will supply more in the short-run, at a higher price level, when
A wage rates increase.
B incomes are higher.
C imports are higher.
D factor costs increase.

EXPLANATION: Producers will supply more, and at a higher price level, when aggregate demand has
shifted to the right due - for example - to an increase in planned consumption, in turn prompted by higher
incomes. Hence, option B is the correct response.

EXPLANATION: In the long-run, the impact of any change in aggregate demand will be limited by the
productive capacity of the economy, and will therefore manifest itself exclusively in changes in the price
level. Hence, option B is the correct response.

EXPLANATION: Option D is the correct answer because a higher growth potential will deliver the three
outcomes featured. At least one of the outcomes specified in options A, B and C will not necessarily occur
as a result of an increase in the productive potential of an economy.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 115

EXPLANATION: Economies grow more quickly, over the long-term, when all available factor resources are
being used more productively. Hence, option D is the correct response.

14. Long-run economic growth would improve if there were

A more occupational mobility.
B less frictional unemployment.
C lower out of work benefits.
D all of the above.

EXPLANATION: The long-run rate of economic growth would increase in circumstances when more people
worked, when workers remained unemployed between jobs for shorter periods, and were prepared to
consider a wider range of job / career throughout their working lives. Hence, option D is the correct
answer.

EXPLANATION: Option A is the correct response because it will increase inflationary pressure. Specifically,
it will coincide with an increase in consumption, and a corresponding increase in aggregate demand.

EXPLANATION: While the Claimant count of unemployment includes everyone who claims, and therefore
is not extrapolated from a sample, the ILO measure, although based on a research sample, identifies
those who declare that they are seeking work, irrespective of whether they can claim benefits. Hence,
option C is the correct response.

17. Unemployment arising from the long-term decline of traditional industries is called
A seasonal unemployment.
B cyclical unemployment.
C structural unemployment.
D frictional unemployment.

EXPLANATION: Unemployment arising from the long-term decline of traditional industries and, therefore,
changes in the structure of UK businesses as a whole, is called structural unemployment. Therefore,
option C is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 116

18. A rise in the price level may have occurred, because an economy is experiencing
A a positive output gap.
B a negative output gap.
C a deflationary gap.
D cyclical unemployment.

EXPLANATION: A rise in the price level may be associated with excess aggregate demand, and this is likely
to occur when the economy is operating beyond its productive capacity and is, therefore, experiencing a
positive output gap. Hence, option A is the correct response.

EXPLANATION: Options A, B, and C are examples of transactions that are included in the current account.
Capital investments into and out of the UK are excluded from the current account (but are included in the
capital account) of the balance of payments. Hence, option D is the correct response.

20. The following table is a simplified summary of some components of the UK balance of payments over
a short period, including data to complete the current account.

Component Exports / Credits (£bn.) Imports / Debits (£bn.)

Trade in Goods 300 800
Trade in Financial Assets 50 75
Factor Incomes 35 15
Trade in Services 700 200
Government Transfers 200 100
Capital Investment 75 125

This shows that there is

EXPLANATION: The current account only includes trade in goods and services, factor incomes, and
government transfers. Trade in financial assets and capital investment appears elsewhere in the balance
of payments. Option B is correct because it refers exclusively to categories found in the current account,
and correctly distinguishes between a deficit and a surplus.

21. Which of the following government decisions is an example of fiscal policy?

A Increasing interest rates
B Decreasing a budget surplus
C Allowing increases in tuition fees
D Decreasing the exchange rate

EXPLANATION: Fiscal policy involves changes in government spending and taxation to manage the
economy. When tax revenue is greater than government spending, the government is benefiting from a
budget surplus. Hence, option B is the correct response.

APT’s Multiple Choice Questions for AQA AS Economics - UNIT 2: The National Economy 117

EXPLANATION: To reduce inflation, government policy should focus on reducing aggregate demand, by
increasing taxes, reducing government expenditure, and (where it can directly) increasing interest rates.
Hence, option A is the correct response.

EXPLANATION: An appreciation of sterling, all other things being equal, is likely to result in lower import
prices and higher export prices. However, the impact on the current account of the balance of payments
is likely to be uncertain, because the impact on the current account depends on the demand response to
these price changes. Hence, option D is the correct response.

24. Supply-side policies would include

A allowing the exchange rate to fall.
B increasing income tax.
C investing more heavily in new infrastructure.
D subsidising essential products.

EXPLANATION: Supply-side policies are defined as those policies that increase the productive potential of
an economy. Investing more heavily in new infrastructure will reduce business costs and improve labour
mobility. In so doing, the resulting improvement in the efficiency of the economy will improve its
productive potential. Hence, option C is the correct response.

EXPLANATION: Keynesian economists believe that factor and product markets do not necessarily clear at
equilibrium, even in the longer term. They would point to an economy in equilibrium but below its
productive potential, and therefore at high levels of unemployment. Therefore, they would advocate
government measures to restore aggregate demand, typically through fiscal policy, and use supply-side
measures to correct market failure. Hence, option D is the correct response.

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