Theme 2 Question Sets

A-Level Economics

Year 12 Knowledge Consolidation Booklet
Theme 2 – The UK Economy

Contents

2.1 Macroeconomic Indicators - Checklist

  1. Economic Growth

  • I can define economic growth

  • I can define the input, output and income methods of measurement

  • I can define GDP, Real GDP and Real GDP per capita, purchasing power parities

  • I can identify limitations of each measure

  • I can explain the causes of economic growth, and how they can self-perpetuate

  • I can explain the advantages and disadvantages of high economic growth 

  • I can explain the limitations of growth as a measure of success

  • I can identify alternative measures of the success of an economy

  • I can explain the trade cycle/boom and bust cycle

  • I know the current trend in economic growth and the key changes recent in UK history

  1. Unemployment

  • I can define ‘employment’, ‘unemployment’, ‘economically inactive’, ‘the labour force’

  • I can explain the different measures of unemployment and their disadvantages

  • I can explain each of the causes of unemployment and identify examples

  • I can explain advantages and disadvantages of unemployment

  • I can explain why the target level of unemployment is not 0%

  1. Inflation

  • I can define ‘inflation’, ‘disinflation’ and ‘deflation’

  • I can explain the difference between CPI, RPI and RPIX

  • I can explain how CPI is calculated

  • I can identify limitations in the way CPI is measured

  • I can explain how inflation is caused

  • I can explain the advantages and disadvantages of high inflation and deflation

  1. Balance of Payments

  • I can define ‘Balance of Payments’, ‘current account, ‘trade imbalance’

  • I can explain the causes of a trade deficit or surplus

  • I can explain the consequences of a trade deficit or surplus

  1. Policy Objectives

  • I can identify the target rate for each macroeconomic indicator and explain why

  • I can explain how policies can come into conflict with each other

  • I can explain the importance of other key policy objectives:

A balanced budget, Protection of the environment, Income equality

Question Set 2.1 

2 Mark Questions (1 Knowledge, 1 Analysis)

Set 1: 25 minutes

  1. Define 'economic growth'.

  2. Define the expenditure method of measuring GDP

  3. Explain one characteristic of a recession

  4. Explain why growth can self-perpetuate

  5. Name 2 flaws in the way we calculate the CPI.

  6. Explain one advantage of inflation

  7. Define ‘structural unemployment’, with an example

  8. Define ‘real-wage unemployment’, with a diagram

  9. Define the claimant count and explain one limitation with the way it is measured

  10. Define ‘brain drain' with an example

  11. Define the ‘Balance of Payments’

  12. Define ‘trade deficit’


Set 2: 25 minutes

  1. Define Real GDP

  2. Name 3 advantages of economic growth

  3. Name 3 characteristics of a recession

  4. Explain how the CPI is calculated

  5. Explain one flaw in the way we calculate CPI

  6. Explain one advantage of deflation 

  7. Which two of the following would not be counted in the labour force?

    1. Unemployed people

    2. The underemployed

    3. 70-year olds

    4. Children looking for jobs

  8. Define ‘cyclical unemployment’, with an example

  9. Name and explain one impact of unemployment on the unemployed

  10. Explain how rising net immigration could impact unemployment in the UK negatively

  11. Define ‘trade surplus’

  12. Explain one consequence of a persistent trade deficit

Set 3: 25 minutes

  1. Define the input method of measuring GDP

  2. Explain one characteristic of an economic boom

  3. Define GNI

  4. Explain one reason that growth is not a good measure of the health of an economy

  5. What would be the impact of a fall in the value of the pound on the UK’s trade balance?

  6. Explain how RPI differs from CPI

  7. Name 3 disadvantages of deflation

  8. Define Unemployment (4 key details!)

  9. Define ‘frictional unemployment’, with an example

  10. Name and explain one impact of unemployment on governments

  11. Define the LFS unemployment figure and explain one limitation with the way it is measured

  12. Name 3 components of the balance of payments.

Set 4: 25 minutes

  1. Define the output method of measuring GDP

  2. Identify one flaw in the way that GDP is measured in the UK

  3. Name 3 characteristics of an economic boom

  4. Explain how RPIX differs from RPI

  5. Name 3 disadvantages of inflation

  6. Explain one disadvantage of deflation

  7. Define 'underemployment' and explain one consequence

  8. Define ‘seasonal unemployment’, with an example

  9. Name and explain one impact of unemployment on firms

  10. Explain how rising net immigration could impact unemployment in the UK positively

  11. If the index number for UK GDP in 2015 was 100, and it rose from £2tn to £2.3tn in 2020, what would be the index number for 2021?

  12. What would be the impact of a rise in the value of the pound on the UK’s trade balance?


2.2 Aggregate Demand - Checklist

Studied ✔ Revised ✔ ✔ Learned ✔ ✔ ✔

  1. Characteristics of Aggregate Demand

  • I know the formula for AD and know the relative sizes of the components in the UK

  • I can explain the shape of the AD curve and what would cause a movement along

  • I know the formula for AD and know that a change in any component will shift AD

  1. Consumption

  • I can define consumption

  • I can list the determinants of consumption from memory

  • I can explain influences on disposable income and thus consumption

  • I can explain influences on the rate of savings and thus consumption

  • I can explain how interest rates affect income and savings and thus consumption

  • I can explain influences on consumer confidence and the wealth effect

  1. Investment

  • I can define ‘gross’ and ‘net’ investment

  • I can explain how the level of economic growth can influence investment

  • I can explain the influences on business confidence

  • I can explain Keynes’ theory of ‘animal spirits’

  • I can explain how demand for exports can influence investment

  • I can explain how the access to and price of credit can influence investment

  1. Government Spending

  • I can identify the key components of the UK budget

  • I can identify the key sources of government revenue

  • I can explain how the point in the trade cycle influences the budget

  • I can identify the basic fiscal policies that can influence the budget 

  1. The Trade Balance

  • I can define trade surplus and deficit

  • I can explain how real incomes can affect the trade balance

  • I can explain how exchange rates can affect the trade balance

  • I can explain how the state of the world economy can affect the trade balance

  • I can explain how protectionism can affect the trade balance

  • I can explain how non-price factors can affect the trade balance


Question Set 2.2

2-mark Questions: (Knowledge and Analysis)

Set 1: 20 minutes

  1. Define 'aggregate demand' and give the formula

  2. Explain why the aggregate demand curve is downward sloping (hint: real balance effect).

  3. Explain how expectations of inflation can affect consumption

  4. Explain why only gross investment, not just net investment, boosts AD

  5. Explain how improvements in technology can affect investment

  6. Use a diagram to show how expansionary fiscal policy affects the economy

  7. Explain how austerity affects aggregate demand

  8. Explain how EU inflation might affect the UK trade balance

  9. Explain how domestic growth might affect the trade balance

  10. Explain how an appreciation of the currency would affect the trade balance

Set 2: 20 minutes

  1. Explain one way that an increase in house prices could affect an economy

  2. Use a diagram to show how an increase in income tax would affect an economy

  3. Explain the term ‘paradox of thrift’ (hint: confidence, AD, income)

  4. Explain how interest rates affect investment 

  5. Explain how the expectation of economic growth affects investment

  6. Explain the concept of ‘automatic stabilisers’ in the context of government spending

  7. Define 'budget deficit' and explain how it affects the economy

  8. Explain how a depreciation of the currency would impact net trade

  9. Explain how an improvement in productivity would affect the trade balance

  10. Explain how an increase in tariff rates would affect the trade balance

Set 3: 20 minutes

  1. Explain how an increase in interest rates could affect consumption (3 ways)

  2. Explain how an increase in wage rates would affect aggregate demand

  3. Explain how fear of a recession can affect consumption

  4. Explain how current economic growth affects investment

  5. Explain how changes in regulation can influence investment

  6. Define budget surplus and explain how it affects the economy

  7. Explain how domestic inflation can affect the trade balance

  8. Explain how EU growth might affect the UK trade balance

  9. Explain how an increase in the minimum wage would affect the trade balance

  10. Explain how the trade balance can act as an automatic stabiliser (hint: 1>(x-m)>AD>2)

2.3 Aggregate Supply - Checklist

Studied ✔ Revised ✔ ✔ Learned ✔ ✔ ✔

2.3.1 Characteristics of Aggregate Supply

  • I can explain why the aggregate supply curve is upward sloping

  • I can define the long-run and short-run in economics and apply it to a context

The Classical Model

  1. Short-Run Aggregate Supply

  • I can explain how the cost of raw materials and energy affect SRAS

  • I can explain how a change in wage rates can cause a shift in SRAS

  • I can explain how a change in exchange rates can cause a shift in SRAS

  • I can explain how a change in tax rates can cause a shift in SRAS

  1. Long-Run Aggregate Supply

  • I can explain that LRAS represents an economy’s productive potential

  • I can explain the shape of the LRAS curve

  • I can explain how a change in factors of production can cause a shift in LRAS

  • I can explain how a change in technology or productivity cause a shift in LRAS

  • I can explain how a change in regulations cause a shift in LRAS

  • I can explain how inflationary and recessionary gaps are corrected in the long run

The Keynesian Model

  1. The Keynesian Aggregate Supply Curve

  • I can explain the shape of the Keynesian AS curve

  • I can explain why Keynes thought that recessionary gaps can endure in the long run

  • I can identify what would cause a shift in the AS curve

Analysis with AD and AS

  1. The Equilibrium Level of Real GDP

  • I can show the impact of a shift in Aggregate Demand or Supply on any diagram

  • I can identify the likely cause of a change in inflation from an extract

  • I can identify the likely cause of a change in economic growth from an extract







Question Set 2.3

2-mark Questions: (Knowledge and Analysis)

Set 1: 20 minutes (longer for these as students often find them difficult!)

  1. Explain the difference between the ‘short run’ and the ‘long run’ in macroeconomics

  2. Explain how a fall in the price of solar energy would affect SRAS

  3. Define ‘classical economics’ (hint: Adam Smith, invisible hand)

  4. On a classical diagram, show the impact of rising net migration on an economy

  5. On a classical diagram, show the impact of increasing levels of bureaucracy on an economy

  6. Explain how positive output gaps are corrected in the long run

  7. On a classical diagram, show how a recessionary output gap is corrected in the long run

  8. Explain why the Keynesian LRAS curve is perfectly elastic when AD is low

  9. Which 2 of the following would not/not directly cause inflation? Explain why 

    1. An increase in minimum wage

    2. A fall in interest rates

    3. Economic growth

    4. An increase in productivity


Set 2: 20 minutes

  1. Define short-run aggregate supply and explain why it is upward sloping

  2. Using a diagram, show the impact on the economy of an increase in the price of steel

  3. Explain the meaning of the label ‘Yf’ at the bottom of the LRAS curve

  4. On a classical diagram, show the impact of an advance in technology on an economy

  5. Explain why a change in net investment but not gross investment shifts the LRAS curve

  6. Explain how negative output gaps are corrected in the long run

  7. On a classical diagram, show how an inflationary output gap is corrected in the long run

  8. Explain why the Keynesian LRAS curve is perfectly inelastic when AD is high 

  9. Which 2 of the following would not cause economic growth? Explain why 

  1. An increase in the price of oil

  2. A fall in interest rates

  3. Inflation

  4. An increase in productivity




Set 3: 20 minutes

  1. Explain how an increase in VAT would affect an economy

  2. Using a diagram, show the impact of an appreciation of the pound (could show 2 shifts)

  3. On a classical diagram, show the impact of an improvement in education on an economy

  4. On a classical diagram, show the impact of war on an economy

  5. Explain how inflationary output gaps are corrected in the long run

  6. On a classical diagram, show how a negative output gap is corrected in the long run

  7. Explain the meaning of Keynes’ famous line, "In the long run, we’re all dead."

  8. Explain the curved part of the Keynesian LRAS curve (hint: it's similar to the PPF)

  9. Which of the following would not/not directly cause unemployment? Explain why 

    1. An increase in minimum wage

    2. A fall in interest rates

    3. New technology

    4. An increase in productivity


Set 4: 20 minutes

  1. Explain how an increase in the price of oil would affect an economy

  2. Using a diagram, show the impact of an increase in the minimum wage rate (could show 2 shifts)

  3. Explain why the classical LRAS curve is vertical (hint: perfectly… because in the long run, classical economists argue…)

  4. On a classical diagram, show the impact of a natural disaster on an economy

  5. Explain how recessionary output gaps are corrected in the long run

  6. On a classical diagram, show how a positive output gap is corrected in the long run

  7. Explain the concept of ‘sticky wages’

  8. Explain why Keynes believed recessionary gaps could persist in the long run

  9. Which of the following would not/not directly cause a recession? Explain why 

    1. Inflation

    2. Austerity policies

    3. Falling consumer confidence

    4. A depreciation







2.4 National Income and the Multiplier Effect - Checklist

2.1.4 The Circular Flow of Income

  • I can define each of the arrows on the circular flow of income

  • I can explain the difference between income and wealth

  • I can identify each of the injections and their corresponding withdrawals

  • I can explain how changes in injections and withdrawals can affect national income


  1. The Multiplier

  • I can define the multiplier and explain how it works

  • I can explain the effect of the multiplier on injections into the circular flow

  • I can explain the effect of changes in the economy on the multiplier

  • I can define each of the marginal propensities to withdraw

  • I know each of the relevant formulae and can use them to find missing variables


  1. Causes of Economic Growth

  • I can identify factors that can cause economic growth.

  • I can differentiate between actual and potential growth

  • I can explain how international trade allows for ‘export-led growth’


  1. Output Gaps

  • I can define inflationary and recessionary output gaps

  • I can show output gaps on a Classical diagram

  • I can show output gaps on a PPF diagram











Question Set 2.4

2-mark Questions: (Knowledge and Analysis)

Set 1: 20 minutes

  1. Explain why the ‘flow’ of income in the economy is seen as ‘circular’

  2. Explain how exchange rates can act as an automatic stabiliser in the economy

  3. Explain the likely impact of a fall in the savings rate on the circular flow of income

  4. Explain the relevance of the multiplier effect to the possible effect of falling exports

  5. Find the multiplier if the marginal rates of savings, imports and taxation are each 30%.

  6. If the marginal propensity to consume is 30%, what is the multiplier?

  7. If the MPW is 0.9, what would be the effect of an increase in imports by 10 percentage points?

  8. If the MPW is 0.9, what change in exports would increase GDP by $200bn?

  9. If the MPC is 80%, what is the MPW?

  10. Explain why the multiplier effect creates a risk for governments considering contractionary fiscal policy

Set 2: 20 minutes

  1. Explain the concept of injections and withdrawals in the circular flow

  2. Explain the likely impact of an increase in investment on the circular flow of income

  3. Explain the likely impact of a fall in imports on the circular flow of income

  4. Explain how job losses may affect the circular flow of income in the economy

  5. Find the multiplier if the marginal rates of savings, imports and taxation are each 20%.

  6. If the marginal propensity to consume is 0.4, what is the multiplier?

  7. If the MPC is 0.9, what would be the effect of an increase in imports by 10 percentage points?

  8. If the marginal rate of tax, savings and imports are each 0.25, what change in exports would increase GDP by $300 billion?

  9. If the MPW is 90%, what is the MPC?

  10. Explain how the multiplier effect can be used to the advantage of governments trying to fix negative output gaps




Set 3: 20 minutes

  1. Explain the difference between income and wealth

  2. Explain the likely impact of a fall in exports on the circular flow of income

  3. Explain the concept of the multiplier effect and its relevance to governments

  4. Explain the impact of rising tax rates on the multiplier

  5. Find the multiplier if the marginal rate of savings is 0.3, the marginal rate of imports is 0.2, and the marginal rate of taxation is 0.5

  6. If the multiplier is 3, what would be the effect of a $20bn increase in government spending

  7. If the multiplier is 4, what change in government spending would increase GDP by $200bn?

  8. If the MPW is 0.9, what change in exports would increase GDP by $200bn?

  9. If the marginal rate of savings, taxation and imports are all 30%, what is the MPC?

  10. Explain the difference between actual and potential growth using a PPF

Set 4: 20 minutes

  1. Explain how net trade can act as an automatic stabiliser in the economy

  2. Explain the likely impact of a fall in government spending on the circular flow of income

  3. Explain the relevance of the multiplier effect to the possible effect of FDI

  4. Explain the impact of falling demand for imports on the multiplier

  5. If the marginal propensity to withdraw is 80%, what is the multiplier?

  6. If the MPW is 0.2, what would be the effect of a £20m increase in exports

  7. If the MPW is 0.4, what change in government spending would increase GDP by $200bn?

  8. If the marginal rate of tax, savings and imports are each 0.25, what change in exports would increase GDP by $300 billion?

  9. If the marginal rate of savings, taxation and imports are all 10%, what is the MPC?

  10. Explain the difference between actual and potential growth using classical diagrams

Set 5: 20 minutes

  1. Explain how mandated fiscal policy can act as an automatic stabiliser in the economy

  2. Explain the likely impact of an increase in taxation on the circular flow of income

  3. Explain the relevance of the multiplier effect to the possible effect of falling investment

  4. Explain the impact of rising saving rates on the multiplier

  5. If the marginal propensity to withdraw is 0.2, what is the multiplier?

  6. If the MPC is 0.8, what would be the effect of a £8bn fall in exports

  7. If the MPC is 0.1, what change in investment would increase GDP by $400bn?

  8. If the MPW is 0.9, what change in exports would increase GDP by $200bn?

  9. Explain how the multiplier effect creates a risk for governments considering expansionary fiscal policy

  10. Explain the difference between actual and potential growth using Keynesian diagrams


















2.5 Macroeconomic Policy Instruments - Checklist 

  1. Policy Objectives

  • I can identify each of the key four policy objectives

  • I can identify alternative policy objectives and their consequences


Demand-Side Policies

  1. Fiscal Policy

  • I can define fiscal policy

  • I can explain the difference between a budget deficit and a surplus

  • I can explain the causes of a budget deficit or surplus: mandated vs discretionary

  • I can explain the difference between direct and indirect taxation

  • I can explain the difference between progressive, proportional and regressive taxation

  • I can explain how fiscal policy can impact each of the policy objectives

  • I can explain the limitations of fiscal policy


  1. Monetary Policy

  • I can define monetary policy and interest rates

  • I can explain the role of the Bank of England

  • I can explain the monetary policy transmission mechanism.

  • I can explain how interest rates affect debt and savings

  • I can explain how interest rates affect exchange rates and thus trade

  • I can explain how interest rates affect aggregate demand

  • I can define 'quantitative easing'.

  • I can explain how monetary policy can impact each of the policy objectives

  • I can explain the limitations of monetary policy


  1. Supply-Side Policies

  • I can define supply-side policy

  • I can identify and explain each type of supply-side policy

  • I can explain the limitations of each supply-side policy

  • I can explain the difference between a market-based and an interventionist approach

Policy Conflicts

  • I can explain the implications of the Phillips Curve and its exceptions

  • I can explain how policies have conflicts and trade-offs:

    • Growth and Inflation

    • Growth and the Environment


  • Growth and Inequality

  • Growth and Net Trade

  • Growth and the Budget Balance

Question Set 2.5

2-mark Questions: (Knowledge and Analysis)

Set 1: 20 minutes

  1. Explain the difference between fiscal policy and monetary policy

  2. Explain the difference between proportional, regressive and progressive taxation

  3. Using a Keynesian diagram, explain how contractionary fiscal policy can be used to reduce inflation

  4. Explain how interest rates can be used to stimulate growth

  5. Explain the impact of contractionary monetary policy on investment

  6. Explain how quantitative easing stimulates growth

  7. Explain one limitation of education as a supply-side policy

  8. What are the four policy objectives?

  9. Explain why economic growth and low inflation are not always mutually exclusive

  10. Explain how economic growth can improve the budget balance

Set 2: 20 minutes

  1. Explain the difference between mandated and discretionary fiscal policy

  2. Explain the difference between direct and indirect taxes

  3. Using a Keynesian diagram, explain how fiscal policy can be used to correct unemployment without causing inflation

  4. Explain how interest rates can be used to control inflation

  5. Explain the impact of contractionary monetary policy on people with existing debts

  6. Explain why monetary policy is more effective at reducing inflation than encouraging growth

  7. Explain why deregulation is considered a supply-side policy

  8. Explain the difference between market-based and interventionist supply-side policies

  9. Explain why unemployment and inflation are not always mutually exclusive

  10. Explain why a trade deficit caused by growth can be seen as an ‘automatic stabiliser’

Set 3: 20 minutes

  1. Explain the difference between a budget deficit and a budget surplus

  2. Explain how tax thresholds can be used to make income tax progressive

  3. Explain the risks of a high budget deficit

  4. Explain the impact of expansionary monetary policy on housing markets

  5. Explain the impact of contractionary monetary policy on net trade

  6. Explain why quantitative easing could cause inflation if mismanaged

  7. Explain one limitation of infrastructure investment as a supply-side policy

  8. Explain why there may be a trade-off between economic growth and inflation 

  9. Explain why economic growth and environmental objectives see a trade-off

  10. Explain why, in a recession, governments may be forced to choose between economic growth and a balanced budget


Set 4: 20 minutes

  1. Explain why economic growth can lead to rising income inequality

  2. Explain how a recession can cause a budget deficit

  3. Explain why indirect taxes have a more regressive effect

  4. Explain why expansionary fiscal policy can be seen as a tax on future generations. 

  5. Explain the impact of expansionary monetary policy on investment

  6. Explain why the Bank of England target 2% inflation rather than 0%

  7. Explain why investment in education is considered a supply-side policy

  8. Explain one limitation of privatisation as a supply-side policy

  9. Explain why there may be a trade-off between unemployment and inflation 

  10. Explain how a decoupling of GDP and emissions may be possible


Set 5: 20 minutes

  1. Explain how economic growth can improve the budget balance

  2. Using a Keynesian diagram, explain the purpose of expansionary fiscal policy

  3. Using a short-run classical diagram, explain why contractionary monetary policy may not be the most effective way to correct cost-push inflation

  4. Explain the impact of expansionary monetary policy on net trade

  5. Explain why the Bank of England target to control inflation in the medium term

  6. Explain why investment in infrastructure is considered a supply-side policy

  7. Explain one limitation of deregulation as a supply-side policy

  8. Explain the shape of the Phillips curve and why it takes this shape

  9. Explain why economic growth and environmental objectives might not have to see a trade-off

  10. Explain the relevance of the multiplier effect to the austerity debate

Set 6: 20 minutes

  1. Explain why monetary policy can be seen as a blunt tool

  2. Explain how a tax cut might in fact improve the budget balance in the long run

  3. Explain the difference between expansionary and contractionary fiscal policy

  4. Using a Keynesian diagram, explain why expansionary fiscal policy is not appropriate when the economy is already at full capacity

  5. Explain why Corbyn advocated for spending increases while Truss advocated for tax cuts to grow the economy

  6. Explain the impact of contractionary monetary policy on housing markets

  7. Explain why privatisation is considered a supply-side policy

  8. Explain the difference between market-based and interventionist supply-side policies

  9. Explain what it means to say that the Phillips curve was an ‘empirical observation’ that has since been disproven

  10. Explain how economic growth can worsen the trade balance