AQA A-level Economics: Aggregate demand and activity, short-run and long-run AS (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

The questions below are based on the AQA AS and A-level Economics specification, version 1.3, covering aggregate demand and the level of economic activity, determinants of short-run aggregate supply and determinants of long-run aggregate supply, numbered 3.2.2.4, 3.2.2.5 and 3.2.2.6 on the AQA website (4.2.2.4 to 4.2.2.6 in the combined PDF). All countries and figures are invented. Use the revision notes and the study guide first. Find the course hub at AQA A-level Economics, tick off topics on the printable checklist and use the free diagnostics to spot weak areas.

Questions

1. In Country D national income rises from 2,000 to 2,400 and consumption from 1,560 to 1,880 (bn cu). Calculate the marginal propensity to consume and the multiplier. [3]

2. Country D’s government spends an extra 12 bn cu on road repairs. The MPC is 0.7.

(a) Calculate the maximum rise in national income. [2] (b) Explain two reasons why the actual rise in real output may be smaller. [3]

3. A new warehouse pays 60 m cu in extra wages in Region R. Residents spend 50% of any extra income on goods made in the region.

(a) Calculate the extra income created in the first four rounds. [2] (b) Calculate the final total change in regional income. [1] (c) Explain why the regional multiplier is smaller than a national multiplier for the same households. [2]

4. Economy P has an MPC of 0.9 and economy Q has an MPC of 0.6. Each receives an injection of 25 bn cu. Calculate the total rise in income in each economy and explain why the results differ. [5]

5. In Country E actual output is 1,150 and normal capacity output is 1,250 (bn cu). The MPC is 0.8.

(a) Calculate the output gap as a percentage of normal capacity. [2] (b) Calculate the injection needed to close the gap if prices stay constant. [2] (c) Explain why a larger injection would be needed if the SRAS curve slopes upward. [2]

6. In Country F, money wage rates rise 6% and productivity rises 4%.

(a) Calculate by how much, in percentage terms, unit labour cost changes. [2] (b) Raw materials are 25% of firms’ costs and their price rises 16%. Calculate the rise in total costs, other costs unchanged. [2] (c) Employer payroll tax rises from 8% to 11% of a wage bill of 200. Calculate the percentage rise in labour cost and state what happens to SRAS. [3]

7. Country F has 15 million workers at normal employment and output per worker of 52,000 cu.

(a) Calculate normal capacity output in bn cu. [1] (b) Productivity rises 2.5% and employment 0.8%. Calculate the new capacity. [2] (c) Explain how better factor mobility and a stronger enterprise culture can shift LRAS. [3]

8. (a) Explain why LRAS is drawn vertical at the normal capacity level. [2] (b) Explain how a banking system that lends to firms affects LRAS. [2] (c) Actual output is 780 and normal capacity is 800. Calculate the output gap as a percentage. [2]

9. On a Keynesian AS curve for Country G the price index is 100 at every output up to 800, 108 at 900, 120 at 950 and 140 at 980 (the maximum).

(a) AD rises so that equilibrium moves from 800 to 900. Calculate the percentage change in output and in prices. [2] (b) AD rises again so that equilibrium moves from 950 to 980. Calculate the same changes to 1 d.p. [2] (c) Explain why the price effect differs between (a) and (b). [2]

10. Country H has AD: Y = 1800 - 6P and SRAS: Y = 1000 + 2P, with Y in bn cu and P an index. Normal capacity is 1,260. Government spending rises 8 bn cu and the MPC is 0.75.

(a) Show that equilibrium is P = 100 and Y = 1,200 before the change. [2] (b) Calculate the size of the AD shift and the new equilibrium. [3] (c) Explain why the rise in output is much smaller than the AD shift. [3] (d) Evaluate whether this policy is an effective way to raise output in Country H. [4]

Answers

1. Change in consumption 320 and change in income 400 [1], so MPC = 320/400 = 0.8 [1]; multiplier = 1/(1 - 0.8) = 5 [1] [3] Examiner insight: the MPC uses changes, not totals. Dividing 1,880 by 2,400 gives the average propensity to consume and does not answer the question.

2. (a) Multiplier = 1/(1 - 0.7) = 3.33 [1]; 12 x 3.33 = 40 bn cu [1] [2] (b) Spare capacity may be limited, so prices rise and real output rises by less [1]; the MPC may be lower than 0.7, for example if confidence falls or some spending leaks abroad [1]; each point is developed by saying how it reduces the later rounds [1] [3] Examiner insight: name the reason and then follow it through to the size of later rounds. A bare list of “leakages” shows less than one developed chain.

3. (a) 60 + 30 + 15 + 7.5 [1] = 112.5 m cu [1] [2] (b) 60/(1 - 0.5) = 120 m cu [1] (c) A region has a larger share of spending on goods from outside it, so less is passed on locally at each round [1], giving a smaller chain of income than in a whole nation, where more of the spending stays inside [1] [2] Examiner insight: the question says “for the same households”, so answers should compare the region and the nation, not just describe leakage.

4. Economy P: multiplier 1/0.1 = 10 [1]; Economy Q: 1/0.4 = 2.5 [1]; rises in income 250 bn cu and 62.5 bn cu [1]; a higher MPC means more of each round of income is spent again [1], so less is lost at each stage and the chain is longer [1] [5] Examiner insight: explain the mechanism round by round. Saying “a bigger MPC means a bigger multiplier” only repeats the question.

5. (a) (1,150 - 1,250)/1,250 [1] = -8% [1] [2] (b) Multiplier = 5 [1]; 100/5 = 20 bn cu [1] [2] (c) On an upward-sloping SRAS curve some of the AD rise raises prices instead of output [1], so AD must shift further to get real output up by 100 [1] [2] Examiner insight: give the gap as a percentage of normal capacity, with the sign. A value of 8% with no sign hides that output is below capacity.

6. (a) 1.06/1.04 = 1.0192 [1], a rise of 1.92% [1] [2] (b) 0.25 x 16 [1] = 4% [1] [2] (c) Labour cost rises from 216 to 222 [1], which is 6/216 = 2.78% [1]; higher costs shift SRAS to the left [1] [3] Examiner insight: ratios of wage to productivity indices are the usual route to unit cost. A cost rise shifts the curve and should not be described as a movement along it.

7. (a) 15 m x 52,000 = 780 bn cu [1] (b) 1.025 x 1.008 = 1.0332 [1]; 780 x 1.0332 = 805.9 bn cu [1] [2] (c) Better factor mobility lets resources move to where they are most productive, so more output from the same total of resources [1]; an enterprise culture brings new firms and ideas, raising productivity and capacity [1]; both raise normal capacity, so LRAS shifts right [1] [3] Examiner insight: end by linking each determinant to normal capacity. A named factor without that link stays descriptive.

8. (a) In the long run output is limited by the quantity and quality of resources [1], and not by the price level, so the curve does not slope [1] [2] (b) Banks turn savings into loans for investment [1], which raises the capital stock and normal capacity, shifting LRAS right [1] [2] (c) (780 - 800)/800 [1] = -2.5% [1] [2] Examiner insight: keep short-run and long-run effects apart. Credit that raises spending this year is an AD effect, while the capacity effect comes through the extra capital.

9. (a) Output: 900/800 = +12.5% [1]; prices: 108/100 = +8% [1] [2] (b) Output: 980/950 = +3.2% [1]; prices: 140/120 = +16.7% [1] [2] (c) In (a) the economy still has spare resources, so costs rise slowly [1]; in (b) it is nearly at full capacity, so bottlenecks make extra demand raise prices strongly [1] [2] Examiner insight: use the figures in the explanation. Comparing 8% with 16.7% shows you have read the table.

10. (a) 1800 - 6 x 100 = 1200 and 1000 + 2 x 100 = 1200 [1], so AD = SRAS at P = 100, Y = 1,200 [1] [2] (b) Multiplier = 4 [1]; AD shift = 8 x 4 = 32 [1]; new AD Y = 1832 - 6P, so 832 = 8P, P = 104, Y = 1,208 [1] [3] (c) The AD shift of 32 raises demand at each price but firms supply more only if prices rise [1]; here prices rise 4% [1], and that rise cuts demand along the new AD curve, so output rises only 8 [1] [3] (d) Output rises, so it is effective in a limited sense [1]; but only a quarter of the shift (8 of 32) appears as output [1]; there is 60 of spare capacity, so a Keynesian flat section would give a bigger rise, though the SRAS used here is upward-sloping [1]; judgement: a larger injection, or supply-side change, would be needed to close the gap, and cost and timing matter [1] [4] Examiner insight: for evaluation, reach a stated judgement about this economy using its numbers. Listing general limits of fiscal policy does not earn the same credit.

Where marks are usually lost

• Using totals rather than changes to find the MPC.
• Writing the multiplier as 1/MPC.
• Quoting a multiplier answer as a change in real output when prices also rise.
• Giving percentage gaps without a sign or without dividing by normal capacity.
• Treating a rise in costs as a movement along SRAS.
• Naming a determinant of LRAS but not linking it to normal capacity.
• Mixing up AD effects of credit with the capacity effect of investment.
• Evaluating in general terms with no use of the data given.

Next steps

• Re-read the revision notes for any answer you lost marks on.
• Read the AQA study guide on how the macroeconomy works.
• Go to the AQA A-level Economics hub and the printable checklist.
• Try the all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA, AS and A-level Economics specification, version 1.3 (29 June 2022), A-level content sections 4.2.2.4 to 4.2.2.6 in the combined PDF (3.2.2.4 to 3.2.2.6 on the AQA website). Published by AQA.