AQA A-level Economics: Circular flow, AD and AS analysis and determinants of aggregate demand (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.

These questions cover the circular flow of income, aggregate demand and aggregate supply analysis, and the determinants of aggregate demand for AQA A-level Economics (7136), specification version 1.3. The PDF numbers these sections 4.2.2.1 to 4.2.2.3; the AQA website numbers them 3.2.2.1 to 3.2.2.3. All countries and numbers here are made up for illustration. Read the revision notes first. The AQA aggregate demand and supply study guide gives more on the diagrams. Course pages: AQA A-level Economics hub, checklist and free diagnostics. Show your working and name every axis and curve when you describe a diagram.

Questions

1. Country C has nominal national income of 3,600 in year 1 (price index 100) and 3,990 in year 2 (price index 105).

(a) Find Country C’s real income in year 2, in year 1 prices. [2] (b) Calculate real growth between the two years, to 1 decimal place. [2]

2. In Country B, state whether each is an injection or a withdrawal, and name it.

(a) The government pays for a new bridge. [1] (b) Households buy holidays abroad. [1] (c) Firms build a new factory. [1] (d) Households pay income tax. [1]

3. In Country B, investment is 42, government spending 58 and exports 62. Saving is 0.09Y, taxation 0.21Y and import spending 0.15Y, where Y is national income.

(a) Calculate equilibrium national income. [3] (b) Full employment income is 400. Calculate the gap, as a percentage of full employment income. [2] (c) Exports fall by 18. Calculate the new equilibrium income. [2]

4. The government of Country B raises income tax so that taxation becomes 0.30Y, with other withdrawals unchanged and injections at 162.

(a) Calculate the new equilibrium income. [2] (b) Explain why income falls. [2]

5. Country D has these schedules, with real output in units.

Price level	AD	Short-run AS
100	720	520
110	660	560
120	600	600
130	540	640

AD is Y = 1,320 - 6P and short-run AS is Y = 4P + 120. Long-run AS is vertical at 640.

(a) State the equilibrium price level and output. [2] (b) A rise in interest rates cuts consumption and investment, so AD falls by 50 at every price level. Calculate the new equilibrium. [2] (c) Explain whether this is a movement or a shift, and what happens to demand-deficient unemployment. [2]

6. Country D has consumption 410, investment 95, government spending 120, exports 150 and imports 135.

(a) Calculate aggregate demand. [1] (b) A recession abroad cuts exports to 132. Imports fall to 129. Calculate the new aggregate demand and the percentage change, to 1 decimal place. [2] (c) Explain why aggregate demand falls by less than exports. [2]

7. Output growth in Country E is 4%, then 6%, then 3% in three successive years.

(a) Explain two determinants of investment. [4] (b) Use the basic accelerator to explain why investment may fall in the third year. [2]

8. In Country E, disposable income is 520 and consumption 468 in one year. The next year disposable income is 560 and consumption 495.

(a) Calculate saving in each year and the share of disposable income saved, to 1 decimal place. [3] (b) Explain one difference between saving and investment. [2]

9. Explain, in words, the AD/AS diagram for each event in Country D.

(a) A recession in its main trading partner. [3] (b) A rise in the world price of energy that the country imports. [3]

10. Evaluate whether growth in real national income is a reliable indicator of improved economic performance. [8]

11. Assess the likely effect of a large fall in a country’s exports on its economic performance. [10]

Answers

1. (a) Real income = 3,990 / 1.05 [1] = 3,800 [1] [2] (b) 3,800 / 3,600 = 1.0556 [1], so real growth of 5.6% [1] [2] Examiner insight: Show the division by the index; a bare figure leaves nothing to reward if it is slightly out. Nominal growth of 10.8% is the wrong measure here because it includes the price rise.

2. (a) Government spending, an injection [1] [1] (b) Import spending, a withdrawal [1] [1] (c) Investment, an injection [1] [1] (d) Taxation, a withdrawal [1] [1] Examiner insight: Give both the label and the item. Saying “withdrawal” without naming saving, taxation or imports may not show you know which flow is meant.

3. (a) J = 42 + 58 + 62 = 162 [1]. W = 0.09Y + 0.21Y + 0.15Y = 0.45Y [1]. J = W gives 0.45Y = 162, so Y = 360 [1] [3] (b) 400 - 360 = 40 [1]. 40 / 400 = 10% below full employment income [1] [2] (c) J = 144 [1]. Y = 144 / 0.45 = 320 [1] [2] Examiner insight: Start with the condition J = W and write it down. Dividing the gap by full employment income, not by equilibrium income, answers the question as set.

4. (a) W = 0.09Y + 0.30Y + 0.15Y = 0.54Y [1]. Y = 162 / 0.54 = 300 [1] [2] (b) Higher tax cuts disposable income and spending, so firms’ sales and output fall [1]. Income keeps falling until withdrawals are again equal to injections at the lower level [1] [2] Examiner insight: Explanations usually need a chain, not a result. Link the tax rise to disposable income, then to output, then back to the equilibrium condition.

5. (a) AD = short-run AS at 1,320 - 6P = 4P + 120, so 10P = 1,200 [1]. P = 120, Y = 600 [1] [2] (b) New AD is Y = 1,270 - 6P [1]. 1,270 - 6P = 4P + 120 gives P = 115, Y = 580 [1] [2] (c) The cause is a change in interest rates, not in the price level, so AD shifts left [1]. Output moves further below 640 (the gap grows from 40 to 60), so demand-deficient unemployment rises [1] [2] Examiner insight: Say why it is a shift: the cause is not a change in the price level. Refer to the gap to long-run AS to link the result to unemployment.

6. (a) 410 + 95 + 120 + (150 - 135) = 640 [1] [1] (b) New net exports = 132 - 129 = 3, so AD = 410 + 95 + 120 + 3 = 628 [1]. Change = -12 / 640 = -1.9% [1] [2] (c) Lower income reduces spending on imports [1], so imports fell by 6 and partly offset the fall of 18 in exports; AD fell by 12 [1] [2] Examiner insight: Net exports is exports minus imports. Quote the figures from the question to support the explanation.

7. (a) Interest rates: higher rates raise the cost of borrowing and lower the expected return, so fewer projects go ahead [1] and investment falls [1]. Business confidence or expected demand: if firms expect higher sales they plan to add capacity [1], so investment rises [1] [4] (b) Investment depends on the rate of change of demand [1]. Growth slowing from 6% to 3% means fewer extra machines are needed, so net investment falls although output continues to grow [1] [2] Examiner insight: Name each determinant and give its direction of effect. For the accelerator, contrast the level of output with the rate of change.

8. (a) Year 1 saving = 520 - 468 = 52, which is 10.0% [1]. Year 2 saving = 560 - 495 = 65 [1], which is 11.6% [1] [3] (b) Saving is income not spent, a withdrawal mainly made by households [1]. Investment is spending on capital goods, an injection mainly made by firms for expected profit [1] [2] Examiner insight: A difference needs both sides compared. Buying shares or putting money in a bank is saving, not the economic meaning of investment.

9. (a) Fewer exports, so the AD curve shifts left [1]. The new equilibrium is where the new AD meets short-run AS [1]. The price level and real output both fall [1] [3] (b) Dearer imported energy raises firms’ costs [1], so the short-run AS curve shifts left [1]. Output falls while the general level of prices goes up [1] [3] Examiner insight: Say which curve moves and which way, then read off both variables. After a demand shock both variables move the same way; after a supply shock they move in opposite ways.

10. Real national income shows the volume of output once price changes are removed [1]. Growth means more goods and services and usually more jobs and higher incomes [1]. But if population grows faster, income per head falls, as with real growth of 3% and population growth of 2%, which gives about 1% per head [1]. It says nothing about distribution, since gains may go to a few households [1]. It leaves out unpaid and informal work, pollution and leisure [1]. Other indicators, such as unemployment, inflation and the current account, show whether growth is sustainable [1]. Real growth that comes from using spare capacity differs from a rise in capacity [1]. Judgement: it is a necessary but incomplete indicator, best used per head and alongside other measures [1] [8] Examiner insight: A list of limits earns less than limits weighed against the benefits. End with a judgement that follows from your points.

11. Exports are an injection [1], so a fall shifts AD left [1]. Income, output and employment fall until withdrawals again equal injections [1]. The size depends on the share of exports in AD [1] and on how much spare capacity exists [1]. Imports fall as income falls, which offsets part of the loss [1]. A weaker exchange rate can help restore competitiveness, although with a delay [1]. Exporting firms may find new markets, so the effect can fade [1]. If the economy was overheating, a fall in AD may ease inflation [1]. Judgement: the effect is likely to be large and damaging in the short run for an open economy near full employment, but smaller where exports are a small share or the currency adjusts [1]. [10] Examiner insight: Strong answers combine the circular flow and the AD/AS diagram, then test the conclusion with conditions such as size, spare capacity and time period.

Where marks are usually lost

• Using nominal income when real income or real growth is asked.
• Dividing the gap by equilibrium income instead of full employment income.
• Writing saving equals investment as the equilibrium condition.
• Not naming the withdrawal or injection when classifying a flow.
• Shifting a curve for a change in the price level, or moving along it for a change in confidence.
• Describing a shock without stating what happens to both price level and output.
• Treating investment and saving as the same thing.
• Giving a list of points in an evaluation with no judgement.

Next steps

• Re-read the revision notes.
• Visit the AQA A-level Economics hub and tick off topics on the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Source: the AS and A-level Economics specification published by AQA (7135/7136, version 1.3, 29 June 2022), content sections 4.2.2.1 to 4.2.2.3 in the PDF (3.2.2.1 to 3.2.2.3 on the AQA website).