AQA A-level Economics: Economic growth and the economic cycle (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 “Economic growth and the economic cycle” in the AQA A-level Economics (7136) specification, version 1.3, numbered 3.2.3.1 on the AQA website (4.2.3.1 in the combined PDF). All countries and figures are invented. Read the study guide first, then the revision notes. The course hub, checklist and diagnostics are linked below too.

Questions

1. Explain what is meant by long-run economic growth. [2]

2. Country B is an illustrative economy.

(a) Its real GDP rises from 640 to 652.8. Calculate the growth rate. [2] (b) Its nominal GDP rises by 9.2% while its price level rises by 4.0%. Calculate the growth in real GDP. [3]

3. Country C’s potential output is 720 and its actual real GDP is 698.4. Calculate the output gap and state what it shows. [4]

4. Using a production possibility curve, explain the difference between short-run and long-run economic growth. [4]

5. The table shows invented data for Country D.

Year	Real GDP growth	Inflation	Unemployment	Investment growth
1	+4.2%	4.8%	4.1%	+9%
2	+0.8%	4.0%	4.3%	-3%
3	-1.9%	2.1%	6.0%	-12%
4	+3.1%	1.4%	5.4%	+6%

Identify the likely phase of the cycle in each year and justify each using the data. [4]

6. Explain two supply-side determinants of the long-run trend rate of growth. [4]

7. Country E imports most of its energy. World energy prices rise sharply. Using an AD/AS diagram described in words, analyse the likely effect on Country E’s economy. [5]

8. In Country A an index of house prices rises from 100 to 150 and then falls to 105.

(a) Calculate the percentage fall from the peak. [2] (b) Explain how an asset price bubble can contribute to a recession. [4]

9. Households in Country G owe debt equal to 110% of annual income.

(a) Calculate the interest payments as a percentage of income when the interest rate is 3% and when it is 6%. [3] (b) Assess whether a rise in interest rates would cause a downturn. [5]

10. Between two years, Country H’s real GDP index rises from 100 to 124 and its emissions index rises from 100 to 111.

(a) Calculate the change in emissions per unit of output. [3] (b) Evaluate whether this growth is sustainable. [6]

11. Country J raises its trend rate of growth from 2% to 3% a year through higher investment. Evaluate the costs and benefits for individuals, the economy and the environment. [10]

Answers

1. An increase in the productive capacity of the economy [1], shown as an outward shift of the PPC or LRAS and measured by the trend rate of growth of real output over time [1]. [2] Examiner insight: Answers that mention capacity and the time dimension give a complete definition; a bare “rise in GDP” does not separate long-run from short-run growth.

2. (a) (652.8 − 640)/640 [1] × 100 = 2.0% [1] (b) Real growth = 1.092/1.04 − 1 [1] = 1.05 − 1 [1] = 5.0% [1]. A subtraction (9.2 − 4.0) gives 5.2%, which is not accurate. Examiner insight: On real growth, show the deflating step; subtracting inflation from nominal growth is an approximation and the working shows you know the difference.

3. Gap = (698.4 − 720)/720 [1] × 100 [1] = −3.0% [1]. Real GDP is 3.0% below productive potential, a negative output gap with spare capacity [1]. [4] Examiner insight: Dividing by actual output instead of potential is a common slip; also state what the sign means, because the figure alone does not interpret the result.

4. Short-run growth: the economy moves from a point inside the PPC to a point nearer the curve as unemployed resources are used, so actual output rises [1] without any change in capacity [1]. Long-run growth: the whole PPC shifts outward because the quantity or quality of resources, or technology, improves [1], so a higher level of output becomes attainable [1]. [4] Examiner insight: Name the axes and say whether a point moves or the curve shifts; a movement along the curve is opportunity cost, not growth.

5. Year 1: boom [1], as growth is strong, inflation is high, unemployment is low and investment is rising. Year 2: slowdown [1], as growth falls to +0.8% and investment is falling, although output is still rising. Year 3: recession [1], as real GDP falls, investment drops sharply and unemployment rises. Year 4: recovery [1], as growth returns and investment rises, while unemployment is still high. [4] Examiner insight: Use more than one indicator per phase and note any lagging one, such as unemployment; a verdict based on a single column is weak.

6. Capital stock: higher investment in machinery and infrastructure raises the capacity of firms to produce [1], so LRAS shifts right and the trend rate rises [1]. Labour quality: better education and training raise productivity per worker [1], which increases potential output over time [1]. [4] Examiner insight: Each determinant needs a link to capacity; naming a factor without saying how it raises potential output leaves the reasoning incomplete.

7. World energy prices raise firms’ costs [1]. SRAS shifts left [1]. In the diagram, the new SRAS crosses AD at a higher price level [1] and lower real GDP [1]. Inflation rises while output falls, and a negative output gap may open and unemployment may rise, so the shock is stagflationary [1]. [5] Examiner insight: State the direction of each variable on the diagram; naming the curve that shifts is worth little unless both the price level and real GDP are described.

8. (a) (105 − 150)/150 × 100 [1] = −30.0% [1] (b) Rising prices raise wealth and the value of collateral, so households borrow and spend more [1], which lifts AD in the boom [1]. When prices fall, owners with large loans may be in negative equity [1], so they cut spending and banks cut lending, shifting AD left and reducing output [1]. [6] Examiner insight: Link each step to AD or spending; stopping at “house prices fall” without the transmission to output gives only part of the chain.

9. (a) Interest burden = debt/income × rate. At 3%: 1.10 × 3% [1] = 3.3% of income. At 6%: 1.10 × 6% [1] = 6.6% of income [1]. (b) Doubling the rate doubles the burden [1], leaving less income for spending, so consumption and AD may fall [1]. However, the effect depends on how many households have variable-rate debt [1], whether incomes are growing [1], and whether savers, who gain, offset some of the loss. The overall judgement is that a downturn is likely if debt is widespread and rates rise quickly, but not certain [1]. [8] Examiner insight: An assessment needs a judgement with a reason, such as the debt distribution; a one-sided list of effects stays at description.

10. (a) Emissions per unit of output = 111/124 [1] = 0.895 [1], so a fall of 10.5% [1]. (b) Emissions per unit of output fall, so growth is cleaner [1]. However, total emissions are 11% higher [1], so total pressure on the environment has increased [1]. Sustainability depends on whether technology continues to improve faster than output grows [1], whether policy such as carbon pricing is in place [1], and on the time period, since the damage may fall on later generations. Overall it is not yet sustainable, though the trend is in the right direction [1]. [9] Examiner insight: Compare the intensity figure with the absolute total, and finish with a judgement; the numbers support both views.

11. Benefits: individuals gain higher incomes and more jobs [1], and a 3% trend roughly doubles output in about 23 years compared with 35 years at 2%, using 70 divided by the rate [1]. The economy gains tax revenue for public services [1] and a larger capital stock [1]. Costs: higher investment means less consumption now [1], inequality may widen if gains go to owners of capital [1], and imports and resource use may rise, so emissions and depletion increase [1]. Evaluation: the net effect depends on the type of investment, such as green technology [1], on whether growth per head rises as population changes [1], and on the time period, since costs come first and benefits later [1]. [10] Examiner insight: Cover all three groups the question names and make a judgement; listing benefits and costs but never weighing them leaves the answer unfinished.

Where marks are usually lost

• Treating any rise in output as long-run growth.
• Subtracting inflation from nominal growth instead of deflating.
• Dividing an output gap by actual GDP and dropping the sign.
• Describing a shock without saying which curve shifts and which way.
• Reading the phase of the cycle from one indicator.
• Describing a PPC shift for a recovery from recession.
• Stopping the bubble chain before it reaches spending and output.
• Giving a list of costs and benefits with no judgement about size or timing.

Next steps

• Re-read the revision notes and the study guide.
• Visit the AQA A-level Economics hub and the checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

AQA, AS and A-level Economics (7135 and 7136), specification version 1.3, 29 June 2022, section 3.2.3.1 on the AQA website (4.2.3.1 in the combined PDF).