AQA A-level Economics: Supply-side policies (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 follow the AQA AS and A-level Economics specification, version 1.3: supply-side policies, A-level sub-section 3.2.5.2 on the AQA website (4.2.5.2 in the combined PDF). All countries, firms and figures are invented. Use the study guide and revision notes first. The course hub is AQA A-level Economics, and the printable checklist tracks progress. The free diagnostics help you find weak spots.

Questions

1. Explain the difference between a supply-side improvement and a supply-side policy, and illustrate each with an example of your own. [4]

2. In Country M the marginal rate of income tax falls from 28% to 22%. A worker earns an extra 600 cu.

(a) Calculate the percentage rise in the worker’s net reward from the extra 600 cu. [2] (b) Total hours worked are 1,500 million and output is 28 cu per hour. Hours respond with an elasticity of 0.5 to the net reward. Calculate the extra output. [3]

3. Country M has a labour force of 32 million. Its natural rate of unemployment falls from 7.5% to 6.25% after a retraining programme.

(a) Calculate the fall in the number of people unemployed at the natural rate. [2] (b) Explain one way in which retraining can reduce the natural rate. [2]

4. Classify each measure as free-market or interventionist, and explain how each could raise potential output: an investment allowance against corporation tax; publicly funded apprenticeships; the sale of a state-owned bus company to private owners. [6]

5. A firm pays 32 cu an hour and produces 40 units an hour.

(a) Calculate its unit labour cost. [1] (b) Wages rise 4% and output rises to 44 units an hour. Calculate the new unit labour cost and its percentage change. [2] (c) Explain why this matters for the rate of change of prices. [2]

6. Country M exports 250 and imports 270 (billion cu).

(a) Supply-side improvements raise exports by 6% and cut imports by 2%. Calculate the new balance of trade in goods and services. [3] (b) Explain two reasons why the current account balance might not improve as much as this. [2]

7. In a local market for freight handling, demand is Qd = 200 − 5P and supply is Qs = 40 + 3P. Deregulation lets new firms enter, and supply becomes Qs = 72 + 3P.

(a) Find the original equilibrium price and quantity. [2] (b) Find the new equilibrium price and quantity. [2] (c) State the percentage changes in price and quantity, and name one group likely to lose. [2]

8. A firm can spend 150 million cu on a project returning 45 million cu a year for 5 years. Its discount rate is 10%.

(a) Calculate the payback period. [1] (b) Calculate the net present value, using an annuity factor of 3.791. [2] (c) Explain how short-termism could lead to this project being rejected, and one policy response. [3]

9. A research project costs 12 million cu. The firm gains 9 million cu and spillovers to others are worth 6 million cu. The government offers a 40% subsidy on cost.

(a) Calculate the firm’s net gain without the subsidy and the social net gain. [2] (b) Calculate the firm’s net gain with the subsidy. [2] (c) Calculate the cost to the government. [1] (d) Evaluate whether the subsidy is good value. [2]

10. Explain, using an example, why supply-side changes often originate in the private sector and why this makes it harder to judge a policy. [4]

11. “Interventionist supply-side policies are more effective than free-market policies at raising the trend rate of growth.” Evaluate this view. [9]

12. A training scheme costs 450 million cu and trains 20,000 workers. Each earns 3,500 cu more a year for 10 years.

(a) Calculate the cost per worker, the annual gain for the group, the payback period, and say whether the scheme is worthwhile if the present value of the gains at 4% is 567.8 million cu. [4] (b) Policies raise trend growth from 2.0% to 2.3% for 15 years. Calculate how much higher potential output is than it would have been. [3] (c) Assess whether cutting taxes is the best way to achieve this. [5]

Answers

1. A supply-side improvement is any rise in productive capacity or efficiency, from any source [1]. A supply-side policy is a deliberate government action intended to bring such a rise about [1]. Example of improvement: a firm adopts faster machinery on its own initiative [1]. Example of policy: government funds training [1]. [4] Examiner insight: Define each term, then contrast them; examples alone rarely answer a “distinguish” command.

2. (a) Net reward before: 600 × 0.72 = 432 [1]. After: 600 × 0.78 = 468, a rise of 36/432 = 8.3% [1]. (b) Hours rise 0.5 × 8.33% = 4.17% [1]. Extra hours: 1,500 × 0.0417 = 62.5 million [1]. Extra output: 62.5 × 28 = 1,750 million cu [1]. [5] Examiner insight: Show each step; a clear chain of arithmetic is easier to follow and to credit.

3. (a) Before: 32 × 0.075 = 2.4 million [1]. After: 32 × 0.0625 = 2.0 million, so a fall of 0.4 million [1]. (b) Retraining gives workers skills that match vacancies [1], so structural unemployment falls and the equilibrium rate is lower [1]. [4] Examiner insight: Say that it is the natural rate, not just the actual rate, that falls and name the type of unemployment affected.

4. Investment allowance: free-market [1]; it raises the post-tax return on investment, so firms add capital and capacity [1]. Apprenticeships: interventionist [1]; they raise the skills and productivity of labour [1]. Sale of the bus company: free-market [1]; private owners with a profit motive have an incentive to cut costs, especially if competition increases [1]. [6] Examiner insight: Pair each label with a mechanism. A classification alone gives a reader little to credit.

5. (a) 32/40 = 0.80 cu per unit [1]. (b) New wage 33.28 cu; 33.28/44 = 0.756 cu [1]. Change: 0.756/0.80 − 1 = −5.5% [1]. (c) Lower unit labour costs reduce firms’ costs of production [1], so firms can hold or lower prices, reducing the rate of change of prices [1]. [5] Examiner insight: Productivity must rise faster than wages for unit costs to fall; state that comparison explicitly.

6. (a) Exports: 250 × 1.06 = 265 [1]. Imports: 270 × 0.98 = 264.6 [1]. Balance: 265 − 264.6 = +0.4 billion cu [1]. (b) The current account also includes income and transfers, which may move the other way [1]. Foreign demand, the exchange rate or retaliation could offset gains, and benefits take time [1]. [5] Examiner insight: Keep calculations to the figures given; save wider qualifications for the explanation.

7. (a) 200 − 5P = 40 + 3P gives 160 = 8P, so P = 20 [1] and Q = 100 [1]. (b) 200 − 5P = 72 + 3P gives 128 = 8P, so P = 16 [1] and Q = 120 [1]. (c) Price falls 20% and quantity rises 20% [1]. Existing firms protected by the old rules, or their workers, may lose [1]. [6] Examiner insight: Describe the diagram in words: supply shifts right, price falls, quantity rises. Naming both curves and the new equilibrium keeps the answer precise.

8. (a) 150/45 = 3.33 years [1]. (b) Present value of returns: 45 × 3.791 = 170.6 [1]. NPV: 170.6 − 150 = +20.6 million cu [1]. (c) A firm demanding payback within, say, three years would reject the project even though NPV is positive [1], because managers or shareholders put too little weight on later returns [1]. A tax allowance or subsidy for investment could raise the private return [1]. [6] Examiner insight: Link short-termism explicitly to under-investment compared with the socially desirable level, then offer a policy that targets that gap.

9. (a) Firm: 9 − 12 = −3 million cu [1]. Social: 9 + 6 − 12 = +3 million cu [1]. (b) Firm pays 12 × 0.6 = 7.2 [1]. Net gain: 9 − 7.2 = +1.8 million cu [1]. (c) 12 × 0.4 = 4.8 million cu [1]. (d) Social gain of 3 million cu for a cost of 4.8 million cu looks poor value if only this project counts [1], but the spillover estimate is uncertain and the subsidy only gives value if the project would not happen without it [1]. [7] Examiner insight: A numerical judgement is strongest when you compare two figures and then state what the answer depends on.

10. Firms invest in machinery and train staff to cut costs or win customers [1]. For example, a bakery chain buys faster ovens and raises output per worker [1]. Such gains happen without government action [1], so it is hard to separate the effect of a policy from what the private sector would have done anyway [1]. [4] Examiner insight: Use a concrete example and state the consequence for judging policy.

11. Interventionist policies such as training and R&D subsidies address market failures like under-provision of skills and spillovers [1]. They raise human capital and innovation, which raise productivity over the long run [1]. They can reach areas the market ignores [1]. However, they are costly and slow, with long time lags [1]. Government may pick the wrong industries or waste money [1]. Free-market policies such as tax cuts, deregulation and privatisation improve incentives and competition [1] and may act faster and at lower direct cost [1]. They may do little where the problem is a skills gap or short-termism [1]. Judgement: the answer depends on the cause of weak growth in the economy concerned; a mix is likely to be best [1]. [9] Examiner insight: A conclusion that picks a side and names the condition on which it depends is more convincing than a balanced list with no verdict.

12. (a) Cost per worker: 450m/20,000 = 22,500 cu [1]. Annual gain: 20,000 × 3,500 = 70 million cu [1]. Payback: 450/70 = 6.4 years [1]. The present value of 567.8 million exceeds the 450 million cost, so it is worthwhile [1]. (b) 1.02^15 = 1.3459 [1]. 1.023^15 = 1.4065 [1]. Ratio: 4.5% higher [1]. (c) A tax cut can raise incentives to work, save and invest [1], but the response is uncertain, with income effects possibly offsetting [1], and revenue falls [1]. Training or investment in capital may raise productivity more directly, but with a lag [1]. The best policy depends on the cause of low trend growth, so a combination is likely [1]. [12] Examiner insight: Part (c) asks you to assess: weigh alternatives against the aim of trend growth rather than describing tax cuts alone.

Where marks are usually lost

• Confusing a supply-side improvement with a government policy.
• Writing that demand-side policy reduces the natural rate.
• Stating a calculation answer without showing the working or units.
• Giving evaluation points with no application to the policy named in the question.
• Forgetting that the current account includes income and transfers.
• Ignoring time lags in training and R&D policies.
• Ending with no judgement.

Next steps

• Revise with the revision notes.
• Re-read the study guide.
• Check progress on the AQA A-level Economics hub and the printable checklist.
• Take the 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 section 4.2.5.2 in the combined PDF (3.2.5.2 on the AQA website): Supply-side policies. Published by AQA.