Cambridge A Level Economics: Growth, output gaps, the business cycle and policies (9708) – 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 outcomes 9.2.1 to 9.2.4 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 9 is A Level content. All countries and figures are invented. Read the study guide and revision notes first. Course links: hub, checklist and free 10-minute diagnostics.

Questions

1. Distinguish between actual growth and potential growth. [2]

2. Country A has actual output of 1,368 and potential output of 1,440. Calculate the output gap as a percentage of potential output and state what type of gap it is. [3]

3. In Country B, actual output rises from 470 to 487.9 and potential output from 500 to 512.5.

(a) Calculate actual growth and potential growth. [2] (b) Calculate the output gap before and after, and explain what has happened to it. [2]

4. Explain two consequences of a positive output gap. [4]

5. Explain, with reference to an aggregate demand and aggregate supply diagram, how actual growth can occur without potential growth. [5]

6. Country C has annual real GDP growth of 3.8%, 1.4%, −1.1%, −2.3%, 0.9% and 3.2% in years 1 to 6. Real GDP at the start of year 1 is an index of 100.

(a) Calculate the index at the end of year 2 and at the end of year 4. [2] (b) Identify the phase of the cycle in year 3, at the end of year 4 and in year 5, and show whether output in year 5 has regained its earlier peak. [3]

7. In Country D, mps = 0.15, the marginal rate of tax = 0.25 and mpm = 0.20. Exports fall by 36.

(a) Calculate the multiplier and the fall in national income. [3] (b) Calculate the fall in income if there were no income-linked taxes, and comment. [2] (c) Calculate the fall in tax revenue in the original case. [1]

8. Distinguish between an automatic stabiliser and discretionary fiscal policy, giving an example of each. [4]

9. In Country E, potential output is 600. The labour force grows by 1.8% and output per worker by 2.2%.

(a) Calculate potential growth and the new level of potential output. [3] (b) Explain two supply-side policies that could raise output per worker. [4] (c) State one reason actual growth could still be below potential growth. [1]

10. Country F has potential output of 1,800 and actual output of 1,740. The marginal rate of tax is 0.25, mps is 0.10 and mpm is 0.15.

(a) Calculate the output gap as a percentage. [2] (b) Calculate the rise in government spending needed to close the gap. [2] (c) Government spending rises by 24. Calculate the new gap. [2] (d) Explain why the same rise would be harmful if actual output were 1,890. [3]

11. Evaluate whether supply-side policies are more effective than demand-side policies in promoting economic growth. [12]

Answers

1. Actual growth is a rise in real GDP [1]. Potential growth is a rise in the economy’s productive capacity [1]. [2] Examiner insight: Answers gain credit by contrasting output with capacity. Two definitions that never compare them tend to be thin.

2. Gap = 1,368 − 1,440 = −72 [1]; −72 / 1,440 × 100 = −5.0% [1]. Actual output is below potential, so it is a negative gap [1]. [3] Examiner insight: Divide by potential output. Giving the sign and the type in words as well as the number protects the final mark.

3. (a) Actual: (487.9 − 470) / 470 = 3.8% [1]. Potential: (512.5 − 500) / 500 = 2.5% [1]. [2] (b) Before: (470 − 500) / 500 = −6.0%. After: (487.9 − 512.5) / 512.5 = −4.8% [1]. The gap narrows because actual growth (3.8%) exceeds potential growth (2.5%), but spare capacity remains [1]. [2] Examiner insight: A comment on the gap needs the cause, which is the comparison of the two growth rates.

4. Inflation: demand exceeds sustainable supply [1], so firms raise prices and labour shortages push up wages and costs [1]. Current account: strong demand pulls in imports [1], so net exports fall and the deficit may widen [1]. (Other valid: unemployment below its natural rate; unsustainable growth; pressure for tighter policy.) [4] Examiner insight: Each consequence needs a development, not just a label. A list of four labels earns less than two chains.

5. Start from a negative gap, with spare capacity [1]. A rise in AD, from consumption, investment, government spending or net exports, shifts AD right [1]. Real GDP rises along the short-run aggregate supply curve [1]. The long-run aggregate supply line does not move, so capacity is unchanged [1]. Once output reaches capacity, extra demand mainly raises the price level and the growth cannot be sustained [1]. [5] Examiner insight: Name the curves and the equilibrium. A shift of AD with no mention of spare capacity does not show why potential output is unchanged.

6. (a) End of year 2: 100 × 1.038 × 1.014 = 105.25 [1]. End of year 4: 105.25 × 0.989 × 0.977 = 101.70 [1]. [2] (b) Year 3: output falls, so a downturn into recession [1]. End of year 4: output at its lowest, the trough [1]. Year 5: recovery, but 101.70 × 1.009 = 102.62, still below the earlier peak of 105.25 [1]. [3] Examiner insight: Phase labels should rest on the evidence. Quote the growth sign or the index.

7. (a) Multiplier = 1 / (0.15 + 0.25 + 0.20) = 1 / 0.60 = 1.67 [1]. Fall = 36 × 1.667 [1] = 60 [1]. [3] (b) Without taxes: 1 / (0.15 + 0.20) = 2.86; fall = 36 × 2.857 = 102.9 [1]. Income-linked taxes cut the multiplier and reduce the fall, which is the stabilising effect [1]. [2] (c) 60 × 0.25 = 15 [1]. [1] Examiner insight: Show the multiplier before using it, and state the comparison in words.

8. An automatic stabiliser changes automatically with the level of income, with no new decision [1], for example progressive income tax or unemployment benefit [1]. Discretionary policy is a deliberate government decision to change spending or taxes [1], for example a new infrastructure programme or a tax cut announced in a budget [1]. [4] Examiner insight: Pair each definition with an example that fits it.

9. (a) 1.018 × 1.022 = 1.0404 [1]. Growth = 4.04% [1]. New potential = 600 × 1.0404 = 624.2 [1]. [3] (b) Education and training raises skills [1], so each worker produces more [1]. Tax incentives for investment encourage firms to buy capital [1], giving workers more equipment [1]. [4] (c) Weak aggregate demand leaves resources unused [1]. [1] Examiner insight: A policy needs a route to output per worker. Naming a policy alone gains little.

10. (a) (1,740 − 1,800) / 1,800 × 100 = −3.33% [1]. The gap is −60 [1]. [2] (b) Multiplier = 1 / (0.25 + 0.10 + 0.15) = 2 [1]. Spending = 60 / 2 = 30 [1]. [2] (c) 24 × 2 = 48, so output = 1,788 [1]. Gap = −12 / 1,800 = −0.67% [1]. [2] (d) Gap would be 90 / 1,800 = +5.0% [1]. Output would rise to 1,938, a gap of +7.67% [1]. Demand would exceed capacity, causing inflation and import growth instead of lasting growth [1]. [3] Examiner insight: A calculation that feeds a later part is easier to follow when each result is stated clearly.

11. Supply-side policies raise potential growth: education, training, infrastructure and R&D raise productivity and shift LRAS right [1]. This allows output to rise without inflation pressure and is lasting [1]. Demand-side policies raise actual growth: fiscal or monetary stimulus shifts AD right, and the multiplier magnifies it [1]. Demand-side policy is effective when there is a negative gap, because spare resources are used [1]. Supply-side policy has long lags: education pays back only as people join the workforce [1]. It is costly and its results are uncertain [1]. Demand-side policy acts faster, which matters in a recession [1]. Demand-side policy near capacity raises prices, not output [1]. Evaluation: the answer depends on the gap, so supply-side policy is more effective when the gap is positive or zero [1]. Crowding out and borrowing can limit fiscal stimulus [1]. Supply-side policies can have unequal effects or cost jobs, such as through deregulation or trade opening [1]. A reasoned judgement: supply-side policy is more effective for sustained growth, while demand-side policy is better for a deep negative gap, so a mix is best [1]. [12] Examiner insight: Strong essays judge the policies against a stated context, such as the gap or the time horizon, rather than listing them.

Where marks are usually lost

• Dividing the gap by actual output.
• Defining potential growth as growth in AD.
• Describing a stabiliser as a decision by the government.
• Giving the multiplier with no working.
• Stating a phase of the cycle without evidence.
• Ignoring the sign of the gap when discussing stimulus.
• Listing policies without effects, lags or costs.
• Evaluating with only “it depends” and no stated condition.

Next steps

• Re-read the revision notes and study guide.
• Use the Cambridge A Level Economics hub and checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics (9708), syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education), sections 9.2.1 to 9.2.4.