Cambridge O Level Economics: Economic growth and recession (2281) – 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.

This set tests section 4.6 (Economic growth) of the Cambridge O Level Economics 2281 syllabus for 2026, which belongs to topic 4, Government and the macroeconomy. The countries and numbers are made up. If you get stuck, read the study guide or the revision notes. The wider course is on the hub page and the checklist.

Questions

1. Define economic growth. [2]

2. Country G (invented) uses year 1 as its base year, with a price index of 100 and nominal GDP of 800 billion currency units. In year 2 nominal GDP is 918 billion and the price index is 108.

(a) Work out real GDP in year 2. [2] (b) Find the growth rate of real GDP from year 1 to year 2. [2] (c) Explain why the growth in nominal GDP is not a good measure of economic growth. [2]

3. Country H is invented. In year 1 real GDP is 1,260 billion with a population of 21.0 million. In year 2 real GDP is 1,323 billion with a population of 21.4 million.

(a) Find GDP per head for each year. [2] (b) Find the percentage change in GDP per head and comment on what it shows that total real GDP does not. [3]

4. State what is meant by a recession and explain where an economy in recession is on its production possibility curve (PPC). [3]

5. Explain two possible causes of a recession. [4]

6. Country K is invented. Its real GDP, in billions, is 400 in quarter 1, 396 in quarter 2, 391 in quarter 3, 385 in quarter 4 and 388 in quarter 5. The government collects tax equal to 22% of real GDP.

(a) Identify, with a reason, whether the economy was in recession. [2] (b) Calculate the percentage fall in real GDP from quarter 1 to quarter 4. [2] (c) Calculate the fall in tax revenue between quarter 1 and quarter 4. [2] (d) Explain one other consequence of the recession for the government’s finances. [2]

7. An economy makes capital goods and consumer goods and is at a point inside its PPC. For each event, state whether it causes a movement toward the PPC or a shift of the PPC, and explain.

(a) Many unemployed workers are hired after a rise in consumer spending. [2] (b) A new invention lets each worker produce more of both goods. [2]

8. In Country L (invented), employment rises by 0.8% and output per worker rises by 1.6%. Population rises by 0.5%.

(a) Calculate the growth in real GDP. [2] (b) Calculate the change in real GDP per head. [2]

9. Explain three ways in which the quantity or quality of the factors of production can lead to economic growth. [6]

10. Explain two benefits and two costs of economic growth for a low-income economy. [6]

11. A government in an economy with high unemployment and spare capacity is choosing between a cut in income tax and spending more on training for workers. Evaluate which policy is more likely to promote growth. [6]

12. Country M is invented. Its real GDP grows by 4.0% a year, but its population grows by 4.5% a year. Its government says that the economy is doing well because output is rising. Most of the extra output comes from a mining industry that is polluting rivers.

(a) Find the annual change in real GDP per head. [2] (b) Discuss whether the government is right to say the economy is doing well. [6]

Answers

1. A rise in how much an economy produces [1] from one period to the next, measured by the percentage increase in real GDP [1]. [2] Examiner insight: “GDP going up” on its own is a weak definition; it reads better when it says output has risen over time and that real, not nominal, GDP is the measure.

2. (a) Real GDP = 918 / 108 x 100 [1] = 850 billion [1]. (b) (850 - 800) / 800 x 100 [1] = 6.25% [1]. (c) A higher price level lifts nominal GDP even if output is unchanged [1]. Nominal GDP grew 14.75%, but part of this was inflation, so output grew only 6.25% [1]. [6 in total] Examiner insight: In part (c) a general statement is stronger when you use the numbers in the question to show the gap between 14.75% and 6.25%.

3. (a) Year 1: 1,260 / 21.0 = 60.0 [1]. Year 2: 1,323 / 21.4 = 61.82 [1]. (b) (61.82 - 60.0) / 60.0 x 100 = 3.04% [1]. Total real GDP grew 5.0% [1], but population grew 1.9%, so the average person gained less than the total suggests, because output is shared among more people [1]. [5 in total] Examiner insight: Show the division by the earlier year when you find a percentage change; answers that divide by the new figure usually end with the wrong number.

4. A recession is a period when real GDP falls [1], often judged by the common rule of thumb of two consecutive quarters of falling real GDP. The economy is inside its PPC [1] because resources such as labour and capital are unemployed or underused, and the recession takes it further inside [1]. [3] Examiner insight: Saying the PPC “shifts in” is a common slip; the curve stays where it is and the economy’s position moves away from it.

5. Cause 1: a fall in consumer spending, for example because households fear losing their jobs [1]. Firms then sell less, cut output and jobs, and falling incomes cut spending further [1]. Cause 2: higher interest rates (or a banking crisis that limits lending) [1], which makes borrowing for investment and spending more costly or impossible, so total demand falls and output falls [1]. [4] Examiner insight: Each cause gains most when it is followed by its link to lower output; naming causes alone tends to leave the explanation incomplete.

6. (a) Real GDP fell in quarters 2, 3 and 4 [1], so there were consecutive falls, which meets the common two-quarter rule of thumb [1]. (b) (385 - 400) / 400 x 100 [1] = -3.75% (a fall of 3.75%) [1]. (c) Tax in quarter 1 = 0.22 x 400 = 88 [1]. Tax in quarter 4 = 0.22 x 385 = 84.7, so tax revenue fell by 3.3 billion [1]. (d) Unemployment rises in a recession [1], so the government pays more in unemployment benefits, and its budget deficit grows [1]. [8 in total] Examiner insight: A consequence for the government’s finances needs both sides, falling revenue and rising spending; part (d) asks for another consequence, so do not repeat the tax point.

7. (a) A movement toward the PPC [1], because workers who were unemployed are now used, so output rises without any increase in capacity [1]. (b) A shift of the PPC to the right [1], because better technology raises the maximum output the economy can produce, so capacity has grown [1]. [4 in total] Examiner insight: Giving only the label gains little; the reason, idle resources used versus capacity raised, is what separates the two answers.

8. (a) 1.008 x 1.016 - 1 [1] = 2.41% [1]. (b) 1.0241 / 1.005 - 1 [1] = 1.90% [1]. [4 in total] Examiner insight: Show that you combine growth rates by multiplying; adding 0.8 and 1.6 to get 2.4% is close here but is the wrong method.

9. Any three of: more workers (a larger labour force) increase the quantity of labour, so more can be produced [2]. Better education and training raise the quality of labour and so output per worker [2]. More capital (machines, factories) raises capacity and productivity [2]. Newly discovered natural resources raise the quantity of land, and better health makes workers more productive. Each way gains two marks, for the factor and its link to higher output. [6] Examiner insight: A named factor with no link to output is thin; explain how the change raises what the economy can produce.

10. Benefit 1: higher incomes can reduce poverty [1] and let households afford food, health and schooling [1]. Benefit 2: more tax revenue lets the government spend on infrastructure, health and education [1]. Cost 1: environmental damage and resource depletion if growth relies on extraction [1], which harms people who depend on farming or fishing [1]. Cost 2: inequality can widen if the gains go to a small group [1]. [6] Examiner insight: Linking each point to a low-income economy, such as basic needs or dependence on farming, shows you are answering for that economy and not any economy.

11. Tax cut: leaves households with more income, so spending rises and idle resources are used [1]. It works fairly quickly [1]. It may be saved or spent on imports, and it reduces government revenue [1]. Training: raises labour quality and productivity, shifting the PPC outward [1], but results take years and it does not directly use the idle resources [1]. Judgement: with unemployment and spare capacity, the tax cut is the quicker route to growth, while training builds lasting capacity; a good answer reaches a supported conclusion [1]. [6] Examiner insight: An evaluation gains most when it ends with a judgement tied to the conditions in the question, here spare capacity, and not a bare list.

12. (a) 1.040 / 1.045 - 1 [1] = -0.48% [1]. (b) For: output is rising, which creates jobs and tax revenue [1]. Against: GDP per head is falling, so the average person has less output [1]. Against: pollution harms health, fishing and farming, and is not counted as a cost in GDP [1]. Against: growth from one polluting industry may not be lasting and may widen inequality [1]. Judgement: output growth alone does not show a better standard of living, so the government is only partly right [1]. Use the figures: 4.0% growth is outpaced by 4.5% population growth [1]. [8 in total] Examiner insight: Use the numbers in the question when you discuss; a judgement supported by the fall in GDP per head tends to carry more weight than one with no evidence.

Where marks are usually lost

• Using nominal figures for growth without dividing by the price index.
• Dividing by the later year when finding a percentage change.
• Giving growth in total GDP when the question asks about GDP per head.
• Adding growth rates instead of multiplying them.
• Drawing a recession as an inward shift of the PPC.
• Stating a cause of recession and stopping before the fall in output.
• Writing one-sided answers on the costs and benefits of growth.
• Failing to link points to the type of economy named in the question.
• Describing policies with no comment on effectiveness or side effects.

Next steps

• Go over the revision notes and the study guide.
• Visit the course hub and the checklist.
• Try a free 10-minute diagnostic.
• Book a free trial class.

Official syllabus

Cambridge O Level Economics 2281, syllabus for examination in 2026 (version 2), published by Cambridge University Press & Assessment (Cambridge International), section 4.6.