Edexcel IAL Economics: Aggregate supply, circular flow, equilibrium (YEC11) – 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 sections 2.3.3 and 2.3.4 items 1 to 3 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (YEC11), Issue 2, June 2018. The specification places this content in Unit 2, an International AS (IAS) unit that carries into the complete International Advanced Level. Every country and number is made up. Read the study guide and the revision notes first if you need to. The course hub, the printable checklist and the free diagnostics are also linked.

Questions

1. State two factors that would shift the short-run aggregate supply curve to the right. [2]

2. Distinguish between a movement along and a shift of an aggregate supply curve. [3]

3. Country D’s firms import fuel priced at 60 units of foreign currency a barrel. The exchange rate falls from 0.50 to 0.40 foreign units per unit of Country D’s currency.

(a) Calculate the cost of a barrel in Country D’s currency before and after the fall. [2] (b) Calculate the percentage change in the cost. [1] (c) Fuel is 20% of a typical firm’s costs. Calculate the effect on its unit costs and state the effect on SRAS. [2]

4. In Country J, the Keynesian AS curve has a price level of 60 until output reaches 400. Between output 400 and 800, price level = 60 + 0.5 × (output − 400). It is vertical at 800.

(a) AD rises so that equilibrium output goes from 300 to 360 in one case and from 600 to 700 in another. Calculate the price level before and after in each case, and the percentage price change in the second. [3] (b) Explain why the price effects differ. [3]

5. Country E has 25 million workers who produce 750 billion currency units. Later, 26 million workers produce 806 billion.

(a) Calculate output per worker in each year. [2] (b) Calculate the percentage growth in output. [1] (c) Calculate the percentage growth in the workforce and in productivity. [2]

6. (a) Distinguish between income and wealth. [2] (b) A household has wealth of 54,000 and saves 5,400 during the year. State its wealth at the end of the year and one assumption you made. [2]

7. Country A has the following flows (cu billion): saving 80, taxation 120, imports 60, investment 90, government expenditure 100, exports 50.

(a) Calculate total withdrawals and total injections. [2] (b) State the net injection or net withdrawal. [1] (c) Predict the direction of change in national output and explain why. [2] (d) Exports then rise by 20. State the new net position. [1]

8. Explain how an increase in government expenditure affects the circular flow of income. [4]

9. In Country G, AD is: output = 1,300 − 5P. SRAS is: output = 700 + 5P. Output is in cu billion.

(a) Calculate the equilibrium price level and output. [3] (b) A fall in energy costs shifts SRAS to: output = 800 + 5P. Calculate the new equilibrium. [2] (c) Calculate the percentage changes in the price level and output between (a) and (b). [2] (d) The new output of 1,050 is the classical LRAS level. AD then rises to: output = 1,400 − 5P. Calculate the long-run price level. [1]

10. In Country G (question 9), a rise in costs shifts SRAS to: output = 640 + 5P, with AD unchanged.

(a) Calculate the new equilibrium price level and output. [2] (b) Explain the effect on the economy compared with the original equilibrium. [2]

11. Evaluate whether an increase in LRAS is a better way to raise real output than an increase in AD for an economy whose LRAS is classical. [10]

Answers

1. A fall in the price of raw materials or energy [1]. A cut in taxes on firms, or a rise in the exchange rate that lowers import costs [1]. [2] Examiner insight: Answers gain credit for naming two different cost factors; two examples of the same factor (for example, oil and gas) may be seen as one idea.

2. A movement along is caused by a change in the price level, with costs and capacity unchanged [1]. A shift happens when something else changes the quantity supplied at every price level [1]. For example, higher energy costs shift SRAS left; they are not a movement along the curve [1]. [3] Examiner insight: A distinction needs both sides stated; giving a definition of one and saying the other is the opposite is thin.

3. (a) Before: 60 ÷ 0.50 = 120 [1]. After: 60 ÷ 0.40 = 150 [1]. (b) (150 − 120) ÷ 120 × 100 = 25% [1]. (c) Unit costs rise by 0.20 × 25% = 5%, and SRAS shifts to the left [1][1]. [5] Examiner insight: Dividing by the exchange rate, not multiplying, is an easy slip; show the working line so that a slip is visible.

4. (a) 300 to 360 is still in the horizontal range, so the price stays at 60 [1]. At 600 the price is 60 + 0.5 × 200 = 160; at 700 it is 60 + 0.5 × 300 = 210 [1]. The change is 50 ÷ 160 = 31.3% [1]. (b) In the first case there is spare capacity, so firms increase output without raising prices [1]. In the second case some resources are scarce [1], so firms compete for them and raise costs and prices as output increases [1]. [6] Examiner insight: Linking the price effect to spare capacity or bottlenecks is what gains credit; naming the Keynesian shape alone does not explain the difference.

5. (a) 750bn ÷ 25m = 30,000; 806bn ÷ 26m = 31,000 [1][1]. (b) 806 ÷ 750 − 1 = 7.5% (7.47%) [1]. (c) Workforce: 26 ÷ 25 − 1 = 4.0% [1]. Productivity: 31,000 ÷ 30,000 − 1 = 3.3% [1]. [5] Examiner insight: Round only at the end and quote the base year; a growth figure with no base is hard to reward.

6. (a) Income is a flow received over a period, such as a year [1]. Wealth is a stock of assets owned at a point in time [1]. (b) 54,000 + 5,400 = 59,400 [1], assuming that asset prices are unchanged [1]. [4] Examiner insight: The words flow and stock, or the idea of per period versus at a point in time, are the usual route to full credit.

7. (a) Withdrawals = 80 + 120 + 60 = 260 [1]; injections = 90 + 100 + 50 = 240 [1]. (b) Net withdrawal of 20 [1]. (c) Output tends to fall [1], because less is injected into the flow than leaves it, so spending on domestic output is below income [1]. (d) Injections = 260, so net position = 0 [1]. [6] Examiner insight: State which side is larger by how much; a sign with no label (for example, minus 20 with no words) can leave the examiner guessing.

8. Government expenditure is an injection [1]. It increases spending on domestic firms [1], so firms hire more or pay more income to households [1]. Households spend part of the extra income, but some leaks as saving, tax and imports [1]. [4] Examiner insight: A chain of linked steps is rewarded; a bare statement that government spending raises output is only a start.

9. (a) 1,300 − 5P = 700 + 5P [1], so 10P = 600 and P = 60 [1]. Output = 1,300 − 300 = 1,000 [1]. (b) 1,300 − 5P = 800 + 5P [1], so P = 50 and output = 1,050 [1]. (c) Price: (50 − 60) ÷ 60 = −16.7% [1]. Output: 50 ÷ 1,000 = +5% [1]. (d) 1,400 − 5P = 1,050 gives P = 70 [1]. [8] Examiner insight: Set out the equation you solve on its own line, so each step is visible.

10. (a) 1,300 − 5P = 640 + 5P [1], so P = 66 and output = 970 [1]. (b) Compared with price 60 and output 1,000, the price level rises by 10% [1] while output falls by 3%, a result of a leftward SRAS shift (cost-push) [1]. [4] Examiner insight: Compare both variables with the starting point; quoting the new values without the comparison leaves the point unfinished.

11. Under classical LRAS the curve is vertical at full employment, so a rise in AD changes prices but not long-run output [1]. A rightward shift of LRAS, through better technology, skills, productivity or net migration, raises capacity [1]. Output then rises and, with unchanged AD, the price level falls [1]. The chain: more capacity, lower unit costs, lower prices [1]. LRAS shifts are slow and costly, as education and technology take years [1]. AD policies can act more quickly [1], but an AD rise beyond capacity only raises prices [1]. If the economy had spare capacity (Keynesian section 1 or 2), AD could raise output without much inflation [1]. So the better choice depends on how close to capacity the economy is, and the time horizon [1]. Judgement: with a classical curve and full employment, a supply-side improvement is better for lasting output, while AD helps only in a downturn [1]. [10] Examiner insight: Credit goes to answers that reach a justified judgement; a list of points for each side with no conclusion leaves the evaluation unfinished.

Where marks are usually lost

• Describing a price-level change as a shift of the AS curve.
• Writing “supply” for “aggregate supply” and mixing market and macro ideas.
• Dividing by the exchange rate the wrong way round.
• Quoting a percentage change without the base value.
• Counting saving, taxes or imports as injections.
• Mixing income and wealth, or flow and stock.
• Giving an unexplained factor, such as “technology”, with no link to capacity or costs.
• Leaving out axes, curve labels or equilibrium points on a diagram.
• Writing a long answer on question 11 with no judgement at the end.

Next steps

• Check your recall with the revision notes.
• Reread the study guide for the worked examples.
• Go to the Edexcel A Level Economics hub and the printable checklist.
• Try all free 10-minute diagnostics at /diagnostics/.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, Pearson Education Limited: Unit 2, sections 2.3.3 and 2.3.4.