Pearson Edexcel International Advanced Level Economics: Supply-side policies (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 statement 3 of 2.3.6 Macroeconomic objectives and policies in the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (Issue 2, June 2018): supply-side policies. Unit 2 is one of the International AS (IAS) units and also counts towards the full International Advanced Level. All countries, firms and figures are invented and illustrative. Teaching is in the study guide and the revision notes; the course hub and printable checklist list the other topics.

Questions

1. State two free market supply-side policies. [2]

2. Country C has 6.0 million workers and real GDP of 270 billion currency units (cu). Four years later, after a training programme, real GDP is 291.6 billion cu with the same number of workers. Calculate the percentage change in output per worker. [3]

3. Consider two groups of policies.

(a) Classify each as free market or interventionist: privatisation of a state airline; regional grants for firms. [2] (b) Explain the difference between a subsidy for new machinery and a cut in corporation tax. [2]

4. In Country D the income tax rate on top earnings is cut from 30% to 25%. The taxable base was 150 billion cu before the cut and rises to 168 billion cu after it.

(a) Calculate the change in tax revenue. [2] (b) Calculate the percentage rise in the base needed to leave revenue unchanged. [2]

5. Out-of-work benefit is 120 cu a week and net pay in a typical job is 200 cu. Benefit is then cut to 100 cu. Calculate the replacement rate before and after the cut, and the percentage rise in the gain from working. [3]

6. Explain how deregulation of a labour market could increase long-run aggregate supply. [5]

7. A scheme gives a 12% subsidy on machinery. 40 firms each buy machinery worth 5 million cu; 24 of them would have bought it without the subsidy. Calculate the cost of the scheme and the cost per cu of additional investment. [4]

8. A government increases spending on a new freight railway and on adult retraining.

(a) Explain how the railway could raise productivity. [3] (b) Explain one weakness of adult retraining as a supply-side policy. [3]

9. Region X has a labour force of 1.5 million and unemployment of 10%. A regional policy creates 30,000 jobs. 24,000 are filled by people who were unemployed in the region, and 6,000 by people from outside who join the regional labour force. Calculate the new unemployment rate to one decimal place. [4]

10. Evaluate the view that privatising a state-owned electricity supplier will improve the supply side of an economy. [8]

11. Assess whether free market supply-side policies are more effective than interventionist policies in raising a country’s long-run growth rate. [10]

Answers

1. Any two from: deregulation of product or labour markets; privatisation; reduction in taxation; changing the level of welfare payments; cutting the costs of bureaucracy for firms. One mark each. [1][1] [2] Examiner insight: A name alone is enough on a “state” question; spending time explaining it gains nothing extra, so move on.

2. Before: 270 billion / 6.0 million = 45,000 cu. [1] After: 291.6 billion / 6.0 million = 48,600 cu. [1] Change: 48,600 / 45,000 - 1 = 8.0%. [1] [3] Examiner insight: Show the two output-per-worker values and use the original as the base; writing only a percentage hides your method if the arithmetic slips.

3. (a) Privatisation is free market. [1] Regional grants are interventionist. [1] (b) A subsidy lowers the cost of capital for chosen spending and costs the government money directly. [1] A corporation tax cut applies to all profit whether or not firms invest, so it is a lower tax on firms rather than a targeted incentive to invest, and it belongs to free market policy. [1] [4] Examiner insight: A comparison needs both items discussed; describing only the subsidy leaves the contrast incomplete.

4. (a) Before: 0.30 x 150 = 45 billion cu. [1] After: 0.25 x 168 = 42 billion cu, a fall of 3 billion cu. [1] (b) Base needed: 45 / 0.25 = 180 billion cu. [1] Rise: 180 / 150 - 1 = 20%. [1] [4] Examiner insight: Set out each revenue figure as rate times base on its own line; clear working lets a reader see your method even if one number slips.

5. Gain before: 200 - 120 = 80 cu; replacement rate 120 / 200 = 60%. [1] After: gain 200 - 100 = 100 cu; rate 100 / 200 = 50%. [1] Rise in gain: 100 / 80 - 1 = 25%. [1] [3] Examiner insight: Be clear which rate is which. Labelled answers show the examiner what each number refers to.

6. Deregulation removes rules on hiring, firing or pay-setting. [1] This lowers the cost and risk to firms of taking on workers. [1] Firms employ more workers or fill vacancies faster, so labour mobility and the matching of workers to jobs improve. [1] Unemployment falls and the labour force is used more fully, raising potential output. [1] LRAS shifts right, from Y1 to Y2 on a diagram with the price level up the side. [1] [5] Examiner insight: An explanation that stops at “firms hire more” describes a short-run effect; carry the chain through to potential output.

7. Cost: 40 x 0.12 x 5 million = 24 million cu. [1] Additional firms: 40 - 24 = 16. [1] Additional investment: 16 x 5 million = 80 million cu. [1] Cost per cu: 24 / 80 = 0.30 cu. [1] [4] Examiner insight: The point of the figure is deadweight: compute spending that changed behaviour, not total spending.

8. (a) A freight railway lowers transport costs and journey times. [1] Firms can reach larger markets and spend less on getting inputs in and goods out. [1] Lower costs and faster delivery mean more output from the same inputs, so productivity and LRAS rise. [1] (b) Retraining has a high cost, so there is an opportunity cost of other public spending. [1] Workers may take training that does not match jobs available, or older workers may have a shorter working life in which to use it. [1] The gain to output is therefore uncertain and slow to appear. [1] [6] Examiner insight: “Expensive” alone is a thin weakness; link the cost to something forgone or to an uncertain result.

9. Unemployed before: 0.10 x 1,500,000 = 150,000. [1] Unemployed after: 150,000 - 24,000 = 126,000. [1] New labour force: 1,500,000 + 6,000 = 1,506,000. [1] Rate: 126,000 / 1,506,000 = 8.37%, so 8.4%. [1] [4] Examiner insight: A common slip is dividing by the old labour force; ask what has changed for both the top and the bottom of the fraction.

10. Strengths (up to 4): privatisation gives private owners a profit motive. [1] Costs fall as waste is cut, so unit cost falls and productivity rises. [1] If other suppliers can enter the market, rivalry may force lower prices and more innovation. [1] Private investment may replace spending that would have come from the budget. [1] Evaluation (up to 4): an electricity network may be a natural monopoly, so a private monopoly could raise prices without regulation. [1] Short-run job losses and the loss of unprofitable but valuable services reduce the benefit. [1] The gain depends on the strength of competition and regulation, and on how fast costs fall. [1] A reasoned judgement that the policy helps most where competition can be introduced and fails where it cannot. [1] [8] Examiner insight: Weigh the benefits against the monopoly risk with a judgement, rather than listing both sides.

11. Free market policies (up to 3): tax cuts and welfare changes raise the reward to work and invest. [1] Deregulation and lower red tape cut costs and raise competition. [1] They are generally cheaper to introduce and can act faster than building schools or railways. [1] Interventionist policies (up to 3): training, infrastructure and start-up finance correct market failures such as under-investment and lack of information. [1] They raise human capital and the capital stock, which directly raise potential output. [1] Government failure and long lags may limit the impact. [1] Evaluation (up to 4): the effect of tax cuts on labour supply may be small and revenue is lost. [1] Welfare cuts raise inequality and fail without vacancies. [1] Which is better depends on the main constraint: skills and infrastructure point to intervention, red tape and weak incentives to free market policies. [1] A judgement favouring a mixed set, stating how long the effect takes. [1] [10] Examiner insight: Define “more effective” in your conclusion (faster, larger or fairer) and judge each type against that single measure.

Where marks are usually lost

• Naming a policy but not explaining how it raises supply.
• Putting tax reductions and tax incentives into the wrong category.
• Percentage change calculated from the new value rather than the old.
• Forgetting that the labour force changes when jobs go to people from outside.
• Weaknesses given as one word (“expensive”) with no consequence.
• Ignoring time lags when comparing policies.
• Conclusions that restate the points without a judgement.
• Treating supply-side policy as only aggregate demand policy.

Next steps

• Review the revision notes and the study guide.
• Course hub: Edexcel A Level Economics; printable checklist.
• Take one of our free 10-minute diagnostics to find your weakest areas.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, Pearson Education Limited: section 2.3.6, statement 3 (a-d).