Pearson Edexcel International Advanced Level Economics: Multiplier, output gaps (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 the multiplier (2.3.4 item 4, a to d) and output gaps (2.3.5 item 4, a to d) in the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018. The content is in Unit 2, an International AS unit, and is also part of the full International Advanced Level. All countries and figures are invented. Learn the content first in the study guide or the revision notes. See also the course hub, the checklist and the diagnostics.

Questions

1. In Country A, national income rises by 200 and household spending on domestic output rises by 180. There are no other leakages.

(a) Calculate the MPC and the MPS. [2] (b) Calculate the multiplier. [1]

2. In Country B, MPS = 0.06, MPT = 0.24 and MPM = 0.30. Investment rises by 36. Calculate the marginal propensity to withdraw, the multiplier and the final change in national income. [3]

3. In Country C, MPS = 0.08, MPT = 0.22 and MPM = 0.20. Exports rise by 48. A shift in consumer taste then raises MPM to 0.30. Calculate the multiplier and the rise in income before and after the change in MPM, and explain the difference. [4]

4. In Country D, MPC is 0.5 and there are no other leakages. Government spending rises by 64.

(a) Calculate the extra income created in rounds 2 and 3 of the multiplier process. [2] (b) Calculate the total eventual rise in national income. [1]

5. In Country E, k = 2.5. The government cuts its spending by 25.

(a) Calculate the change in national income. [2] (b) Explain why the change is larger than the cut in spending. [3]

6. Country F has potential output of 2,400 and actual output of 2,292.

(a) Calculate the output gap in units and as a percentage of potential output. [2] (b) State whether it is a positive or negative gap. [1] (c) With k = 1.8, calculate the rise in injections that would close the gap in the simple model. [1]

7. Country G has trend growth of 3% a year. Actual output is 500, 510, 528 and 531 in Years 0 to 3.

(a) Calculate actual growth in Years 1, 2 and 3 to 2 decimal places. [3] (b) Calculate potential output and the output gap (to 2 decimal places) in Year 3. [2] (c) Explain why the gap widened between Years 2 and 3. [1]

8. Describe two characteristics of a positive output gap and two of a negative output gap. [4]

9. Two analysts estimate Country H’s potential output. Actual output is 1,010. Analyst X estimates potential at 1,000 and analyst Y at 1,050.

(a) Calculate the output gap on each estimate to 2 decimal places. [2] (b) Explain one reason why the estimates might differ. [1] (c) Explain why this difficulty matters for a government choosing policy. [2]

10. Country J has potential output of 3,000 and actual output of 2,820. MPS = 0.1, MPT = 0.25 and MPM = 0.15. The government raises its spending by 60.

(a) Calculate the multiplier, the change in output and the new output gap as a percentage. [3] (b) Evaluate whether this policy is likely to be enough to remove the gap. [7]

11. Country K has potential output of 1,600 and actual output of 1,648. MPW = 0.4. Exports rise by 16.

(a) Calculate the original gap as a percentage, the multiplier, the change in output and the new gap as a percentage. [3] (b) Explain why the rise in exports is likely to be inflationary in this case. [3] (c) Explain one reason why the real output rise could be smaller than your calculation. [2]

Answers

1. (a) MPC = 180/200 [1] = 0.9, so MPS = 1 - 0.9 = 0.1 [1] [2] (b) k = 1/(1 - 0.9) = 1/0.1 = 10 [1] [1] Examiner insight: Show the substitution into the formula, because a bare number gives nothing to build on if one step slips.

2. MPW = 0.06 + 0.24 + 0.30 = 0.60 [1]. k = 1/0.60 = 1.667 [1]. Change in income = 36 x 1.667 = 60 [1] [3] Examiner insight: A common slip is to use 1/MPS alone, which gives a far too large multiplier here (about 16.7); add every leakage that is in the question first.

3. Before: MPW = 0.08 + 0.22 + 0.20 = 0.50, k = 2 [1], income rise = 48 x 2 = 96 [1]. After: MPW = 0.60, k = 1/0.6 = 1.667, rise = 48 x 1.667 = 80 [1]. The rise is 16 smaller because a higher MPM means a larger share of each round of income is spent on imports, so less is re-spent on domestic output and the rounds shrink faster [1] [4] Examiner insight: Link the cause to the mechanism, such as “less is re-spent at home each round”. Saying only that the multiplier is lower repeats the data.

4. (a) Round 2 = 64 x 0.5 = 32 [1]; round 3 = 32 x 0.5 = 16 [1] [2] (b) k = 1/(1 - 0.5) = 2, so the rise = 64 x 2 = 128 [1] [1] Examiner insight: State that each round is the previous one multiplied by MPC, since that is the process the question asks you to show.

5. (a) Change = -25 x 2.5 [1] = -62.5 [1] [2] (b) Government spending is an injection and the cut reduces incomes of firms and workers who supplied it [1]. Those people cut their own spending by their MPC [1], which reduces other people’s incomes in further rounds, so the total fall is a multiple of the first cut [1] [3] Examiner insight: Keep the negative sign in part (a), and use the words “further rounds” or “successive rounds” in part (b).

6. (a) Gap = 2,292 - 2,400 = -108 [1]; -108/2,400 x 100 = -4.5% [1] [2] (b) Negative gap, as actual output is below potential [1] [1] (c) 108/1.8 = 60 [1] [1] Examiner insight: Divide by potential output, not actual output; the other base gives a different percentage.

7. (a) Year 1: 510/500 = 2.00% [1]; Year 2: 528/510 = 3.53% [1]; Year 3: 531/528 = 0.57% [1] [3] (b) Potential = 500 x 1.03 x 1.03 x 1.03 = 546.36 [1]; gap = (531 - 546.36)/546.36 = -2.81% [1] [2] (c) Growth of 0.57% was below the 3% trend, so actual output fell further behind potential (the gap widened from -0.46% to -2.81%) [1] [1] Examiner insight: Compare actual growth with trend growth to explain a change in the gap; saying that output grew misses the point.

8. Positive gap, any two of: low unemployment, upward pressure on wages and prices, high use of capacity, strong tax revenue with lower welfare spending [1][1]. Negative gap, any two of: spare capacity, higher cyclical unemployment, weak or falling inflation, lower profits and investment [1][1] [4] Examiner insight: A short phrase that says what happens and why is stronger than a single word, such as “spare capacity so firms cut output”.

9. (a) X: (1,010 - 1,000)/1,000 x 100 = +1.00% [1]. Y: (1,010 - 1,050)/1,050 x 100 = -3.81% [1] [2] (b) They may use different trend periods or methods, so their estimates of the trend growth rate differ [1] [1] (c) X’s figure suggests a slight positive gap and so a case for restraint, whereas Y’s suggests a large negative gap and a case for stimulus [1]. Acting on the wrong estimate could cause inflation or leave resources idle [1] [2] Examiner insight: Part (c) wants a consequence for policy, so state what each estimate would lead a government to do.

10. (a) MPW = 0.1 + 0.25 + 0.15 = 0.5, so k = 2 [1]. Change in output = 60 x 2 = 120, so output = 2,940 [1]. Gap = (2,940 - 3,000)/3,000 = -2.0% [1] [3] (b) Points that earn credit, with evaluation:

• The starting gap is -6.0% (-180), and the policy closes 120 of it, so it is not enough on its own [1].
• The extra spending needed is 180/2 = 90, which is 30 more than planned [1].
• The multiplier of 2 is modest because tax and imports take half of each round [1].
• With a negative gap there is spare capacity, so extra AD is likely to raise real output with little inflation [1].
• The multiplier takes time and the rise in confidence may be uncertain, so the full 120 may arrive slowly [1].
• If the government borrows, higher interest rates could crowd out private investment and reduce the gain [1].
• Judgement: the policy narrows the gap by two-thirds and is a sensible step, but it depends on the gap estimate being right and on a larger or longer programme to finish the job [1] [7] Examiner insight: Use your figures (-6.0% to -2.0%, and 90 needed) in the evaluation, and end with a judgement that depends on a stated condition.

11. (a) Gap = (1,648 - 1,600)/1,600 = +3.0% [1]. k = 1/0.4 = 2.5, change = 16 x 2.5 = 40, new output 1,688 [1]. New gap = 88/1,600 = +5.5% [1] [3] (b) The economy is already above potential, so there is little spare capacity [1]. Extra demand is therefore likely to raise wages and prices as firms compete for scarce resources [1], so part of the rise in AD shows up as higher prices and not extra output [1] [3] (c) The multiplier may be smaller than 2.5 because households save more when uncertain, or because rising prices cut the real value of incomes, so less is re-spent [1], and the rise in real output is smaller than 40 [1] [2] Examiner insight: With a positive gap there is little spare capacity, so say that the calculated rise in income overstates the rise in real output.

Where marks are usually lost

• Using 1/MPS when tax or import leakages are also given.
• Losing the sign when an injection falls.
• Dividing by actual output, not potential output, in a gap calculation.
• Treating a rise in growth as closing a gap without comparing growth with trend.
• Stating a multiplier result with no meaning for output or jobs.
• Explaining the process as a chain “rises, rises, rises” without saying what is re-spent.
• Evaluating with a list of general points and no figures from the question.
• Giving measurement problems for GDP in general and not for potential output.

Next steps

• Review the revision notes and the study guide.
• Check progress against the Edexcel IAL Economics checklist and the course hub.
• Try all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, first teaching September 2018, published by Pearson Education Limited. Sections 2.3.4 (item 4) and 2.3.5 (item 4).