OCR A Level Economics: The circular flow, propensities and aggregate demand (H460) – 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 Circular flow of income and Aggregate demand topics of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, macroeconomics content. The specification gives no AS or Extension labels. All data are invented and illustrative.

Read the study guide and revision notes first, and see the OCR Economics hub, the checklist and the free diagnostics.

Questions

1. In Country B, a farm sells grain to a mill for 40, the mill sells flour to a baker for 70, and the baker sells bread to households for 130 (cu million). Calculate the value added at each stage and in total, and explain why national output is measured using value added. [3]

2. Country B’s spending (cu billion) is: consumption 640, investment 170, government spending 230, exports 260, imports 220.

(a) Calculate national expenditure. [2] (b) The output method gives 1,074. Explain one reason why two methods might give different figures in practice. [2]

3. Distinguish between physical flows and monetary flows in the circular flow of income, using the example of a tailor employing an assistant. [4]

4. In Country C (cu billion) saving is 120, taxation 200 and import spending 150. Investment is 140, government spending 210 and exports 130.

(a) Calculate total withdrawals and total injections. [2] (b) Explain the likely effect on national income. [2]

5. A household group has disposable income of 400 and consumption of 340. When disposable income rises to 500, consumption rises to 415.

(a) Calculate APC and APS at a disposable income of 500. [2] (b) Calculate MPC and MPS between the two levels. [2] (c) Explain why APC is higher than MPC. [1]

6. When national income in Country D rises by 200, saving rises by 16, tax revenue by 50 and import spending by 34.

(a) Calculate MPS, MRT and MPM. [3] (b) Calculate MPW. [1] (c) Calculate the share of extra income re-spent on domestic output. [1] (d) Total withdrawals are 380 when national income is 1,000. Calculate the average propensity to withdraw. [1]

7. Explain how (a) a rise in interest rates and (b) a fall in consumer confidence would each affect consumption. [4]

8. A capital-output ratio of 2.5 applies in Country E. Output in years 1 to 5 is 200, 220, 250, 270 and 280.

(a) Calculate net investment in each of years 2, 3, 4 and 5. [3] (b) Account for the fall in net investment in year 5 even though output is still growing. [2] (c) Replacement investment is 30 in year 5. Calculate gross investment in year 5. [1]

9. Explain why the aggregate demand curve slopes downward. [6]

10. At every price level, consumption falls by 12, investment rises by 8, government spending is unchanged, exports rise by 14 and imports rise by 6.

(a) Calculate the initial change in aggregate demand. [2] (b) State the direction of the shift and distinguish it from a movement along the curve. [2]

11. Country A’s households have disposable income of 500, 540 and 600 in years 1, 2 and 3, with consumption of 440, 470 and 510.

(a) Calculate MPC from year 1 to year 2 and from year 2 to year 3. [2] (b) Evaluate the view that income is the main determinant of consumption. [8]

12. Evaluate how far the accelerator theory explains the level of investment. [9]

Answers

1. Grain 40, flour 70 − 40 = 30, bread 130 − 70 = 60 [1]. Total value added = 40 + 30 + 60 = 130 [1]. Adding sales would give 240 and count inputs more than once, so value added is used to avoid double counting [1]. [3] Examiner insight: Show each subtraction; a total alone gives no evidence you used value added rather than adding up sales.

2. (a) 640 + 170 + 230 = 1,040 [1]; net exports 260 − 220 = 40, so total = 1,080 [1]. (b) Data come from many sources and contain measurement errors [1]; some activity, such as unrecorded cash work, appears in spending or income but is missed in output (or the reverse) [1]. [4] Examiner insight: A reason must say why the gap arises; “mistakes” alone is thin, whereas naming a source of measurement difference develops the point.

3. Physical flow: the assistant’s labour moves to the tailor [1], and clothes move to households [1]. Monetary flow: a wage moves to the assistant [1], and consumer spending moves to the tailor, each in the opposite direction to the matching physical flow [1]. [4] Examiner insight: Pair each physical flow with its opposite monetary flow; naming the two types without an example of direction is weak.

4. (a) Withdrawals = 120 + 200 + 150 = 470 [1]. Injections = 140 + 210 + 130 = 480 [1]. (b) Injections exceed withdrawals by 10 [1], so more is entering than leaving the circular flow and national income tends to rise [1]. [4] Examiner insight: State which side is larger and the direction of change; “unbalanced” is not a conclusion.

5. (a) APC = 415/500 = 0.83 [1]; APS = 85/500 = 0.17 [1]. (b) MPC = (415 − 340)/(500 − 400) = 75/100 = 0.75 [1]; MPS = 1 − 0.75 = 0.25 [1]. (c) The household spends 75% of each extra unit but 83% of its whole income, so spending the whole income pulls the average above the marginal figure [1]. [5] Examiner insight: Show the division and use the correct base; a decimal with no working leaves the method unclear.

6. (a) MPS = 16/200 = 0.08 [1]; MRT = 50/200 = 0.25 [1]; MPM = 34/200 = 0.17 [1]. (b) MPW = 0.08 + 0.25 + 0.17 = 0.50 [1]. (c) 1 − 0.50 = 0.50 [1]. (d) 380/1,000 = 0.38 [1]. [6] Examiner insight: Sum the three components for MPW rather than quoting a total; mixing up the marginal and average figures is a typical slip.

7. (a) A rise in rates increases the cost of loans and the reward from saving [1], so consumption falls, particularly of credit-financed goods [1]. (b) Lower confidence about jobs and income leads households to postpone spending and save more [1], so consumption falls at any given income [1]. [4] Examiner insight: Finish each chain with the effect on consumption; naming the determinant without a link to spending gains little.

8. (a) Year 2: 2.5 × 20 = 50 [1]; year 3: 2.5 × 30 = 75 [1]; years 4 and 5: 2.5 × 20 = 50 and 2.5 × 10 = 25 [1]. (b) Investment depends on the change in output [1]; growth slowed from 20 to 10, so less new capital was needed [1]. (c) 25 + 30 = 55 [1]. [6] Examiner insight: Refer to the rate of change of output in (b); stating that “output rose so investment should rise” shows the theory has not been applied.

9. Wealth effect: a higher price level reduces the real value of money wealth [1], so spending falls [1]. Interest rate effect: higher prices raise the demand for money and interest rates [1], so consumption and investment fall [1]. International trade effect: higher domestic prices make exports less competitive and imports more attractive [1], so net exports fall [1]. [6] Examiner insight: Pair each effect with its link to a component of AD; a bare list of three names is only partly developed.

10. (a) −12 + 8 + 0 + 14 − 6 = +4 [1]; imports enter negatively, hence the −6 [1]. (b) AD shifts right [1], because planned spending changes at every price level; only a price-level change is a movement along the curve [1]. [4] Examiner insight: Net exports need the sign handled correctly; a rise in imports reduces AD.

11. (a) (470 − 440)/(540 − 500) = 30/40 = 0.75 [1]; (510 − 470)/(600 − 540) = 40/60 = 0.67 [1]. (b) Income matters: consumption rose each time disposable income rose [1]. APC fell from 0.88 to 0.85 [1], so households spent a smaller share as they became better off [1]. The MPC also fell from 0.75 to 0.67, so the link is not constant [1]. Other determinants matter: wealth, interest rates, credit and confidence [1]; expectations about whether income gains will last affect how much is spent [1]; with three years of data, any conclusion is tentative [1]. Judgement: income is the main influence in the short run, but its effect varies, so it is the leading determinant, not the only one [1]. [10] Examiner insight: Use the figures you calculated in (a) as evidence in the evaluation, and finish with a supported judgement rather than a list.

12. The accelerator ties investment to the change in output, with net investment = capital-output ratio × change in output [1]. It explains why investment is volatile [1]: a fall in output growth can reduce investment even while output still rises [1]. It also explains why investment rises in booms [1]. Limits: spare capacity means extra output needs no new capital [1]; firms invest only if growth is expected to last [1]; interest rates and access to finance can block investment even when output grows [1]; the capital-output ratio changes with technology [1]. Judgement: it explains part of the swing in investment, but expectations and financial conditions matter alongside it, so it is a useful, partial explanation [1]. [9] Examiner insight: A balanced answer weighs the theory against alternatives and reaches a judgement; repeating the formula alone does not evaluate.

Where marks are usually lost

• Using Y instead of Yd as the base for household APC and MPC.
• Quoting a ratio with no working shown.
• Treating saving as an injection.
• Counting sales rather than value added.
• Giving the sign of imports the wrong way round in AD.
• Drawing a shift of AD when only the price level has changed.
• Writing about the accelerator as a link between output and investment without the word change.
• Evaluating by listing points with no judgement.

Next steps

• Recall the key results in the revision notes.
• Review any gaps in the study guide.
• Visit the OCR Economics hub and the checklist.
• Try the free diagnostics, or book a free trial class.

Official syllabus

These questions are aligned to the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, published by OCR.