OCR A Level Economics: The multiplier, the economic cycle and output gaps (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 topic The economic cycle in the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. All countries and figures are invented. Read the study guide and revision notes first. The OCR Economics hub, the checklist and the free diagnostics help you track progress.

Questions

1. Define the national income multiplier. [2]

2. In Country T the marginal propensities to save, to be taxed and to import are 0.08, 0.22 and 0.20.

(a) Calculate the value of the multiplier. [2] (b) Investment rises by 35. Calculate the change in national income. [1] (c) The propensity to import rises to 0.30, other things equal. Calculate the new multiplier. [2]

3. Country R’s real GDP growth was +4.1% in year 1, +1.2% in year 2, -1.8% in year 3 and +0.6% in year 4. Identify the most likely stage of the economic cycle in each year. [4]

4. Country S’s real GDP was 1,000 in year 0 and 1,159.3 in year 5.

(a) Calculate the average annual rate of growth. [2] (b) Actual growth in year 6 is 1.2%. Compare this with your answer to (a) and state the effect on the output gap, assuming potential output grows at that average rate. [2]

5. Evaluate the view that investment in human capital is the most important factor determining a country’s trend rate of growth. [6]

6. In Country W government spending rises by 15 and the marginal propensity to withdraw is 0.25. The table shows real GDP demanded and supplied at each price level.

Price level	100	105	110	115
AD before	860	845	830	815
AD after	920	905	890	875
SRAS	860	875	890	905

(a) Calculate the multiplier. [1] (b) Calculate the shift in AD and show that it matches the table. [2] (c) State the new equilibrium and explain why real GDP rises by less than the AD shift. [3]

7. Country U’s income (year 1 to year 6) is 300, 318, 342, 360, 366 and 364. The capital-output ratio is 3.

(a) Calculate net induced investment in years 2 to 6. [2] (b) Explain why investment falls in year 4 although income rises. [2]

8. Country V’s potential output is 720 and actual output is 698.4.

(a) Work out the output gap as a percentage of potential output. [2] (b) Describe how this is shown on a PPF/C diagram. [2]

9. Explain how the multiplier-accelerator model helps explain the economic cycle. [6]

10. Evaluate the causes of a negative output gap. [8]

11. Evaluate the consequences of a positive output gap for an economy. [8]

Answers

1. The eventual change in national income [1] divided by the injection (or change in autonomous AD) that started it [1]. [2] Examiner insight: Both halves of the ratio are needed: the eventual change and the starting injection. “Spending has a bigger effect” describes the idea without defining it.

2. (a) MPW = 0.08 + 0.22 + 0.20 = 0.50 [1]. k = 1 ÷ 0.50 = 2 [1]. (b) 35 × 2 = 70 [1]. (c) MPW = 0.08 + 0.22 + 0.30 = 0.60 [1]. k = 1 ÷ 0.60 = 1.67 [1]. Examiner insight: Show the addition of the three propensities. Using 1 ÷ (1 - MPC) here would ignore taxes and imports.

3. Year 1: boom or expansion, strong growth [1]. Year 2: downturn, growth positive but falling [1]. Year 3: recession, output falls [1]. Year 4: recovery, growth returns after the fall [1]. [4] Examiner insight: Give the stage and the evidence from the figures. “Most likely” invites a reason, since growth rates alone cannot fix the exact point.

4. (a) (1,159.3 ÷ 1,000)^(1/5) - 1 [1] = 1.03 - 1 = 3.0% a year [1]. (b) Actual growth of 1.2% is below the 3.0% trend [1]. Output grows more slowly than potential, so a negative gap widens (or a positive gap narrows) [1]. [4] Examiner insight: Use the compound formula for an average over several years. Dividing total growth by 5 gives a different, less accurate figure.

5. Human capital raises productivity, which is the main source of growth in a mature economy [1]. Skilled workers can use new technology and adapt, which lifts output per head [1]. But workers need capital and technology to be productive, so human capital depends on other factors [1]. Institutions, infrastructure and investment may matter more in a poor economy with weak property rights [1]. Education takes years to pay off and skills may be lost through emigration [1]. Judgement: it is probably the most important in a developed economy, but its effect depends on investment and technology working with it [1]. [6] Examiner insight: Weigh one factor against the others for a stated type of economy. A list of every factor with no ranking stays at description.

6. (a) k = 1 ÷ 0.25 = 4 [1]. (b) Shift = 15 × 4 = 60 [1]. Each row of AD after is 60 above AD before [1]. (c) New equilibrium: price level 110, real GDP 890 (from 100 and 860) [1]. Real GDP rises by 30, half of 60 [1]. SRAS slopes upward, so higher spending also raises the price level, which cuts the quantity demanded along the new AD curve [1]. [6] Examiner insight: Find equilibrium where AD equals SRAS in the table, and say why the gain is smaller than the shift. Quoting the multiplier as the rise in output would be wrong.

7. (a) Changes in income: 18, 24, 18, 6, -2 [1]. Investment: 54, 72, 54, 18, -6 [1]. (b) Accelerator investment depends on the change in income, not the level [1]. The change fell from 24 to 18, so investment fell from 72 to 54 even though income rose [1]. [4] Examiner insight: Refer to the figures. A general statement that investment depends on growth does not use the table.

8. (a) (698.4 - 720) ÷ 720 × 100 [1] = -3.0% [1]. (b) A point inside the PPF/C [1], as resources are unemployed or underused so less of both goods is produced than is possible [1]. [4] Examiner insight: Keep the sign. A negative gap means actual below potential, and the sign carries the meaning.

9. A rise in autonomous spending raises income through the multiplier [1]. Rising income raises investment through the accelerator [1]. This investment is an injection and raises income again, so the boom feeds itself [1]. Growth then slows as capacity or confidence limits are reached [1]. Investment falls even though income is still rising, so the downturn begins [1]. The multiplier works in reverse and a recession follows, with recovery when capital needs replacing [1]. [6] Examiner insight: Keep the links in order, each step causing the next. A list of terms with no chain stays at definition.

10. A fall in consumption, such as from lower confidence, reduces AD [1]. The multiplier then amplifies the initial fall [1]. A financial crisis or tight credit cuts spending and investment [1]. Falling exports, for example after a currency rise, cut AD [1]. Sticky wages and prices mean the economy adjusts slowly, so the gap persists [1]. Potential output is unobservable, so the measured gap may be wrongly estimated [1]. The cause matters: a temporary shock may close by itself, while a deep one needs policy [1]. Judgement: for most economies, a fall in private sector confidence and credit is the leading cause, magnified by the multiplier and slow wage adjustment [1]. [8] Examiner insight: Choose and defend the main cause. A list of causes, however accurate, earns less than a ranked, reasoned one.

11. Inflation rises as demand outruns capacity [1]. Labour shortages push up wages, adding to cost pressure [1]. Imports rise, worsening the trade balance [1]. Asset prices may form a bubble that later bursts [1]. There are benefits: low unemployment, high profits and rising tax revenue [1]. The effects depend on size and duration: a small, short gap does little harm [1]. Different groups are affected differently, such as savers and exporters [1]. Judgement: the costs usually outweigh the benefits if the gap persists, because inflation and instability follow [1]. [8] Examiner insight: Cover both sides, then judge. Costs only, with no benefit and no conditions, is one-sided.

Where marks are usually lost

• Using 1 ÷ (1 - MPC) when taxes and imports are in the question.
• Forgetting to multiply the multiplier by the injection.
• Treating the AD shift as the rise in real GDP.
• Mixing up the accelerator, which depends on the change in income, with the level of income.
• Dropping the minus sign on a negative gap.
• Listing causes or consequences without judging which matters most.
• Evaluation that says “it depends” without saying on what.
• Working from nominal rather than real figures.

Next steps

• Review the revision notes and the study guide.
• Try the macroeconomics practice set.
• Use the OCR Economics hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR, A Level in Economics (H460), Version 3.0 (June 2026), first assessment 2021, Component 2 content: Aggregate demand and aggregate supply, topic The economic cycle. Published by OCR (Oxford Cambridge and RSA).