OxfordAQA International AS and A-level Economics: Aggregate demand, SRAS and LRAS (9640) – 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 follow sections 3.2.2.4 to 3.2.2.6 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Section 3.2 is International AS content. Every country and figure is invented. Read the study guide and revision notes first if you need to. The course hub and checklist list the rest of the course.

Questions

1. Explain what economists mean by the multiplier. [2]

2. In Country B the marginal propensity to save is 0.07, to tax 0.18 and to import 0.25. Investment rises by 45m. Find the value of the multiplier and the resulting change in income. [3]

3. In Country C, of each extra 100 units of income, 62 are spent on domestically produced goods. Exports fall by 19m. Calculate the change in national income. [3]

4. Country D has normal capacity output of 3,500m and actual output of 3,360m. Its government believes the multiplier is 3.5.

(a) Calculate the injection needed to close the gap. [2] (b) Explain one reason why the rise in income might be smaller than planned. [2]

5. Country E receives an injection of 50m. In every round, 70% of new income is spent on domestic output.

(a) Calculate the new spending in each of the first three rounds. [2] (b) Calculate the total change in income once all rounds are complete. [2] (c) Explain why the full effect may take a long time to appear. [2]

6. Explain the difference between moving along SRAS and shifting it, giving one cause of each. [4]

7. Classify each event below as a movement along SRAS or a shift of SRAS, and give its direction. [5] (i) A fall in raw material prices. (ii) A rise in AD that raises the price level. (iii) A rise in indirect taxes. (iv) A fall in AD that lowers the price level. (v) A rise in productivity.

8. A firm pays 18 an hour for output of 36 units an hour. Money wages rise 8% and productivity rises 3%. Calculate the percentage change in labour cost per unit and state the effect on SRAS. [4]

9. Country F has 6.4m workers, each producing 90,000 a year.

(a) Calculate normal capacity output in billions. [1] (b) The workforce rises 1.5% and output per worker 2.5%. Calculate the new capacity, its percentage growth, and state what happens to LRAS. [3]

10. Explain how any two determinants of LRAS named in the specification can shift LRAS. [6]

11. Analyse why an economy may stay below its normal capacity level of output for many years. [8]

12. Country G has capacity output of 5,000m and actual output of 4,700m. Its multiplier is thought to be 3. Evaluate whether raising AD or raising LRAS is the better response. [10]

Answers

1. It shows how many times larger the final change in income is than the first injection [1]. The effect exceeds the injection because each recipient re-spends part of what they receive, creating further income [1]. [2] Examiner insight: Explain the re-spending mechanism as well as the size effect; a sentence that only says “income rises by more” leaves out the reason.

2. MPW = 0.07 + 0.18 + 0.25 = 0.50 [1]. k = 1 ÷ 0.50 = 2 [1]. Change in income = 45 × 2 = 90m [1]. [3] Examiner insight: Write down the sum of the withdrawals before dividing; showing each step lets a reader follow your reasoning even if the arithmetic slips.

3. k = 1 ÷ (1 − 0.62) = 1 ÷ 0.38 = 2.63 [1]. Change = −19 × 2.63 [1] = −50m (income falls by 50m) [1]. [3] Examiner insight: The sign matters: a fall in an injection must give a fall in income, so state the direction as well as the size.

4. (a) Gap = 3,500 − 3,360 = 140m [1]. Injection = 140 ÷ 3.5 = 40m [1]. [2] (b) Leakages may be larger than assumed, for example a higher marginal propensity to import [1]. The multiplier is then smaller; if k were 2.8, 40m would raise income by only 112m [1]. [2] Examiner insight: An explanation needs the link from the reason to the size of k; naming “leakages” alone gives less than showing how they change the result.

5. (a) Round 1 = 50m [1]. Round 2 = 35m, round 3 = 24.5m [1]. [2] (b) k = 1 ÷ (1 − 0.7) = 3.33 [1]. Total = 50 × 3.33 = 166.7m [1]. [2] (c) Each round needs time for people to receive income and then decide to spend it [1]. So the later rounds spread over many months [1]. [2] Examiner insight: In a table or list of rounds, label which round each figure belongs to, so the pattern of 70% falling away each round is clear.

6. The economy moves along SRAS when the price level alters [1], for example after a rise in AD that lifts prices and output [1]. The curve itself shifts when production costs alter [1], for example higher money wage rates moving SRAS to the left [1]. [4] Examiner insight: Pairing each cause with its direction of effect usually earns more than listing causes without saying what they do to the curve.

7. (i) Shift right [1]. (ii) Movement up along SRAS [1]. (iii) Shift left [1]. (iv) Movement down along SRAS [1]. (v) Shift right [1]. [5] Examiner insight: Write both parts, the type and the direction, for every item; answers that give only “shift” leave out half of what is asked.

8. Starting cost = 18 ÷ 36 = 0.50 per unit [1]. New cost = (18 × 1.08) ÷ (36 × 1.03) = 19.44 ÷ 37.08 = 0.524 [1]. Change = +4.9% [1]. Costs per unit rise, so SRAS shifts left [1]. [4] Examiner insight: Compare cost per unit, not wages alone; a wage rise matched by productivity growth would leave SRAS where it was.

9. (a) 6.4m × 90,000 = 576bn [1]. [1] (b) New capacity = 576 × 1.015 × 1.025 = 599.3bn [1]. Growth = 4.04%, which is more than 1.5% + 2.5% because the two compound [1]. LRAS shifts right, which is underlying economic growth [1]. [3] Examiner insight: Multiply the growth factors rather than adding the percentages; adding gives 4.0% and misses the compounding.

10. Any two, 3 marks each. Example 1: capital stock rises [1]; each worker has more equipment, so more output per worker [1]; normal capacity rises and LRAS shifts right [1]. Example 2: working population rises, for example through higher participation [1]; more labour is available at normal capacity [1]; LRAS shifts right [1]. [6] Examiner insight: Each determinant should be followed through to normal capacity output; a list of eight determinants with no explanation earns little.

11. AD falls, for example because of lower confidence [1]. Firms cut output and jobs, so unemployment rises [1]. Wages and prices are slow to fall because workers resist pay cuts and firms are cautious [1]. So costs fall slowly and SRAS shifts right only slowly [1]. Weak incomes and low confidence keep consumption and investment low, so AD stays low [1]. The economy settles at an equilibrium with output below LRAS [1]. This can continue for many years [1]. The Keynesian view is therefore that a rise in AD may be needed [1]. [8] Examiner insight: Build a chain of linked steps, each starting from the previous one; stating the end result without the chain is a conclusion, not an analysis.

12. Gap = 4,700 − 5,000 = −300m, or −6.0% [1]. Output is below capacity, so the main problem is deficient demand [1]. With k = 3, an injection of 300 ÷ 3 = 100m would close the gap [1]. If k is only 2, 150m is needed, so the estimate is uncertain [1]. Raising AD can use spare resources quickly without much inflation [1]. Raising LRAS lifts capacity but takes years [1], and if AD does not also rise, the gap widens because capacity is larger [1]. If capacity were overestimated, a stimulus could raise prices rather than output [1]. A rise in AD cannot raise normal capacity permanently, so long-term growth needs LRAS [1]. Judgement: with a large gap, raise AD first, then LRAS, because it matches the problem and its timescale [1]. [10] Examiner insight: An evaluation earns more when it reaches a supported judgement about this country’s gap, not when it lists advantages of both options without weighing them.

Where marks are usually lost

• Dividing by MPC instead of by 1 minus MPC, or by MPW.
• Leaving out tax or imports when adding the withdrawals.
• Losing the negative sign when an injection falls.
• Treating the multiplier as the change in income.
• Shifting SRAS when the price level changes.
• Adding growth rates instead of compounding them.
• Naming a determinant of LRAS without explaining the link to capacity.
• Writing an evaluation that lists points without a judgement.

Next steps

• Re-read the revision notes and the study guide.
• Check the course hub and printable checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, published by OxfordAQA.