OxfordAQA A-level Economics: Circular flow and AD and AS analysis (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 the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, sections 3.2.2.1 to 3.2.2.3: the circular flow of income, AD and AS analysis, and the determinants of aggregate demand. Section 3.2 is International AS content. All countries and figures are invented and illustrative. Learn the content first from the study guide and the revision notes. Course pages: hub and checklist. Not sure what to practise? Take a free 10-minute diagnostic.

Questions

1. Define national income and distinguish nominal national income from real national income. [3]

2. Country B has nominal national income of 1,200 in year 1 (price index 100) and 1,326 in year 2 (price index 104).

(a) Calculate real national income in year 2. [2] (b) Calculate the percentage growth in real national income. [1] (c) Explain why the nominal growth rate is a poor guide to the change in output. [1]

3. State whether each of the following is an injection into, or a withdrawal from, the circular flow of income. [5] (a) A firm buys new machinery. (b) Households pay money into savings accounts. (c) Overseas visitors spend money in hotels in Country C. (d) Households pay income tax. (e) The government spends on building schools.

4. In Country D, withdrawals are 0.4 of national income. Injections are 180.

(a) Calculate equilibrium national income. [2] (b) Explain what happens to national income if it is currently 400. [3] (c) Injections rise to 200. Calculate the new equilibrium and the change in income. [2]

5. The government of Country D raises income tax, so that withdrawals become 0.45 of national income. Injections stay at 180. Explain the effect on national income, with a calculation. [4]

6. Using an AD and AS diagram, explain the likely effect on Country E of a recession in its main trading partner. [5]

7. In an invented model of Country A, AD is P = 190 − 0.15Y and short-run aggregate supply is P = 10 + 0.15Y, where P is a price index and Y is real GDP.

(a) Calculate the equilibrium price level and real GDP. [2] (b) A rise in energy costs moves SRAS to P = 22 + 0.15Y. Calculate the new equilibrium. [2] (c) Calculate the percentage changes in P and Y, and say what kind of shock this was. [2]

8. In Country G, disposable income rises by 80 and consumption by 60. National income rises by 200, tax revenue by 30 and spending on imports by 20. Calculate the MPC, MPS, MPT and MPM. [4]

9. (a) Distinguish saving from investment. [3] (b) Each unit of output needs 3 units of capital. Output rises from 300 to 330, then to 350. Explain, with calculations, what the basic accelerator suggests about net investment. [4]

10. Real national income in Country H rises by 6.25% in a year while its population rises by 5%. Calculate the change in real national income per head, then evaluate whether this means economic well-being has risen. [8]

Answers

1. National income is the value of output produced (or income earned) in an economy over a period [1]. Nominal income is measured at the prices of the year in which it is earned [1]. Real income adjusts for price changes, so it shows the change in the quantity of output [1]. [3] Examiner insight: A definition is stronger when it names what is measured and the period, not just “a country’s income”.

2. (a) Real = 1,326 ÷ 104 × 100 [1] = 1,275 [1]. (b) (1,275 − 1,200) ÷ 1,200 × 100 = 6.25% [1]. (c) Nominal growth is 10.5%, which includes the 4% rise in prices, so it overstates the rise in output [1]. [4] Examiner insight: Show the division by the price index; a final figure with no working is hard to credit if it is wrong.

3. (a) Injection [1]. (b) Withdrawal [1]. (c) Injection (exports) [1]. (d) Withdrawal [1]. (e) Injection [1]. [5] Examiner insight: Give one word for each part. Saving and tax are the ones most often placed on the wrong side.

4. (a) Y = J ÷ 0.4 [1] = 180 ÷ 0.4 = 450 [1]. (b) At 400, withdrawals are 0.4 × 400 = 160 [1]. Injections of 180 exceed withdrawals, so spending is greater than output [1]. Firms raise output, so income rises toward 450 [1]. (c) Y = 200 ÷ 0.4 = 500 [1], a rise of 50 [1]. [7] Examiner insight: In part (b) compare the two flows with figures, then state the direction of change and where it stops.

5. Tax is a withdrawal, so a higher tax rate raises withdrawals [1]. New equilibrium: Y = 180 ÷ 0.45 [1] = 400 [1]. Income falls by 50, which is 11.1% of 450 [1]. [4] Examiner insight: Name the tax as a withdrawal and say what that does to the J = W balance before calculating.

6. Lower incomes abroad reduce spending on Country E’s exports [1]. Exports are a component of AD, so AD shifts left [1]. On a diagram with the price level on the vertical axis and real GDP on the horizontal axis, equilibrium moves down SRAS to a lower price level [1] and lower real GDP [1]. If real GDP is below the long-run level, firms need fewer workers, so demand-deficient unemployment rises [1]. [5] Examiner insight: Show the whole route from the event to the component, the curve and both axes. Describing only the shift leaves marks on the table.

7. (a) 190 − 0.15Y = 10 + 0.15Y, so 0.3Y = 180 [1]; Y = 600, P = 100 [1]. (b) 190 − 0.15Y = 22 + 0.15Y, so 0.3Y = 168 [1]; Y = 560, P = 106 [1]. (c) Y falls by 40 ÷ 600 = 6.7% and P rises 6% [1]. Price up and output down means a supply-side (cost) shock [1]. [6] Examiner insight: Percentage change is on the original value. Linking opposite price and output movements to a cost shock shows you can read the diagram.

8. MPC = 60 ÷ 80 = 0.75 [1]. Saving rises by 80 − 60 = 20, so MPS = 20 ÷ 80 = 0.25 [1]. MPT = 30 ÷ 200 = 0.15 [1]. MPM = 20 ÷ 200 = 0.10 [1]. [4] Examiner insight: Use the right denominator: disposable income for MPC and MPS, national income for MPT and MPM.

9. (a) Saving is income not spent on consumption [1] and is a withdrawal from the circular flow [1]. Investment is spending on capital goods [1] and is an injection that adds to AD. (Any three separate points.) (b) Investment depends on the rate of change of output [1]. Capital needed is 900, 990 and 1,050 [1]. Net investment is 90 and then 60 [1]. It falls although output is still rising, because growth has slowed from 10% to 6.1% [1]. [7] Examiner insight: In part (a) state the role of each in the circular flow, not just the definitions. In part (b) use the figures given.

10. Per head: 1.0625 ÷ 1.05 = 1.0119 [1], so a rise of about 1.2% [1]. Output has risen, so more goods and services are available [1]. But most growth is absorbed by population, so each person gains little [1]. If gains go mainly to high earners, average figures hide poorer households [1]. Real income omits unpaid work, leisure and environmental damage, and longer working hours would raise output but cut well-being [1]. Well-being may be improved by growth through more spending on health or education, but that depends on how government uses the extra income [1]. Judgement: probably a small gain, but real income alone is not enough to conclude [1]. [8] Examiner insight: An evaluation is strongest when each limitation is tied to the figures given, with a final judgement that follows from them.

Where marks are usually lost

• Not showing the division by the price index when converting to real terms.
• Placing saving or tax as injections.
• Describing a price rise as a shift of AD.
• Leaving the axes unnamed when describing a diagram.
• Stating a shift but not the change in both price level and real GDP.
• Using the wrong denominator when finding marginal propensities.
• Giving a list of limitations with no link to the data in the question.
• Skipping the final judgement in an evaluation.

Next steps

• Revise from the revision notes and the study guide.
• Course pages: hub and checklist.
• Take one of the free 10-minute diagnostics to find weak spots.
• Book a free trial class: /trial/.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), version 1.2, first teaching September 2020, published by OxfordAQA. Sections 3.2.2.1, 3.2.2.2 and 3.2.2.3, with section 3.5 quantitative skills.