Paper 2: How the economy works

Gross domestic product (GDP) measures:

Which one of the following is a component of aggregate demand?

Inflation is:

The Bank of England's inflation target is:

Which type of unemployment is caused by a fall in demand during a recession?

A progressive tax is one where:

Which one of the following is a supply-side policy?

If the pound depreciates against the dollar, UK exports to the USA become:

A tariff is:

Which one of the following is a function of money?

Explain what is meant by an interest rate.

A basket of goods cost £250 last year and £265 this year. Calculate the rate of inflation.

Explain one cost of unemployment to the government.

Explain one benefit of free trade to UK consumers.

Extract C (data are illustrative, written for this paper):

	Year 1	Year 2	Year 3
Inflation (CPI, %)	2.5	9.1	4.0
Unemployment (%)	3.9	3.7	4.4
Bank Rate (%)	0.25	3.5	5.25
Real GDP growth (%)	4.3	0.1	0.5

Higher energy and food prices pushed inflation up in Year 2. The Bank of England raised Bank Rate sharply. Mortgage payments rose for many households, while savers earned more interest. Identify the two years with the largest change in the rate of inflation, and state the change.

Define 'economic growth'.

Explain why higher energy prices caused inflation.

Explain how raising Bank Rate is intended to reduce inflation.

Using Extract C, explain one possible conflict between government objectives.

Analyse the effects of high inflation on different groups in the economy.

Evaluate whether monetary policy is the best way to control inflation.

Extract D (data are illustrative, written for this paper): A UK car manufacturer exports 60% of its cars, mainly to the EU and the USA. In one year the pound fell from $1.40 to $1.20. The firm imports many of its parts. The UK government is negotiating a free trade agreement, but some UK farmers fear competition from cheaper imported food. A car is priced at £28,000. Calculate its price in dollars before and after the change in the exchange rate.

Define 'globalisation'.

Explain one disadvantage to the car manufacturer of the fall in the value of the pound.

Explain why countries specialise and trade.

Explain one reason why UK farmers might want protection from imports.

Analyse the effects of a lower pound on the UK's balance of payments current account.

Evaluate whether a free trade agreement with another country would benefit the UK economy.