1. Click here to Commence quiz Click here to Commence quiz © APT Initiatives Ltd UNIT 2 The National Economy 2.1 The Measurement of Macroeconomic Performance Test 1

2. Gross Domestic Product is defined as… © APT Initiatives Ltd Incorrect Correct Next question the value of goods and services produced by households in a country. the value of goods and services produced by households in a country. the value of goods and services produced by factors owned by the population of a country. the value of goods and services produced by factors owned by the population of a country. the value of goods and services after capital consumption is taken into account. the value of goods and services after capital consumption is taken into account. the value of goods and services produced by factors within a country. the value of goods and services produced by factors within a country. Gross Domestic Product is one of the measures of National Income. It includes the value of output produced, irrespective of the nationality of the businesses responsible. Therefore, C is the correct answer. Incorrect Question 1 AQA AS Economics Unit 2 – The National Economy

3. An economy is currently experiencing growth in GDP below trend. In the short-run, if the rate of growth of aggregate demand is less than the rate of growth in productive capacity, then this economy is most likely to experience… © APT Initiatives Ltd Incorrect Correct Next question an increase in inflation. a decrease in output. a decrease in imports. an increase in unemployment. In these circumstances, actual output will grow less quickly than potential output, a deflationary (or negative) output gap will grow, and unemployment will rise. Hence, option C is the correct response. Incorrect Question 2 AQA AS Economics Unit 2 – The National Economy

4. The diagram adjacent shows 2 production possibility frontiers for an economy. The movement of the economy from position S to T could indicate that there has been… © APT Initiatives Ltd Incorrect Correct Incorrect Next question a boom, and GDP is growing faster than trend. a boom, and GDP is growing faster than trend. a recession, and the rate of growth in GDP is falling. a recession, and the rate of growth in GDP is falling. there is a leftward shift in the country’s aggregate supply curve. there is a leftward shift in the country’s aggregate supply curve. an increase in GDP per capita. an increase in GDP per capita. The diagram, with a leftward shift in the production possibility, could either represent a fall in output below trend growth, which is not offered as an option, or a long term fall in the productive capacity of this economy, which could also be illustrated as a leftward shift in the long-run in the aggregate supply curve. Hence, option D is the correct response. Incorrect Question 3 AQA AS Economics Unit 2 – The National Economy Capital Goods Consumer Goods S T

5. A country’s per capita GDP is a useful measure of economic welfare because… © APT Initiatives Ltd Incorrect Correct Next question it takes out the effect of inflation. it reflects the average wealth of each factor owner. it reflects the average wealth of each factor owner. it takes out the effect of output from foreign owned businesses. it takes out the effect of output from foreign owned businesses. it measures the average income earned by each citizen. it measures the average income earned by each citizen. GDP refers to the flow of goods and services and corresponding income produced in an economy over a period of time. Therefore, GDP per capita means income per person in the population. Hence, C is the correct option. Incorrect Question 4 AQA AS Economics Unit 2 – The National Economy

6. The Consumer Price Index has been chosen as the means of measuring inflation because… © APT Initiatives Ltd Incorrect Next question it makes use of a more extensive range of products compared to the retail price index. it makes use of a more extensive range of products compared to the retail price index. it is calculated using the same methods as those found elsewhere in the EU. it is calculated using the same methods as those found elsewhere in the EU. it includes mortgage interest payments. it mirrors closely changes in the Retail Price Index. it mirrors closely changes in the Retail Price Index. The earlier measure of price change, the Retail Price Index, was found to be a less useful measure of inflation because it included changes in mortgage interest payments. Since interest rates were the primary way of managing inflation, their inclusion would be misleading. Primarily for this reason, in 2004, the Consumer Price Index (CPI), which excluded these payments, was introduced. Furthermore, calculation of CPI used the same methodology adopted by other EU countries, enabling more useful comparisons of economic performance and policy effectiveness. Hence, B is the correct response. Correct Question 5 AQA AS Economics Unit 2 – The National Economy

7. If the Consumer Price Index rises from 100 to 104, this means that… © APT Initiatives Ltd Incorrect Next question the price of each product has increased by 4%. the price of each product has increased by 4%. the average price level has increased by 4%. the average price level has increased by 4%. inflation is rising at a constant 4% per annum. inflation is rising at a constant 4% per annum. consumer goods inflation has increase by 4%. consumer goods inflation has increase by 4%. The Consumer Price Index (CPI) provides a measure of the level of prices in the economy, and because it excludes some changes that also affect inflation, it can only remain an indicator of inflation. Hence option B can be the only correct response. Since price changes, over a time period, vary significantly between products, option A is clearly incorrect. Option C is incorrect because it excludes changes in the prices of services, which must be included in the CPI in order to remain representative of price change generally. Given the different cost, market and price pressures in different markets, at different times, inflation cannot be constant, and therefore option D is also incorrect. Correct Question 6 AQA AS Economics Unit 2 – The National Economy

8. From the data adjacent it can be concluded that… © APT Initiatives Ltd Incorrect Correct Incorrect Next question average prices rose is some years and fell in others. average prices rose is some years and fell in others. prices were at their lowest in 2005. prices were at their lowest in 2005. prices grew least quickly in 2005. prices grew least quickly in 2005. prices remained constant in 2006. prices remained constant in 2006. The data shows that prices rose each year, and at various rates. However, in 2005 the price level grew least, at only 2.5%. Hence, option D is the correct response. Incorrect Question 7 AQA AS Economics Unit 2 – The National Economy YEARAnnual % change in Retail Prices 20033.9 20042.9 20052.5 20063.0 20073.0

9. The Government decides in April 2011 to use the Retail Price Index to increase the Basic State Pensions by 4.2% to £120.68 per week. How much would this pension have been worth in 2010, to the nearest penny? © APT Initiatives Ltd Incorrect Next question £113.12 £115.82 £125.75 £117.27 Since £120.68 is 4.2% greater than the Basic State Pension in 2010, this pension in 2010 can be derived by the following calculation: (120.68 / 104.2) x 100, which equals £115.82. Hence, B is the correct option. Correct Question 8 AQA AS Economics Unit 2 – The National Economy

10. The labour force only includes those who… © APT Initiatives Ltd Correct Incorrect Next question are willing and able to work. are employed full and part time. who are not earning money in the black economy. who are not earning money in the black economy. are employed or are claiming Jobseeker’s Allowance. are employed or are claiming Jobseeker’s Allowance. The labour force includes those from the workforce who are economically active and, therefore, are either in work, or are actively seeking work. Hence, it refers to those who are willing and able to work. They may or may not be able to claim Jobseeker’s Allowance, or may or may not be working in the black economy. Therefore, the correct answer is option A. Incorrect Question 9 AQA AS Economics Unit 2 – The National Economy

11. A current account deficit on the UK balance of payments means that typically… © APT Initiatives Ltd Incorrect Next question the value of the goods we sell overseas is less than the value of the goods we import. the value of the goods we sell overseas is less than the value of the goods we import. the total value of exports of goods and services is less than the total value of imports of goods and services. the total value of exports of goods and services is less than the total value of imports of goods and services. government revenue is less than government expenditure. government revenue is less than government expenditure. the volume of exported goods and services is less than the volume of imported goods and services. the volume of exported goods and services is less than the volume of imported goods and services. A current account deficit refers to the fact that the value of goods and services exported from the UK is less than the corresponding value of goods and services imported. Hence, option B is the correct response. Correct Question 10 AQA AS Economics Unit 2 – The National Economy

12. The current account of the balance of payments does not include… © APT Initiatives Ltd Incorrect Correct Incorrect Next question invisible trade. the value of exports in services. the transfer of funds to be invested overseas. the transfer of funds to be invested overseas. profits earned from overseas investment. profits earned from overseas investment. The current account of the balance of payments identifies transactions in goods and services between the residents of a country and the rest of the world. It, therefore, includes factor rewards from earlier investment overseas. The actual investment, which will generate this reward at some future date, is included in the capital account. Therefore, option D is the correct answer. Incorrect Question 11 AQA AS Economics Unit 2 – The National Economy

13. Macroeconomists make extensive use of index numbers because it can help them to … © APT Initiatives Ltd Incorrect Correct Next question demonstrate more clearly a percentage change in output. demonstrate more clearly a percentage change in output. understand how much the level of unemployment has fallen. understand how much the level of unemployment has fallen. compare the price of a product across different countries with different currencies. compare the price of a product across different countries with different currencies. clarify trends in economic data over a period of time. clarify trends in economic data over a period of time. Economic data is often expressed using large, detailed, and precise numbers. Hence any comparison, for example over time, or across two or more variables, is very difficult and time consuming. By using index numbers, with 100 representing a typical and therefore useful base year, the size and significance of any changes is much more apparent. Hence, option C is the correct response. Incorrect Question 12 AQA AS Economics Unit 2 – The National Economy

14. The economic cycle is characterised by… © APT Initiatives Ltd Correct Incorrect Next question changing rates of real GDP growth. changing rates of inflation arising from Bank of England intervention. changing rates of inflation arising from Bank of England intervention. increasing rates of unemployment over two consecutive quarters. increasing rates of unemployment over two consecutive quarters. the change of emphasis in the UK economy from manufacturing to services. the change of emphasis in the UK economy from manufacturing to services. The economic cycle refers to the way in which real GDP changes around the long term growth trend. Hence, option A is the correct response. Incorrect Question 13 AQA AS Economics Unit 2 – The National Economy

15. Recession is defined as a period of time over which… © APT Initiatives Ltd Incorrect Correct Next question output growth falls below the trend rate. output growth falls below the trend rate. nominal output falls, but real output continues to grow. nominal output falls, but real output continues to grow. output grows less fast over two consecutive quarters. output grows less fast over two consecutive quarters. output falls over two consecutive quarters. output falls over two consecutive quarters. Recession is a feature of some economic (or business) cycles. It occurs when output is falling, at least over two consecutive quarters compared with the previous quarter. Hence, option C is the correct answer. Incorrect Question 14 AQA AS Economics Unit 2 – The National Economy

16. The UK trend rate of economic growth is 2.5%. If next year’s inflation is expected to be at 3% and money national income is expected to grow by 4%, which one of the following is most likely? © APT Initiatives Ltd Correct Incorrect Next question The economy will operate below its trend rate, and unemployment will increase The economy will operate below its trend rate, and unemployment will increase Employment will rise, and national output will be above trend rate Employment will rise, and national output will be above trend rate Unemployment will decrease, and the economy will grow below the trend rate Unemployment will decrease, and the economy will grow below the trend rate Employment will fall, and the economy will operate above its trend rate Employment will fall, and the economy will operate above its trend rate According to this data, the economy will grow by 4% in £ terms, but with a 3% rate of inflation real growth will be restricted to about 1%, which is below trend. Trend growth reflects the ability of the economy to maintain current levels of employment and, therefore, in principle, unemployment. Thus, a real growth rate of less than trend, in this case 1%, will result in an increase in unemployment. Hence, option A is the correct response. Incorrect Question 15 AQA AS Economics Unit 2 – The National Economy

17. Higher rates of inflation are typically associated with… © APT Initiatives Ltd Correct Incorrect Next question the boom phase of the economic cycle. the boom phase of the economic cycle. an increase in the trend rate of real GDP. an increase in the trend rate of real GDP. higher rates of unemployment. the recovery phase of the economic cycle. the recovery phase of the economic cycle. The Economic Cycle is often associated with significant changes in Aggregate Demand, which in turn have implications for inflation. During a boom phase, there is high aggregate demand, and therefore the economy is typically producing at a higher-than-trend rate of growth. As a result, there will be increased inflationary pressures through shortages, as businesses strive to keep pace with demand. Therefore, option A is the correct response. Incorrect Question 16 AQA AS Economics Unit 2 – The National Economy

18. During the recovery phase of the economic cycle after a prolonged recession, economists would expect the rate of inflation, all other factors being equal, to… © APT Initiatives Ltd Incorrect Correct Incorrect Next question be falling at a faster rate. be rising at a slower rate. be rising at a faster rate. remain unchanged. During the recovery phase, as aggregate demand increases at a faster rate than aggregate supply, the rate of inflation would be expected to rise, and at a faster rate than rates incurred before. Hence, the correct response is option D. NB Inflation can be affected by factors outside the economic cycle. Incorrect Question 17 AQA AS Economics Unit 2 – The National Economy

19. Unemployment may not fall during a recovery phase in an economic cycle because… © APT Initiatives Ltd Incorrect Next question the rate of change of output is increasing. the rate of change of output is increasing. businesses will first try to increase output with existing factors. businesses will first try to increase output with existing factors. all of the above. unemployment will rise for non- cyclical reasons. unemployment will rise for non- cyclical reasons. There is typically a time lag between the recovery phase of the economic cycle and a corresponding reduction in unemployment. This is because businesses may be nervous about the strength and duration of the recovery and, in the first instance, will accommodate increases in demand from existing resources. Hence, option B is the correct response. Correct Question 18 AQA AS Economics Unit 2 – The National Economy

20. The rate of change of investment during a period of boom could be… © APT Initiatives Ltd Correct Incorrect Next question decreasing in anticipation of an economic slowdown. decreasing in anticipation of an economic slowdown. rising or falling, because many businesses are unconcerned about the economic cycle. rising or falling, because many businesses are unconcerned about the economic cycle. rising or falling, because businesses do not take a long-run view. rising or falling, because businesses do not take a long-run view. negative because interest rates may have fallen. negative because interest rates may have fallen. Investment levels across the whole economy will broadly reflect current and anticipated changes in the economic cycle. Therefore, during a boom, in anticipation of a en economic slowdown some businesses may cancel or postpone investment plans. Hence, option A is the correct answer. Incorrect Question 19 AQA AS Economics Unit 2 – The National Economy

21. The macroeconomic performance of the UK economy may be undermined by supply shocks, for example… © APT Initiatives Ltd Correct Incorrect Next question an increase in the world price of oil. an increase in £ exchange rate in relation to other major currencies. an increase in £ exchange rate in relation to other major currencies. falling house prices. low inflation and corresponding low interest rates. low inflation and corresponding low interest rates. A supply shock typically refers to an unanticipated reduction in aggregate supply, which results in macroeconomic disequilibrium and, in due course, less being supplied at each price level (ie a shift usually to the left in the long-run aggregate supply curve). The most common examples arise from wars, natural disasters, and increases in the price of key commodities such as oil. Hence, A is the correct response. Incorrect Question 20 AQA AS Economics Unit 2 – The National Economy

22. A positive output gap is defined as the extent to which… © APT Initiatives Ltd Correct Incorrect Next question actual output is greater than the productive potential of an economy. actual output is greater than the productive potential of an economy. GDP is greater than GNP. GNP is greater than GDP. the productive potential of an economy output is greater than actual output. the productive potential of an economy output is greater than actual output. A positive output gap (also known as an inflationary gap) occurs when an economy is producing at a level of output, which, in the short term, is greater than the productive potential of the economy. Hence, option A is the correct response. Incorrect Question 21 AQA AS Economics Unit 2 – The National Economy

23. A positive output gap is more likely to occur when… © APT Initiatives Ltd Incorrect Next question growth is below trend. there is full employment. aggregate demand equal aggregate supply. aggregate demand equal aggregate supply. inflation is low. A positive (or inflationary) output gap occurs when actual output is greater than potential output. Output at these exceptionally high levels is more likely to be associated with full employment. Hence, the correct answer is option B. Correct Question 22 AQA AS Economics Unit 2 – The National Economy

24. If an economy’s output gap moves from being negative to positive, the economy is likely to experience… © APT Initiatives Ltd Incorrect Correct Next question deflation. excess aggregate supply. rising unemployment. inflationary pressure. Such a move will result in this economy moving from producing real output levels below production potential, to real output above output potential (albeit temporarily). Therefore, of the options available, this economy is more likely to be experiencing Inflation. Hence, option C is the correct response. Incorrect Question 23 AQA AS Economics Unit 2 – The National Economy

25. A deflationary gap is typically associated with… © APT Initiatives Ltd Incorrect Correct Incorrect Next question aggregate demand and aggregate supply in equilibrium. aggregate demand and aggregate supply in equilibrium. increasing imports. changes in the economic cycle. a higher price level. A deflationary gap (also known as a negative output gap) occurs when real GDP (output) falls below potential output levels, usually as a result of a deficiency of aggregate demand. Changes in the level of aggregate demand are most commonly associated with changes in the economic cycle. Hence, option D is the correct response. Incorrect Question 24 AQA AS Economics Unit 2 – The National Economy

26. A negative output gap is defined as the extent to which… © APT Initiatives Ltd Incorrect Correct Incorrect Exit actual output is greater than the productive potential of an economy. actual output is greater than the productive potential of an economy. Inflation is falling. the productive potential of an economy output is less than actual output. the productive potential of an economy output is less than actual output. output is falling. A negative output gap (also known as a deflationary gap) occurs when an economy is producing at a level of output that is below the productive potential of the economy. Hence, option D is the correct response. Incorrect Question 25 AQA AS Economics Unit 2 – The National Economy