Economic Performance (AQA A Level Economics): Exam Questions

Extract D

Extract E: Financial regulation and monetary policy 

In response to the lessons learned from the global financial crisis of 2007/08, the government of the UK has introduced major reforms to financial markets. The government recognised that systemic risk, moral hazard and imperfect information had all contributed to the credit crunch and subsequent recession in the UK. As a result, changes have been made to try to avoid a recurrence of failing banks and expensive state-backed bailouts. 

The Prudential Regulation Authority (PRA) was established to ensure the stability of firms offering financial services and the Financial Conduct Authority (FCA) was set up to regulate the industry. Also, the Bank of England is responsible for supervising the whole financial system through the Financial Policy Committee (FPC). The FPC identifies and attempts to reduce risks in the system. The new framework is seen as the biggest change for the Bank of England since it was given operational independence for the conduct of monetary policy in 1997.  Since 2013, the Treasury has required the Bank of England to place more emphasis on helping the government to achieve its objectives for growth and employment, in addition to its central objective of maintaining price stability. However, some argue that trying to maintain stable prices and low unemployment could create trade-offs. 

The Monetary Policy Committee’s decision to lower Bank Rate to 0.5% in 2009, and the subsequent decision to lower it to 0.25% in 2016, have been instrumental in the UK’s sustained recovery and return to low levels of unemployment. The Bank of England has also used quantitative easing (QE) to boost consumption and investment. Maintaining low interest rates is considered by many to be vital for both consumer and business confidence.

During 2018, the UK experienced an annual growth rate of 1.4%, an unemployment rate of around 4.1%, inflation close to target at 2.5% and a reduced current account deficit on the balance of payments. However, in November 2018, the Bank of England warned that economic shocks could damage the UK’s prosperity.

In the past few years, CPI inflation has often differed by more than 1% from its 2% target. In the winter of 2015 the UK experienced a brief period of deflation but, more recently, inflation has been over 3%.

In July 2017, more people were employed in the UK than ever before. At the same time, the UK unemployment rate fell to 4.3%, the lowest rate for 40 years. Whilst this suggests that the government’s policies for employment are working, some claim that zero-hours contracts, low real wages and temporary jobs have made many people worse off.

During 2018, the UK experienced an annual growth rate of 1.4%, an unemployment rate of around 4.1%, inflation close to target at 2.5% and a reduced current account deficit on the balance of payments. However, in November 2018, the Bank of England warned that economic shocks could damage the UK’s prosperity.

Extract B: What is GDP?

Imagine £50 notes stacked on top of each other, stretching almost 4500 kilometres into the sky. This fantastically large amount of money (more than £2 trillion) is the current estimated value of the UK’s Gross Domestic Product (GDP).

GDP is the standard measure of the size and health of a country’s economy but it is important to distinguish between nominal and real GDP. It’s the way we measure and compare how well or badly countries are doing. In other words, it is the total value of the output of goods and services produced in an economy over a period of time. The higher the value of GDP, the bigger the economy. If injections into an economy’s circular flow of income increase, then this may generate multiple increases in GDP, depending upon the size of the marginal propensity to consume.

Why is the measurement of GDP important? Well, it’s a way of keeping track of how the economy is doing, and whether it is growing. We can also use it to measure one economy against other economies using purchasing power parity exchange rates. If real GDP goes up, the economy is doing well; this is associated with higher incomes, more jobs and higher spending. If real GDP goes down, the economy is not doing so well; this is associated with falling incomes, lower consumption and a lower standard of living.

Source: News reports, 2017

In the past few years, CPI inflation has often differed by more than 1% from its 2% target. In the winter of 2015 the UK experienced a brief period of deflation but, more recently, inflation has been over 3%.

In July 2017, more people were employed in the UK than ever before. At the same time, the UK unemployment rate fell to 4.3%, the lowest rate for 40 years. Whilst this suggests that the government’s policies for employment are working, some claim that zero-hours contracts, low real wages and temporary jobs have made many people worse off.

Between 2011 and 2016, UK unemployment fell from a high of 8.5% to 4.8%. Some argue that government attempts to reduce unemployment inevitably lead to trade-offs with other macroeconomic policy objectives.

Extract D: Macroeconomic performance indicators, selected Southeast Asian economies, 2010 to 2021

Source: World Bank, 2022

In November 2022, the Bank of England warned there was a risk that the UK was heading for a recession. This announcement came shortly after the money supply fell, following its rapid growth in 2020 and 2021.

In August 2022, the Office for National Statistics (ONS) announced that the unemployment rate had reached 3.5%, the lowest rate in almost 50 years. Some argue this is below the natural rate of unemployment (NRU) and that very high levels of employment may cause problems for the economy.

In August 2022, the Office for National Statistics (ONS) announced that the unemployment rate had reached 3.5%, the lowest rate in almost 50 years. Some argue this is below the natural rate of unemployment (NRU) and that very high levels of employment may cause problems for the economy.

Throughout 2021 and 2022, the UK suffered from supply-side problems which caused prices to rise. Within an economic cycle, there are often trade-offs between different macroeconomic objectives. However, many economists argue that the government should do more to reduce the likelihood of these trade-offs persisting in the long run.

According to the Office for National Statistics, the UK’s real gross domestic product (GDP) increased by an estimated 7.5% in 2021, the fastest rate in 80 years. This followed a fall in real GDP of 9.4% in 2020

According to the Office for National Statistics, the UK’s real gross domestic product (GDP) increased by an estimated 7.5% in 2021, the fastest rate in 80 years. This followed a fall in real GDP of 9.4% in 2020.

Extract E: Argentina’s economic woes

In 2019, Argentina’s inflation rate hit 53.8%, climbing to its highest level in thirty years. This confirmed Argentina’s place among the five countries with the highest inflation rates in the world, just behind Venezuela, Zimbabwe, South Sudan and Sudan. However, inflation isn’t the only problem faced by Argentina. The country has just suffered three years of recession and the government has often struggled to meet its debt repayments.

Despite one of the tightest monetary policies in Argentina’s history, implemented in 2018 after a currency crisis, inflation continued to rise and the recession deepened. It was hoped that policy measures, including a reduction in tariffs and strict currency controls, would help to reduce inflation, but so far this has not happened.

In 2020, Argentina’s central bank cut its base interest rate to support the recovery of the economy. However, it has been argued that lower interest rates would be likely to cause further inflation. “Loosening monetary policy without having a clear fiscal plan or winning over the confidence of businesses and consumers is a mistake”, said an Argentine economist.

Some argue that Argentina should prioritise eliminating inflation over other objectives of economic policy. In the 1970s and 1980s, the UK experienced high inflation. Policies were put in place to reduce the money supply and reduce government spending. The control of inflation became the main target of UK government macroeconomic policy. However, reducing inflation often comes at the expense of growth and jobs, at least in the short term.

Source: News reports, 2020

Extract E: Argentina’s economic woes

In 2019, Argentina’s inflation rate hit 53.8%, climbing to its highest level in thirty years. This confirmed Argentina’s place among the five countries with the highest inflation rates in the world, just behind Venezuela, Zimbabwe, South Sudan and Sudan. However, inflation isn’t the only problem faced by Argentina. The country has just suffered three years of recession and the government has often struggled to meet its debt repayments.

Despite one of the tightest monetary policies in Argentina’s history, implemented in 2018 after a currency crisis, inflation continued to rise and the recession deepened. It was hoped that policy measures, including a reduction in tariffs and strict currency controls, would help to reduce inflation, but so far this has not happened.

In 2020, Argentina’s central bank cut its base interest rate to support the recovery of the economy. However, it has been argued that lower interest rates would be likely to cause further inflation. “Loosening monetary policy without having a clear fiscal plan or winning over the confidence of businesses and consumers is a mistake”, said an Argentine economist.

Some argue that Argentina should prioritise eliminating inflation over other objectives of economic policy. In the 1970s and 1980s, the UK experienced high inflation. Policies were put in place to reduce the money supply and reduce government spending. The control of inflation became the main target of UK government macroeconomic policy. However, reducing inflation often comes at the expense of growth and jobs, at least in the short term.

In 2018, the European Commission estimated that Bulgaria and Romania were both experiencing positive output gaps whilst the UK was experiencing a negative output gap. Persistent output gaps can cause problems for economies which may be addressed by supply-side improvements.

Extract E: South Korea: a model for development?

The Republic of Korea (South Korea) holds the number one spot in the recently released 2019 Bloomberg Innovation Index. This index scores economies using factors such as research and development (R&D) spending and the number of large high-tech companies. South Korea gained top scores worldwide for manufacturing value-added, as well as a measure that includes enrolment in higher education and the proportion of science and engineering graduates.

South Korea’s transformation from one of the poorest countries in the world in the 1950s to a major industrial power and member of the Organisation for Economic Co-operation and Development (OECD) was exceptionally rapid, reflecting effective economic policies. South Korea’s sound fiscal and monetary policy decisions, as well as high levels of investment in human and physical capital and a commitment to free trade, led to rapid growth. Per capita income increased from 6% of the OECD average in 1970 to 89% in 2017. Rapid development has been export-led, with large business groups, known as ‘chaebols’, making South Korea the world’s sixth-largest exporter.

Investment in R&D has been an important driver of economic growth and industrial progress. It is a key factor that has contributed to the technological competitiveness and productivity of many developing countries. Some economists also point to the vital role the government played in helping to create the conditions needed for sustained economic growth. However, it is the private sector, working in conjunction with the government, which is key to South Korea’s success. Samsung, Hyundai, Kia and LG are just some of the successful companies which sell to a worldwide market and drive innovation.

Source: News reports, 2019

Commercial banks provide financial services for both individuals and businesses. In 2007–08, the financial crisis led many to argue for tighter regulation of the banks to prevent problems in financial markets affecting the real economy. However, financial markets are not the only source of cyclical instability. Governments can use a variety of policies to try to create a more stable economy.