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Economics Factory AQA style Paper 2 Summer 2024 - B

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EITHER

CONTEXT 1 Total for this context: 40 marks

Liz Truss and the dash for growth

Extract A
Figure 1: Real GDP per capita in the UK (£)

Figure 2: Growth of real GDP per capita (%) over time

Extract B: “Trussonomics” – the economic agenda of the UK’s shortest-serving Prime Minister

Liz Truss became Prime Minister on 6th September 2022 and left office on 25th October, making her
the shortest-serving Prime Minister in history. However, she entered office with great optimism,
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claiming that she would revitalise the UK economy. There was a strong focus on boosting trend
economic growth to a pre-set rate of 2.5%. This would be achieved by reducing the tax burden in a
way that would stimulate wealth creation rather redistributing income. There would be cuts to
corporation tax to encourage businesses to invest. There would also be a reduction in the basic rate
of income tax to reward work, and the abolition of the 45% tax rate in order to incentivise higher
paid and more productive workers. If these cuts were to reduce taxation revenue, then so be it. The
government would borrow more in the short term, but this would result in higher revenue in the
long term so that the budget could return to surplus for the first time since 2000-2001 and the
national debt could be paid down. Trussonomics also included an emphasis on supply-side reforms
such as deregulation – reducing burdens on businesses from regulation and planning (e.g. allowing
more fracking), together with low regulation and low tax investment zones.

Extract C: The mini-budget and the ‘dash for growth’

On 23rd September 2022, then Chancellor of the Exchequer Kwasi Kwarteng delivered a mini-budget
which began to implement Liz Truss’s plans and was dubbed by some as a “dash for growth”.
Significant tax cuts were announced as well as deregulation and supply-side reforms, especially in
the construction and energy markets. However, the days immediately following the min-budget saw
extraordinary turmoil on bond markets (with the government’s cost of borrowing rising sharply) and
currency markets (with the Sterling depreciating equally quickly). Within days, Liz Truss had been
forced to resign by this market reaction to her policies. This reaction is best explained in the context
of the economic climate of the time. The UK was faced by sharply rising inflation, which peaked at
above 11% just a couple of months later. The UK’s national debt was already around 100% of GDP
even before the large budget deficit that Liz Truss and Kwasi Kwarteng planned to operate in the
short term. These policies would stimulate demand strongly at a time when the UK’s economy was
experiencing capacity constraints and a shortage of workers. In the summer of 2022, the number of
job vacancies exceeded the number of unemployed workers for the first time. The UK seemed to be
at, or even below, its natural rate of unemployment.

0 1 Using Extract A, Figure 1 calculate to two decimal places the price on 26th September 2022 of a
ten year UK government bond with a coupon of £5. [2 marks]

0 2 Explain how the data in Extract A Figure 2 show that the UK’s economic growth rate is a
problem.

[4 marks]

0 3 Extract B speaks of a “strong focus on boosting economic growth” and says that this would be
achieved by “reducing the tax burden in a way that would stimulate wealth creation”.

With the aid of a diagram, explain how a lower tax burden may boost the trend growth rate of the
UK economy. [9 marks]

0 4 Extract C speaks of a “dash for growth” and says that the reaction “is best explained in the
context of the economic climate of the time”.
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Evaluate the policies by which Liz Truss hoped to boost the UK’s trend growth to 2.5%. [25 marks]

OR

CONTEXT 2 Total for this context: 40 marks

Unemployment in the UK

Extract D: Percentage of economically active people aged over 16 who are unemployed

Source: ONS

Extract E: Is low unemployment all it seems?

Economists have long accepted that full employment in its truest sense (everyone who wants a job
at prevailing wage rates has one) is not achievable. Instead, they have focused on achieving a lower
natural rate of unemployment, for example by policies that improve labour mobility. It is easy to
find evidence that policy in this area has been successful. In late 2022, UK unemployment was at a
record low rate, indicating that there was little spare capacity and helping to boost output. Low
unemployment also delivers a fiscal dividend for the government. Most importantly, being in a job
boosts the living standards of individuals and their families. The UK’s low unemployment rate may
be hiding problems, however. There are actually about 10 million people in the UK of a working age
(16-64) who aren’t working, but most of them don’t count as unemployed. Around 25% of them are
registered as long-term sick and unavailable for work, while over 12% have retired from the
workforce before reaching the age of 64. The number in both these categories has increased
significantly in recent years. Reversing this trend could deliver a substantial boost to the UK
economy. The question is how this might be done? Increased government spending may be
required, for example to reduce National Health Service waiting lists or to train the early-retired in
new skills. Alternatively, cuts to sickness benefits may raise concerns but may also encourage those
who may be able to work in some capacity to do so.
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Extract F: Youth unemployment

Despite a sustained low rate of unemployment, storm clouds remain. The UK teetered on the brink
of recession for much of 2022 and 2023 and any fall in GDP would inevitably see unemployment rise.
Meanwhile, youth unemployment, affecting workers aged 16-24 is a concern. In 2023 Quarter 3, the
unemployment rate amongst this age group was 12.6%. This is perhaps not as concerning as Spain’s
youth unemployment rate of 27.8% and Greece’s rate of 26%. Yet what of the long-term effects?
Those who are unemployed in the first few years after entering the labour market do not gain the
experience that they would otherwise do. They gain fewer skills and thus do not accumulate the
“human capital”. Is this part of the explanation of the UK’s productivity problem, which sees output
per hour worked about 25% less than in key comparator nations such as the USA? Reducing youth
unemployment is more easily said than done. Firms tend to prefer more experienced workers and
will not hire young workers unless they possess relevant skills or can easily be trained in them.

0 5 Using Extract D, and the information that there were 1.3m unemployed people in the UK in
December 2022, calculate to the nearest million the size of the UK’s labour force at this time.

[2 marks]

0 6 Explain how the data in Extract D show that the UK’s natural rate of unemployment has fallen
since 1985. [4 marks]

0 7 Extract E says “In late 2022, UK unemployment was at a record low rate”

With the aid of a production possibilities diagram, explain how reduced unemployment may affect
the UK’s GDP.

[9 marks]

0 8 Extract F states “Despite a sustained low rate of unemployment, storm clouds remain.”

Evaluate whether employment policy in the UK should focus on achieving further reductions in the
natural rate of unemployment.

[25 marks]
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EITHER

Essay 1

According to the World Bank, China's $18 trillion economy accounts for just under 18 percent of
global GDP, having grown at an average of 7% a year for the past decade and even more quickly
before that. The growth has lifted many out of poverty, but there are still question marks over
whether development in China has matched its growth rate.

0 9 Explain why rapid economic growth does not always result in rapid economic development.

[15 marks]

1 0 Evaluate the effects of economic growth in emerging economies such as China on the
macroeconomic performance of the UK. [25 marks]

OR

Essay 2

In June 2015 the Sterling exchange rate against the US dollar was £1 = $1.58, but Sterling has since
depreciated and for the past five years the rate has rarely been above £1 = $1.40

1 1 Explain possible causes of a depreciation in the Sterling exchange rate.

[15 marks]

1 2 Assess the likely macroeconomic effects of a sustained depreciation of Sterling.

[25 marks]

OR

Essay 3

In 2022-23, came close to entering recession, having been battered by a range of economic shocks
including the Covid pandemic and the effects of Russia’s invasion of Ukraine. At the same time, the
UK experienced an elevated rate of inflation, which reached more than 11% in late 2022.

1 3 Explain why low and stable inflation is an objective of macroeconomic policy. [15 marks]

1 4 Evaluate whether macroeconomic policy can prevent recessions and their effects. [25 marks]
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