2022 Exams - EdExcel Five and Eight Mark Questions

Here is a selection of shorter data response questions for EdExcel students - each drawing on a short data stimulus and using topics covered by advance information.

Economic Inactivity

In March 2022, 8.8 million people aged 16-64 were economically inactive, which is 21% of the population of working age.

Question: Using the data, calculate the size of population of working age (2)

Economic inactivity = 8.8 million
This is 21% of the population of working age
Therefore, population of working age = 8.8 x (100 / 21)
= 41.9 million people

Explain one reason why people of working age might be economically inactive

The economically inactive are people of working age who are neither in work or actively searching for a job. Nearly 9 million people are inactive in the UK. One reason might be that more students are deciding to stay on in full-time education either at school/college or taking a degree or apprenticeship. This could be because there are limited well-paid jobs available for younger people as the economy comes out of recession. Studying for qualifications will improve their human capital and earnings potential.

Quantitative Easing

The Bank of England has started to reduce the size of its asset purchase programme (known as quantitative easing, QE) from its peak value of £895bn. A reduction in QE might have a negative effect on aggregate demand.

Briefly explain how a fall in QE might affect aggregate demand (5 marks)

A fall in QE is a tightening of monetary policy and means that the Bank of England will be selling some of their stock of bonds to commercial banks such as HSBC. If for example, the BoE sells £50 billion of bonds (reducing the stock of QE to £845bn) than commercial banks will pay for these in cash and as a result, they will see a fall in their liquidity. Consequently, they will have less funds available to lend to businesses which in turn might have a negative effect on capital investment which itself is a component of AD. AD = C+I+G+(X-M)

Currency Depreciation

The Sterling Exchange Rate Index measures sterling’s value against a ‘basket’ of currencies, ‘trade‑weighted’ (based on currencies’ relative importance in UK trade). The sterling effective exchange rate depreciated 20% between November 2015 and October 2016, including a record 6.5% fall between June and July 2016 following the EU referendum vote. In April 2022, the sterling exchanger rate index is 23% below its January 2007 peak level.

Examine the possible effects of a depreciation in the UK exchange rate on two UK macroeconomic indicators. (8 marks)

KAA: The 6.5% fall in Sterling between June and July 2016 might have caused an increase in cost-push inflationary pressure. This is because a weaker pound increases import prices so input costs for manufacturers such as steel producers will have gone up.

Eval: However, this depends on the extent to which UK firms are dependent on imports and whether they can source their inputs from domestic suppliers at a cheaper price.

KAA: A second effect of a currency depreciation is to stimulate exports and an improved trade balance. If sterling falls 23% against the Euro, then UK firms such as a book producer might be able to sell products at a lower price in European markets and make a higher profit margin.

Eval: However, other factors might be making it harder to export products. Since the UK left the EU single market and customs union in 2020, many UK firms have complained of increasing paperwork and delays which have increased their costs putting them at a competitive disadvantage despite a weaker exchange rate.

Costs of Rising Inflation

Annual inflation in the UK in April reached its highest level since 1992, at 9.0%. Prices have been rising across almost all sectors of the economy, but fuel and energy have been particularly noticeable. For example, the Ofgem energy price cap increased on 1 April by 54% compared to the previous cap.

Question:
Examine two possible costs of rising inflation for households in the UK.

KAA: One cost of rising inflation is that many households will see a fall in their real income. For example, if inflation is 9% and nominal wages rise by only 4%, this leads to a 5% decline in real wages.

KAA: A second cost of inflation is that the Bank of England has and is likely to continue monetary policy interest rates. This will make borrowing more expensive – for example higher mortgage rates – which will lower the effective disposable income of millions of households. This might then increase the risk of a consumer-recession.

EVAL: However, this depends on the ability of workers to bargain for pay rises that might compensate for inflation and higher loan costs. Unemployment is low (3.8% of the labour force) and many employers face labour shortages, so wage bargaining power might be tilting towards employees. Firms may want to raise pay (if they have the profits to absorb this) to attract and retain skilled workers in scarce supply.