Practise calculating aggregate demand, interpreting AD shifts and analysing how consumption, saving, investment, government spending and net trade change demand.
The table shows selected macroeconomic data for an economy in 2022.
Ceteris paribus, calculate the value of aggregate demand for this economy in 2022. Show your workings.
The diagram shows aggregate supply and aggregate demand for an economy. Which one was the most likely cause of the change from AD to AD1?
A decrease in government spending
An increase in interest rates
A decrease in net exports
An increase in consumption
In the first quarter of 2019 average house prices decreased by 15% in real terms in Sydney, Australia.
Explain one possible impact of this change in house prices on the level of consumption.
The chart shows the savings ratio for Latvia between 2016 and 2021.
(Source adapted from: https://tradingeconomics.com/latvia/gross-household-
saving-rate-b8g-b6gd8net100-eurostat-data.html)
With reference to the trend shown in the chart, explain what is meant by the 'savings ratio'.
Between June 2021 and June 2022 the savings ratio in the USA fell from 9.5% to 5.1%.
Draw an AD and SRAS diagram to show the likely impact of this change in the savings ratio on the economy of the USA.
The table shows the value of gross investment in Tanzania for 2015 and 2020.
With reference to the table, explain what is meant by 'gross investment'.
Sources for use with Section C
The eurozone economy
Figure 1 Annual real GDP growth rate, Q1 2018 to Q3 2020
Figure 2 Inflation rate, as measured by the Consumer Price Index (CPI), January 2020 to December 2020
Extract A Monetary policy
In November 2020 the European Central Bank (ECB) highlighted that there were “worrying signals” about the future state of the eurozone economy. It indicated that low business confidence had caused a fall in the demand for bank loans. At the same time, there was a decrease in the availability of credit. These factors resulted in significantly lower levels of investment.
In response the ECB immediately launched an additional round of quantitative easing in December 2020. This programme was reintroduced to help the eurozone economy to recover from negative rates of economic growth, rising unemployment and to prevent another recession. It announced a €500 billion increase in the size of its quantitative easing programme for the period January 2021 to September 2021.
The ECB also announced the provision of extra low-cost funding for banks, aimed at encouraging an increase in bank lending. It agreed to finance the banks at negative interest rates of –1% until June 2022. This meant that the ECB would be paying banks to borrow more money, provided they continue to lend.
Economists have suggested that a reflationary policy could be needed for years, given the weak state of the eurozone economy. In 2020 economic growth in the eurozone was –6.7%. The ECB forecast an economic growth rate of only 3.9% in 2021, 4.2% in 2022 and 2.1% in 2023. The ECB also forecast that the rate of inflation in 2023 will increase but remain below its 2% target.
However, it is unlikely that the ECB can manage the entire burden of supporting the eurozone recovery. Market forces have already reduced the effectiveness of existing policies. For example, in 2020 the eurozone’s currency, the euro, traded at its highest level against the US dollar for more than two years. The ECB said it was “very carefully” monitoring the impact of the increase in the exchange rate of the euro against the US dollar.
Economists are concerned that the ECB’s asset purchases will have a limited impact because interest rates are already extremely low. They argue that reflationary fiscal policy will be necessary to stimulate economic recovery.
With reference to Figure 1 and the first paragraph of Extract A, analyse two influences on the level of investment in the eurozone.
The French Government is to offer €5 billion in tax relief for business investment.
Explain one likely economic effect of this investment tax relief.
South Africa's annual government expenditure as a proportion of GDP increased from 31.4\% to 34.6\% between 2012 and 2019.
Which one of the following is most likely to have contributed to this increase in government expenditure as a proportion of GDP?
Lower welfare payments
A lower exchange rate
Less economic activity
Increased business confidence
Sources for use with Section C
The eurozone economy
Figure 1 Annual real GDP growth rate, Q1 2018 to Q3 2020
Figure 2 Inflation rate, as measured by the Consumer Price Index (CPI), January 2020 to December 2020
Extract A Monetary policy
In November 2020 the European Central Bank (ECB) highlighted that there were “worrying signals” about the future state of the eurozone economy. It indicated that low business confidence had caused a fall in the demand for bank loans. At the same time, there was a decrease in the availability of credit. These factors resulted in significantly lower levels of investment.
In response the ECB immediately launched an additional round of quantitative easing in December 2020. This programme was reintroduced to help the eurozone economy to recover from negative rates of economic growth, rising unemployment and to prevent another recession. It announced a €500 billion increase in the size of its quantitative easing programme for the period January 2021 to September 2021.
The ECB also announced the provision of extra low-cost funding for banks, aimed at encouraging an increase in bank lending. It agreed to finance the banks at negative interest rates of –1% until June 2022. This meant that the ECB would be paying banks to borrow more money, provided they continue to lend.
Economists have suggested that a reflationary policy could be needed for years, given the weak state of the eurozone economy. In 2020 economic growth in the eurozone was –6.7%. The ECB forecast an economic growth rate of only 3.9% in 2021, 4.2% in 2022 and 2.1% in 2023. The ECB also forecast that the rate of inflation in 2023 will increase but remain below its 2% target.
However, it is unlikely that the ECB can manage the entire burden of supporting the eurozone recovery. Market forces have already reduced the effectiveness of existing policies. For example, in 2020 the eurozone’s currency, the euro, traded at its highest level against the US dollar for more than two years. The ECB said it was “very carefully” monitoring the impact of the increase in the exchange rate of the euro against the US dollar.
Economists are concerned that the ECB’s asset purchases will have a limited impact because interest rates are already extremely low. They argue that reflationary fiscal policy will be necessary to stimulate economic recovery.
Examine the likely effects of 'the increase in the exchange rate of the euro against the US dollar' (Extract A, lines 25-26) on the net trade balance of the eurozone.