Unit 2 AQA Economics The National Economy January 2013

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Olatunde Osikoya
Section B: Data Response ­ Context 1.
Question 1.
The economic cycle is defined as the natural fluctuation of national and global economic activity
between periods of boom, recession, slump and recovery. Factors such as GDP, interest rates, levels
of employment, investment and consumption help determine each stage of the economic cycle.
Question 2.
Productivity levels were at their highest in the 2nd quarter of 2008 at an index of 102, whereas the highest
index of real GDP was approximately at 104 in the 1st quarter of 2008.
The lowest recorded index of real GDP was 96.5 around the 3rd quarter of 2009. On the other hand, the
lowest productivity index was at 99 in the 2nd quarter of 2009.
Question 3.
As the economy recovers, the economic atmosphere appears more secure, thus there will be an
increase in consumer and business confidence, this will increase aggregate demand as consumers are
more willing to consume so firms are more willing to invest as a result of this. The increased demand
of consumers means that firms will see a rise in profits and so will have more resources available to
Furthermore, a recovering economy means that banks have more incentive to lend out credit
accompanied with relatively low interest rates. The lower interest rates mean that the cost of
borrowing falls for firms so as a result the cost of production falls from P1 to P2, this allows firms
more income to invest in more capital which shifts the supply curve from SRAS1 to SRAS2. The
increased supply means that goods and services will be cheaper and thus aggregate demand
increases as real national output increases from Y1 to Y2.

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Olatunde Osikoya
Question 4.
Extract C suggest that as the pace of the recovery quickens, a further increase in inflation is
inevitable. A sustained recovery in the UK economy can be defined as a sustained period of
increasing economic activity with signals the end of a recession. Factors that determine whether an
economy is recovery are GDP, inflation and levels of unemployment and investment.…read more

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Olatunde Osikoya
Extract B states that the expansionary policies pursued by the government around the world were
the underlying cause for an increase in demand, which led to an increase in the inflation rate.
This basically means that expansionary policies such as an increase in government expenditure have
increased aggregate demand in the economy. An increase in government expenditure means
increasing the budget deficit.…read more

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Olatunde Osikoya
pound stronger. By doing this imports would be cheaper for British firms who rely on them and
therefore in turn their costs of production and therefore prices will also be lower, although this may
also increase AD in the economy as consumers have increased purchasing power. This actually refutes
the idea that a sustained recovery will inevitably experience inflation as long as aggregate supply
and real national output are able to match AD.…read more


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