Edexcel A-level Economics Paper 2
Macroeconomics -correct answer_The study of the economy as a whole, including inflation,
growth and unemployment. Aggregate demand -correct answer_The total of all demands or
expenditures in the economy at any given price. Aggregate demand curve -correct
answer_Shows the relationship between the price level and equilibrium national income. As
the price level rises the equilibrium level of national income falls. Animal spirits -correct
answer_Business confidence: the mood of managers and owners of firms about the future of
their industry and the wider economy. Gross investment -correct answer_The addition to
capital stock, both to replace the existing capital stock which has been used up (depreciation)
and the creation of additional capital. Investment -correct answer_The addition to the capital
stock of the economy. Retained profit -correct answer_Profit kept back by a firm for its own use
which is not distributed to shareholders or used to pay taxation. Net exports or the net trade
balance -correct answer_Exports minus imports. Aggregate supply curve -correct answer_The
relationship between the average level of prices in the economy and the level of total output.
Full capacity -correct answer_The level of output where no extra production can take place in
the long run with existing resources. The full capacity level of output for an economy is shown
by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate
supply curve. Short-run aggregate supply curve -correct answer_The upward sloping
aggregate supply curve which assumes that money wage rates are fixed. Supply-side shocks
-correct answer_Factors such as changes in wage rates or commodity prices which cause the
short run aggregate supply curve to shift. Circular flow of income -correct answer_A model of
the economy which shows the flow of goods, services and factors and their payments around
the economy. Closed economy -correct answer_An economy where there is no foreign trade.
Income -correct answer_Rent, interest, wages and profits earned from wealth owned by
economic actors. Injections -correct answer_In the circular flow of income, spending which is
not generated by households including investment, government spending and exports.
National income -correct answer_The value of the output, expenditure or income of an
economy over a period of time. Open economy -correct answer_An economy where there is
trade with other countries. Wealth -correct answer_A stock of assets which can be used to
generate a flow of production or income. For example, physical wealth such as factories and
machines is used to make goods and services. Withdrawals or leakages -correct answer_In
the circular flow of income, spending by households which does not flow back to domestic
firms. It includes savings, taxes and imports. Marginal propensity to import (MPM) -correct
answer_The increase in imports divided by the increase in income that caused them (i.e.
change in M / change in Y) Marginal propensity to save (MPS) -correct answer_The increase
in saving divided by the increase in income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) -correct answer_The increase in tax revenues divided by the
increase in income that caused them (i.e. change in T / change in Y) Marginal propensity to
withdraw (MPW) -correct answer_The increase in withdrawals from the circular flow (S + T + M)
, divided by the increase in income that caused them (i.e. change in W / change in Y); this is the
same as the sum of the marginal propensity to save, tax and import (MPS + MPT + MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier -correct
answer_The figure used to multiply a change in an injection into the circular flow, such as
investment, to find the final change in income (assuming the injection is not determined by
income). It is the ratio of the final change in income to the initial change in an injection. It can
be calculated as 1 ________ 1 - MPC or 1 ___________________ MPS + MPT + MPM or 1 ____
MPW Multiplier effect or process -correct answer_An increase in investment or other injection
will lead to an even greater increase in income (assuming the injection is not determined by
income). Gross domestic product (GDP) -correct answer_A measure of the output or value
added of an economy which does not include output or income from investments abroad or an
allowance for the depreciation of the nation's capital stock. Gross national income (GNI)
-correct answer_The value of goods and services produced by an economy over a period of
time (GDP) plus net overseas interest payments and dividends (factor incomes). Gross
national product (GNP) -correct answer_The market value of goods and services produced
over a period of time through the labour or property supplied by citizens of a country both
domestically (GDP) and overseas. Hidden, black or informal economy -correct
answer_Economic activity where trade and exchange take place but which goes unreported to
the tax authorities and those collecting national income statistics. Net national income -correct
answer_A measure of national income which includes both net income from investments
abroad and an allowance for depreciation of the nation's capital stock. Per person or per head
or per capita -correct answer_Per individual in the population Purchasing power parities
-correct answer_An exchange rate of one currency for another which compares how much a
typical basket of goods in one country costs compared to that of another country. Standard of
living -correct answer_How well off is an individual, household or economy, measured by a
complex mix of variables such as income, health, the environment, participation in society and
political freedoms. Transfer payments -correct answer_Income for which there is no
corresponding output, such as unemployment benefits or pension payments. Value and
volume of national income -correct answer_The value of national income is its monetary value
at the prices of the day; the volume is the national income adjusted for inflation and is
expressed either as an index number or in money terms at the prices in a selected base year.
Actual growth -correct answer_Economic growth as measured by recorded changes in real
GDP over time. Boom or peak -correct answer_Period of time when the economy is growing
strongly and is operating above its productive potential. Demand-side shock -correct
answer_A sudden and large impact on aggregate demand. Depression or slump -correct
answer_A period of the trade cycle when there is a particularly deep and long fall in output.
Downturn -correct answer_A period of the trade cycle when either economic growth or GDP
itself is falling. Economic growth -correct answer_The rise in output in an economy which can
be either actual growth or potential growth. Economic recovery -correct answer_The
movement back from where the economy is operating below its productive potential to a point
Macroeconomics -correct answer_The study of the economy as a whole, including inflation,
growth and unemployment. Aggregate demand -correct answer_The total of all demands or
expenditures in the economy at any given price. Aggregate demand curve -correct
answer_Shows the relationship between the price level and equilibrium national income. As
the price level rises the equilibrium level of national income falls. Animal spirits -correct
answer_Business confidence: the mood of managers and owners of firms about the future of
their industry and the wider economy. Gross investment -correct answer_The addition to
capital stock, both to replace the existing capital stock which has been used up (depreciation)
and the creation of additional capital. Investment -correct answer_The addition to the capital
stock of the economy. Retained profit -correct answer_Profit kept back by a firm for its own use
which is not distributed to shareholders or used to pay taxation. Net exports or the net trade
balance -correct answer_Exports minus imports. Aggregate supply curve -correct answer_The
relationship between the average level of prices in the economy and the level of total output.
Full capacity -correct answer_The level of output where no extra production can take place in
the long run with existing resources. The full capacity level of output for an economy is shown
by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate
supply curve. Short-run aggregate supply curve -correct answer_The upward sloping
aggregate supply curve which assumes that money wage rates are fixed. Supply-side shocks
-correct answer_Factors such as changes in wage rates or commodity prices which cause the
short run aggregate supply curve to shift. Circular flow of income -correct answer_A model of
the economy which shows the flow of goods, services and factors and their payments around
the economy. Closed economy -correct answer_An economy where there is no foreign trade.
Income -correct answer_Rent, interest, wages and profits earned from wealth owned by
economic actors. Injections -correct answer_In the circular flow of income, spending which is
not generated by households including investment, government spending and exports.
National income -correct answer_The value of the output, expenditure or income of an
economy over a period of time. Open economy -correct answer_An economy where there is
trade with other countries. Wealth -correct answer_A stock of assets which can be used to
generate a flow of production or income. For example, physical wealth such as factories and
machines is used to make goods and services. Withdrawals or leakages -correct answer_In
the circular flow of income, spending by households which does not flow back to domestic
firms. It includes savings, taxes and imports. Marginal propensity to import (MPM) -correct
answer_The increase in imports divided by the increase in income that caused them (i.e.
change in M / change in Y) Marginal propensity to save (MPS) -correct answer_The increase
in saving divided by the increase in income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) -correct answer_The increase in tax revenues divided by the
increase in income that caused them (i.e. change in T / change in Y) Marginal propensity to
withdraw (MPW) -correct answer_The increase in withdrawals from the circular flow (S + T + M)
, divided by the increase in income that caused them (i.e. change in W / change in Y); this is the
same as the sum of the marginal propensity to save, tax and import (MPS + MPT + MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier -correct
answer_The figure used to multiply a change in an injection into the circular flow, such as
investment, to find the final change in income (assuming the injection is not determined by
income). It is the ratio of the final change in income to the initial change in an injection. It can
be calculated as 1 ________ 1 - MPC or 1 ___________________ MPS + MPT + MPM or 1 ____
MPW Multiplier effect or process -correct answer_An increase in investment or other injection
will lead to an even greater increase in income (assuming the injection is not determined by
income). Gross domestic product (GDP) -correct answer_A measure of the output or value
added of an economy which does not include output or income from investments abroad or an
allowance for the depreciation of the nation's capital stock. Gross national income (GNI)
-correct answer_The value of goods and services produced by an economy over a period of
time (GDP) plus net overseas interest payments and dividends (factor incomes). Gross
national product (GNP) -correct answer_The market value of goods and services produced
over a period of time through the labour or property supplied by citizens of a country both
domestically (GDP) and overseas. Hidden, black or informal economy -correct
answer_Economic activity where trade and exchange take place but which goes unreported to
the tax authorities and those collecting national income statistics. Net national income -correct
answer_A measure of national income which includes both net income from investments
abroad and an allowance for depreciation of the nation's capital stock. Per person or per head
or per capita -correct answer_Per individual in the population Purchasing power parities
-correct answer_An exchange rate of one currency for another which compares how much a
typical basket of goods in one country costs compared to that of another country. Standard of
living -correct answer_How well off is an individual, household or economy, measured by a
complex mix of variables such as income, health, the environment, participation in society and
political freedoms. Transfer payments -correct answer_Income for which there is no
corresponding output, such as unemployment benefits or pension payments. Value and
volume of national income -correct answer_The value of national income is its monetary value
at the prices of the day; the volume is the national income adjusted for inflation and is
expressed either as an index number or in money terms at the prices in a selected base year.
Actual growth -correct answer_Economic growth as measured by recorded changes in real
GDP over time. Boom or peak -correct answer_Period of time when the economy is growing
strongly and is operating above its productive potential. Demand-side shock -correct
answer_A sudden and large impact on aggregate demand. Depression or slump -correct
answer_A period of the trade cycle when there is a particularly deep and long fall in output.
Downturn -correct answer_A period of the trade cycle when either economic growth or GDP
itself is falling. Economic growth -correct answer_The rise in output in an economy which can
be either actual growth or potential growth. Economic recovery -correct answer_The
movement back from where the economy is operating below its productive potential to a point
