ECONOMICS A MAY 2025 PAPER 2 UK
ECONOMY PERFORMANCE AND POLICIES
2026 EXAM-STYLE QUESTIONS AND MODEL
RESPONSES
◉ Aggregate demand. Answer: The total of all demands or
expenditures in the economy at any given price.
◉ Aggregate demand curve. 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. Answer: Business confidence: the mood of
managers and owners of firms about the future of their industry and
the wider economy.
◉ Gross investment. 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. Answer: The addition to the capital stock of the
economy.
,◉ Retained profit. 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. Answer: Exports minus
imports.
◉ Aggregate supply curve. Answer: The relationship between the
average level of prices in the economy and the level of total output.
◉ Full capacity. 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. Answer: The upward sloping
aggregate supply curve which assumes that money wage rates are
fixed.
◉ Supply-side shocks. 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. Answer: A model of the economy which
shows the flow of goods, services and factors and their payments
around the economy.
◉ Closed economy. Answer: An economy where there is no foreign
trade.
◉ Income. Answer: Rent, interest, wages and profits earned from
wealth owned by economic actors.
◉ Injections. Answer: In the circular flow of income, spending which
is not generated by households including investment, government
spending and exports.
◉ National income. Answer: The value of the output, expenditure or
income of an economy over a period of time.
◉ Open economy. Answer: An economy where there is trade with
other countries.
◉ Wealth. 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. 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). 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). 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). 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). 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. 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
ECONOMY PERFORMANCE AND POLICIES
2026 EXAM-STYLE QUESTIONS AND MODEL
RESPONSES
◉ Aggregate demand. Answer: The total of all demands or
expenditures in the economy at any given price.
◉ Aggregate demand curve. 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. Answer: Business confidence: the mood of
managers and owners of firms about the future of their industry and
the wider economy.
◉ Gross investment. 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. Answer: The addition to the capital stock of the
economy.
,◉ Retained profit. 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. Answer: Exports minus
imports.
◉ Aggregate supply curve. Answer: The relationship between the
average level of prices in the economy and the level of total output.
◉ Full capacity. 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. Answer: The upward sloping
aggregate supply curve which assumes that money wage rates are
fixed.
◉ Supply-side shocks. 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. Answer: A model of the economy which
shows the flow of goods, services and factors and their payments
around the economy.
◉ Closed economy. Answer: An economy where there is no foreign
trade.
◉ Income. Answer: Rent, interest, wages and profits earned from
wealth owned by economic actors.
◉ Injections. Answer: In the circular flow of income, spending which
is not generated by households including investment, government
spending and exports.
◉ National income. Answer: The value of the output, expenditure or
income of an economy over a period of time.
◉ Open economy. Answer: An economy where there is trade with
other countries.
◉ Wealth. 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. 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). 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). 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). 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). 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. 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
