AS LEVEL ECONOMICS A: THE UK
ECONOMY: PERFORMANCE AND POLICIES
COMPREHENSIVE STUDY GUIDE 2026 FULL
QUESTIONS AND SOLUTIONS GRADED A+
◍ 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 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 - MPCor 1___________________MPS + MPT +
, MPM or 1____MPW
◍ Multiplier effect or process.
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).
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).
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).
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.
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.
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.
Answer: Per individual in the population
◍ Purchasing power parities.
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.
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.
Answer: Income for which there is no corresponding output, such as
unemployment benefits or pension payments.
◍ Value and volume of national income.
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.
◍ Boom or peak.
Answer: Period of time when the economy is growing strongly and is
operating above its productive potential.
◍ Demand-side shock.
Answer: A sudden and large impact on aggregate demand.
◍ Depression or slump.
Answer: A period of the trade cycle when there is a particularly deep and
long fall in output.
◍ Downturn.
Answer: A period of the trade cycle when either economic growth or GDP
itself is falling.
◍ Economic growth.
Answer: The rise in output in an economy which can be either actual growth
or potential growth.
◍ Economic recovery.
, Answer: The movement back from where the economy is operating below
its productive potential to a point where it is at is productive potential.
◍ Export-led growth.
Answer: A rise in aggregate demand caused by a rise in exports.
◍ Hysteresis.
Answer: The process whereby a variable does not return to its former value
when changed. In terms of the trade cycle, it is used to describe the
phenomenon of an economy failing to return to its former long term trend
rate of growth after a severe recession.
◍ Output gap.
Answer: The difference between the actual level of GDP and the productive
potential of the economy.
◍ Positive output gap.
Answer: When actual GDP is above the productive potential of the economy
and it is in boom.
◍ Negative output gap.
Answer: When actual GDP is below the productive potential of the
economy.
◍ Potential growth.
Answer: Economic growth as measured by the changes in the productive
potential of the economy over time.
◍ Recession.
Answer: A period of the trade cycle when output or growth in output falls.
The technical definition now used by the UK government is that a recession
occurs when growth in output is negative for two consecutive quarters (i.e.
two periods of three months).
◍ Spare capacity.
Answer: For a whole economy, this exists when long run aggregate supply is
greater than aggregate demand and so there is a negative output gap.
ECONOMY: PERFORMANCE AND POLICIES
COMPREHENSIVE STUDY GUIDE 2026 FULL
QUESTIONS AND SOLUTIONS GRADED A+
◍ 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 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 - MPCor 1___________________MPS + MPT +
, MPM or 1____MPW
◍ Multiplier effect or process.
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).
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).
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).
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.
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.
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.
Answer: Per individual in the population
◍ Purchasing power parities.
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.
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.
Answer: Income for which there is no corresponding output, such as
unemployment benefits or pension payments.
◍ Value and volume of national income.
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.
◍ Boom or peak.
Answer: Period of time when the economy is growing strongly and is
operating above its productive potential.
◍ Demand-side shock.
Answer: A sudden and large impact on aggregate demand.
◍ Depression or slump.
Answer: A period of the trade cycle when there is a particularly deep and
long fall in output.
◍ Downturn.
Answer: A period of the trade cycle when either economic growth or GDP
itself is falling.
◍ Economic growth.
Answer: The rise in output in an economy which can be either actual growth
or potential growth.
◍ Economic recovery.
, Answer: The movement back from where the economy is operating below
its productive potential to a point where it is at is productive potential.
◍ Export-led growth.
Answer: A rise in aggregate demand caused by a rise in exports.
◍ Hysteresis.
Answer: The process whereby a variable does not return to its former value
when changed. In terms of the trade cycle, it is used to describe the
phenomenon of an economy failing to return to its former long term trend
rate of growth after a severe recession.
◍ Output gap.
Answer: The difference between the actual level of GDP and the productive
potential of the economy.
◍ Positive output gap.
Answer: When actual GDP is above the productive potential of the economy
and it is in boom.
◍ Negative output gap.
Answer: When actual GDP is below the productive potential of the
economy.
◍ Potential growth.
Answer: Economic growth as measured by the changes in the productive
potential of the economy over time.
◍ Recession.
Answer: A period of the trade cycle when output or growth in output falls.
The technical definition now used by the UK government is that a recession
occurs when growth in output is negative for two consecutive quarters (i.e.
two periods of three months).
◍ Spare capacity.
Answer: For a whole economy, this exists when long run aggregate supply is
greater than aggregate demand and so there is a negative output gap.
