Highly Possible Questions In Unit 2:Managing the Economy (coming very very soon)

This posting is dedicated to several of my students who requested me this morning to blog about the possible questions in tomorrow’s exam. Frankly speaking, questions in Unit 2 are far more unpredictable than those in Unit 1. This is because of the nature of macroeconomics itself where every single issue or topic can be highly inter-related. To illustrate, they may provide an extract on joblessness and perhaps a figure showing the fall in house prices. Somehow, the questions can focus on so many aspects. For instance, how will government finances be affected by this, the impact falling house prices onto the positioning of current account, difference of Labour Force Survey measure of unemployment and Claimant Count etc

Unlike Unit 1, questions are far more predictable. Based on the topic, whether is commodity or merit/ demerit goods, I can more or less tell what are the questions that always follow suit. For instance, if the passage is about commodity, do expect questions like DD-SS diagram, price elasticity of demand, price elasticity of supply, buffer stock and others. If it is merit goods, maybe they can test you on definitions like private benefit, external benefit, cost-benefit diagram and others

Nevertheless I may be able to help you all by narrowing the scope of issues to concentrate on. As far as I am aware of, usually the information in the Extracts are one or two years back. So during these years, some of the significant issues that had taken place and should be fed with more attention are:

(1) Bank of England slashed interest rates to the lowest level in the history of 0.5% and has maintained it until now

(2) UK’s economy experienced the sharpest contraction since 1991-1992 housing market slump

(3) Pound deteriorating significantly against dollar and euro thus improving the position of current account

(4) House prices suffered a great fall up to 20% in some prosperous areas

(5) Rise in joblessness thus worsening government finances on top of the damage caused by bailing out failed financial institutions

Therefore you should:

Read up these issues. Google it by including BBC and years in your search. Buff up your general knowledge in all the key areas so that it will help you in evaluation. I forgot to mention in my previous posting that candidates who lack of general knowledge may find great difficulty to argue in a constructive manner

Practice the past year papers especially the more recent ones. It started as once a year examination in June 2009, then June 2010 before it is re-decided that it should be tested bi-annually. So we do have one in January 2011. Practice your evaluation by using what you have read. Consider the following examples

Examine effectiveness of reducing interest rates as a method to promote growth

Article wrote ‘Bank of England reduces interest rates to 0.5% from 5% and spending level is still weak’. So, this is how I make good use of the info:

When MPC reduces interest rates, in theory people will borrow more money since the cost of borrowing is cheap. Therefore more goods and services will be demanded in the economy. Rise in consumption will shift AD rightward leading to rise in real output. However, this is assuming that other factors are constant when it is not. Lately, the MPC has slashed the interest rates to the lowest level in the history of 0.5% and it still fails to stimulate spending. That shows that expansionary monetary policy can be a blunt tool if there is a total collapse in the consumer confidence

(2) Examine one supply side policy to increase level of output

Article wrote ‘UK government incurring huge fiscal deficit and national debt rising’. So I will include this in my writing:

The government can consider n income tax reduction. As working people get to keep a bigger portion of their income, it will create an incentive for them to work harder. A rise in productivity and efficiency will lead to greater output thus promoting growth. However, this may only sound nice in theory. In reality, the UK government is already bleeding so much money out of its coffer which explains why its fiscal deficit is expected to rise in the next few years. A further slash in income tax which is its main source of revenue is therefore not tolerable at all

Examine the impact of falling house and share prices onto the level of real output

Article quote ‘Most UK people have house ownership. Therefore a fall in house prices affect so many aspects of their living’

A decline in property and share prices would lead negative wealth effect. Feeling poorer and fuelled by pessimism, UK people will generally reduce their spending into the economy. Demand for retail goods and services will fall. Since UK is a consumption led economy, it is expected that AD will incur a large leftward shift in AD causing a decline in economic growth. Between these two factors, it is argued that house prices have more influence onto people’s decision to spend than stocks. This is because traditionally, most UK people store their wealth in housing market while only few very rich ones will store their wealth in paper assers

Watch out for these few popular questions. They can be tested again but rephrased:

(1) Define real GDP/ recession (have not been tested)/ economic growth

(2) Explain differences between Labour Force Survey and Claimant Count measure of unemployment

(3) Explain how CPI is calculated

(4) AD/AS diagram and how does it affect price level and real output/ UK economy (means mention both)

(5) Application of demand side polices and supply side policies to influence certain economic objectives like reducing unemployment, promote growth/ prevent a recession, restore consumer confidence, fix the problem of current account deficit, prevent a further fall in inflation and others

(6) Impact onto the distribution of income due to fall in interest rates, rise in income tax, recession etc

(7) Factors that MPC will consider before making interest rate changes

FAQs in Unit 2: Managing the Economy (GCE Edexcel)

(1) How to know which question is suitable for me?

Very simple. As soon as you were told by the invigilators to begin, quickly turn to the pages with questions. Go through ALL those questions and try to get a ‘feel’ which question you are actually more comfortable with. The comfortable factors here may include but not limited to familiarity with definitions and questions, whether some answers or even evaluations pop up in your mind while you are going through and whether the essay is student-friendly or not. Again as I always mention, this will be handy if and only if you have done sufficient read up or revision. If not both questions will appear equally hard

(2) One question has easier short questions but the other has easier 30 marks essay. So how?

This is the most common dilemma. Rest assured you are not the only one. Ok, this is how I decide. I will most probably consider the one with easier short questions. Also I assume that the difficult essay is within your ‘manageable range’. The only thing is that, it may be slightly hard for you to score. Such decision is made because no matter what it is those short questions that made up the bulk of 50 marks. Therefore greater concern will be for those that carry more weights

(3) How long should I spend for short questions?

Probably about 50 minutes and for essay try not to exceed 40 minutes. 35 minutes would be best

(4) Should I start with the 30 marks essay?

Speaking from experience I will not recommend such action unless you have assurance that you are highly comfortable with the essay question and it will DEFINITELY get you at least 25 marks. If not, just follow the usual order. Start from (a)

(5) I want A for this paper. So I must get at least?

Of course to obtain A, 80% will suffice. But you have to consider the overall grade for Economics. Given that Unit 4 is extremely hard for students, I would highly recommend you to get at least 85% not only for Unit 2, but also in Unit 1 and 3. This is to offset the lower grade you might end up with in the last unit

(6) Why is there so little time given in the exam?

Nothing is wrong with the timing in exam. It is all about personal efficiency. Some people can get 4 marks by providing two well elaborated sentences while some may have to write as long as 5 or even 6 sentences just to land up with the same 4 marks. Similarly, some candidates show very little comprehension towards the need of the question. For instance, the question mentions ‘Analyse’ or ‘Outline’, quite a number will end up spending like 15 minutes to provide evaluation points when it is not needed at all

(7) What is the breakdown of marks in each question?

The first step I would take is segregating between the marks for evaluation and the marks for explanation. For instance a 14 marks evaluation question will be divided into two parts, 10 marks and 4 marks. Just to notify, I realised that evaluation marks are always 4 for short questions. The 4 marks can be either one evaluation or two evaluation each carrying 2 marks. Back to our discussion. The remaining 10 marks I will decide based on the acronym ‘RDD’. I will explain based on whether reference is needed, is there a diagram or definition. If you follow this rule strictly, Unit 2 will not be as hard as you think. Similarly if the question is 16 marks, then the breakdown will be 12 marks and 4 marks. The similar steps are repeated

(8) What are the popular definitions?

Speaking from experience, they are GDP related. For instance the one that I encountered are real GDP, GDP at constant prices, GDP at 2004 prices, annual real GDP, annual real GDP growth. Next, is inflation related. You might be asked to define inflation, inflation target and how is inflation calculated. Another is difference between LFS (ILO measure of unemployment) and Claimant Count

(9) Are there questions that tend to repeat in the same way all the time?

Yes. Watch out for questions which require you to provide AD/AS diagram. If it is spending related such as consumption, private investment, public expenditure and net exports, do not forget to include multiplier in your answer and what will happen to both price level and real output. You have to be very sensitive to information. The common ones are increase in fiscal deficit, fall in value of pound, rise in house and share prices, fall in level of interest rates and weak global output growth. All these influence the movement of AD. The ones that can affect AS must be productivity/ efficiency/ cost related such as more regulations onto businesses, increase in oil price and fall in productivity. Also watch out for questions like ‘issues that MPC will consider before arriving at decision to change interest rates’

(10) A lot of stuffs are not covered in class. They seem to be very different from what we learnt

I have to strongly disagree with this. One of the most common problems we as educators face is students do not know how to interpret questions when in fact those questions are repetitive in nature, but phrased differently. Consider:

Example 1

Explain two economic effects of high inflation

Explain two economic effects of having inflation ‘exceeding the targeted range’ (Extract 2, line 8-10)

Explain two economic effects when inflation is higher than expected

(They all are the same)

Example 2

Using AD/AS diagram, discuss the impact onto UK economy following a rise in public spending

Using AD/AS diagram, evaluate the impact onto UK economy following a rise in fiscal deficit

Using AD/AS diagram, examine the impact onto price level and real output following the announcement of ‘government expenditure is larger than expected’ (Extract 1, line 8-10)

(They are all the same)

(11) How many marks for AD/AS diagram?

4 marks all the time. 2 marks for correct direction of the movement of AD/AS and another 2 marks for proper labelling

(12) Which version of AD/AS diagram I should draw? The one with two straight lines crossing one another or the one with a ‘long AS tail’?

Both are correct and will be accepted. Academic wise, I suggest candidates to draw the one with so called ‘long AS tail’. There are two reasons for this. Experience suggests that if a candidate draws the one with two straight lines (AD and AS) intercepting one another, there is a high chance that the candidate will confuse themselves with the normal demand-supply curve in Unit 1, assuming that they ARE THE SAME. Secondly candidates will not be able to distinguish between the part where spare capacity exists with the one when economy reaches or near full employment

(13) I always get confuse between government spending, taxation and investment with the movement of AD and AS

You are right. All these three components will have to be explained correctly as they can affect both AD and AS. If they come under the explanation of demand side policies, make sure you relate it to spending and if they come under supply side policies, make sure your transmission mechanism contains words like efficiency, rise in productivity or reduction in costs. To illustrate, I give a simple example here

The expansionary monetary policy allows firms to get additional finances at cheaper borrowing rate. In theory, this should lead to greater level of investment into the economy. Such injection will cause AD to shift rightward leading to a rise in real output (demand-side explanation)

Government can also consider the reduction of corporate tax. With higher retained profits, firms are more likely to invest, for instance the adoption of high-tech capital equipments. This will help to increase efficiency in factories, allowing for more output to be produced. Economic growth can be achieved (supply-side explanation)

(14) How should I revise in this critical last two days?

Practice according to types of question. This is what I called as specialisation. I do not recommend candidates to go through papers by papers but rather by types of questions. From my observation, there are generally four types of questions. First is definition/ explanation related/ data interpretation or calculation. Second is AD/AS diagram. Third are those which require short explanations and evaluations and last will be the long essay. You don’t really have to read extracts for the first two types. I find that not only your understanding will improve since you go by specialisation, but also finishing those papers at a faster rate

Best of luck

FAQs in Unit 1: Competitive Markets-How they work and why they fail

After conducting a survey and gathering some feedbacks from my students, I found that these are the most common FAQs

(1) I heard that papers are generally easier in January than June. Is that true?

I have heard about the same rumours too quite some time ago, even before the implementation of new syllabus examination in January 2009. Feeling curious, I dug out all those questions and made a general comparison. To be honest, there is no clear-cut evidence that January papers are easier. Sometimes, June papers could be easier. Probably is due to examination psychology. It is easy because people want to believe that it is easy and choose to go towards that direction. The same principle applies for stock market/ commodities. The price goes up, because a herd of people choose to believe that it will be that case in future. So everyone jumps into the market driving its price to all time high. There you go, self-fulfilling prophecy. The second reason is probably some candidates have too many papers to resit in June, thereby having insufficient time to revise. The paper is thus artificially more difficult

(2) Must I always include definition in my MCQ?

According to the marking scheme, 1 mark is awarded for the correct option and remaining 3 marks for explaining why such option is chosen. The 3 marks can be any explanations which may not necessarily include definition. Somehow, it is strongly advised to put in definition as it is a guaranteed 1 mark (provided if you define accurately). Furthermore candidates are often ‘clumsy’ in providing long-winded explanations which sometimes can be totally out of scope. That is a risk that must not be assumed

(3) How many definitions I should give?

Good question. As long as you see keywords like production possibility frontier and opportunity cost, define both. If you are lucky, you can easily escape with 2 marks and if not probably 1 mark. The reason is because of the irregularities in the marking scheme. In certain years, 2 keywords mean 2 marks and in some years 2 keywords but only 1 mark. We wouldn’t be able to figure out such odd. So to our best interest, just define both

(4) How many MCQ questions from How they work and how many from Why they fail?

From experience, it is either 5/3 or 6/2 respectively. In my opinion, 5/3 will be more likely

(5) What is the minimal marks I should get?

This paper carries the total of 80 marks, where 32 marks from Section A MCQ and 48 marks from Section B data response. It will be adjusted as 100 marks. As long as you do not obtain at least 85 marks, reseat. It is for a simple reason. Economics 4: Global economy is extremely hard and it has very high tendency to pull your overall grade down. As such, candidates will need quite a strong grade/ marks for Unit 1, 2 and 3 to cushion the devastating effect from Unit 4

(6) How many minutes for each MCQ question?

Approximately 4 minutes 30 seconds inclusive of thinking process and inking down the answer. That is on average. You can always steal some time from easier questions and allocate it for harder MCQ questions. If you are good and well prepared, there are even questions that you can easily get full 4 marks in just 1 minute. Don’t believe? See for yourself MCQ Question 1, May 2010 paper and that is just one out of many

(7) Should I start with Section B since they carry larger weightage?

In fact, I discourage one from beginning with Section B. As I mentioned before, there is always a tendency to finish what we have started. There is a very high tendency that one many take ages just to complete Section B, leaving out ‘cherries’ in Section A which are easier to be ‘picked’

(8) What should I do if I do not know how to define?

You can always explain in your own word and they must be reflective of the actual definition

(9) If I draw a diagram, should I explain it as well?

Yes. Please do not leave a diagram unattended

(10) Which chapter is your ‘5 core’ techniques applicable to?

They are production possibility frontier and opportunity cost, consumer and producer surplus, price mechanism, all the elasticities (PED, XED, YED and PES), taxation and subsidy as well as cost-benefit analysis

(11) Breakdown marks for questions with evaluations?

6 marks = 4 + 2, 8 marks = 6 + 2, 10 marks = 6 + 4 (evaluations can be 2+2/ 3+1), 12 marks = 6+6 (evaluations can be 3+3/ 2+2+2) and 14 marks = 8+6 (evaluations can be 3+3/ 2+2+2). This is my common practice. First I will breakdown all the marks as explained earlier. After segregating the evaluation marks, I will zoom in the marks for explanations by referring to RDD. R means reference, D means definition and another D for diagram. I will make sure that all these three components are addressed, provided if they appear in the questions

(12) How to know when I should evaluate?

There are three easy steps to this. First, remember my acronym JEDATE (Justify, Examine, Discuss, Assess, To what extent and Evaluate). If not, remember that anything other than analyse, outline and explain, you evaluate. Another easier one will be telling yourself that anything that is worth at least 6 marks, you evaluate (6, 8, 10, 12 and 14). However, in some rare circumstance I may be wrong. There is one recent paper where the evaluative question was actually just 5 marks

(13) How to know which question to choose?

As I mentioned in earlier posting, don’t read the extract but rather go through all the questions first. Assuming that you are well prepared, I’m sure that there will be one that is definitely more appealing. Appealing to me means, by one look, more or less you know how to answer or at least what to write or what to evaluate

(14) What should I do if I picked the wrong question?

It actually depends on how long you have spent on that question. If you have just finished Question (a) and about to move into Question (b) realising that you may have picked the wrong one, you may have some chance, unless you spent like 20 minutes just to do (a). This is quite common among those who picked questions in Section B based on ‘love at first sight’ rather than going through all the questions first before arriving at a decision

(15) When the question say ‘With reference to Extract 1...’, does that imply that I can only refer to that particular Extract?

No, definitely not. You just have to provide at least one reference while the rest of the explanations can be anywhere within the information provided

(16) Is it definite that one topic will be on commodities and another on market failure?

If based on the trend of papers since January 2009, yes to your question

(17) Is it necessarily true that questions from commodities are easier?

I agree on this. One reason is because How they work requires lesser memorising compared to Why they fail where one has to remember so many solutions to market failure and must also know how to evaluate them. Due to this, there are tendencies that students spend lesser time on the second half of the syllabus. Somehow, the Examination Board is no silly people. They have tried to secure extracts where elements from both areas can be equally tested. So may advice, go study both

Hope this could be of great help in this critical hour!! If there are further queries do post them in the query box. Cheers!