# A2 Multiple-Choice Revision – the Multiplier

Below is a type of question which has been quite popular in the last couple of exam sessions. I have changed the data from the original CIE question.

The table shows the values of selected macroeconomic variable over a two-year period.

What is the value of the multiplier?

A. 3 – B. 4 – C. 6 – D. 12

From the data both years are in equilibrium
Year 1 NI = 3800  –  Injections = 260+160+200 = 620 Withdrawals = 300+140+180 = 620
Year 2 NI = 4600  –  Injections = 360+210+250 = 820 Withdrawals = 350+210+260 = 820

The increase in injections has been 200 but the increase in NI has been 800 (4600-3800) – therefore the multiplier is 4 – (4 x 200 = 800).

The Multiplier
Consider a \$300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then \$180m will be added to the incomes of others. At this point, total income has grown by (\$300m + (0.6 x \$300m). The sum will continue to increase as the producers of the additional goods and services realise an increase in their incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be (\$300m + (0.6 x \$300m) + (0.6 x \$180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC)
You can also use the following formula which represents a four sector economy
1 ÷ MPS+MRT+MPM

# A2 Economics Multiple-Choice: Two ways of calculating the equilibrium level of income

With the CIE multiple-choice paper next week, I went through an A2 multiple-choice question with some students on calculating the equilibrium level of income. There are two ways that it can be worked out. Here is the question:

In a closed economy with no government C = 30 + 0.8 Y and I = 50, where C is consumption, Y is income and I is investment.

What is the equilibrium level of income?

A 64                B 80              C 250               D 400

Below is the most common way of working the question out:

Y = C + I

Y = 30 + 0.8Y + 50

0.2Y = 80

Y = 400

Here is the other way that you should be able to work out the equilibrium

Remember: Savings = Income – Consumption

S = Y – C

S = Y – (a + cY)

S = Y – a – cY

S = -a + (1-c) Y

So if we put the figures into the equation you get:

50 = -30 + (1-0.8) Y

50 = -30 + 0.2Y

80 = 0.2Y

Y = 400

# Essay writing in Economics

Students have struggled to write well structured essays in economics. I decided that they needed some guidance and therefore produced a booklet on how to plan and structure your essay – link to download at the bottom of the post. It looks at how you integrate the following into your essays  whether at CIE or NCEA Scholarship level and shows examples.

Knowledge and understanding – Demonstrate knowledge and understanding.

Application – Interpret and apply knowledge and understanding to information presented in written, numerical or graphical form.

Analysis – Analyse economic issues and arguments, using relevant economic concepts, theories and information, and communicate conclusions in a clear, reasoned manner.

Evaluation – Critically evaluate economic information, arguments, proposals and policies, taking into consideration relevant information and economic principles and distinguishing facts from hypothetical statements and value judgements.

It also contains – the box plan – 12 different sentence types (see below) – command words – PREC Point Reason Example Concluding sentence.

I have taken some material from Dr Ian Hunter’s publications and would recommend the books he has for sale on the Write That Essay website.

Essay Writing for Economics

# A2 CIE Economics – 50 question quiz

I held the annual 50 question quiz during the last session of the CIE A2 revision course. I split the class into 5 teams (approx 4-5 in each) and asked 5 questions at a time – with a time limit also. Each team had whiteboards to draw / write answers and it was a nice way to finish the three days.

1. What conditions have to be met to achieve allocative efficiency?
2. Draw two features of productive efficiency
3. What is dynamic efficiency?
4. Social cost = ?
5. Draw negative externalities of consumption
6. What is meant by Tragedy of the Commons?
7. What does an indifference curve show?
8. Using indifference curves draw a giffen good.
9. Where does the firm’s supply curve commence?
10. Draw minimum efficient scale
12. Draw short-run to long-run in Perfect Competition
13. List 3 characteristics of an oligopoly
14. Draw dead weight loss for a monopoly
15. What is significant about the output where MC=MR=AC=AR?
16. A natural monopoly achieves economies of scale at what outputs?
17. What are the three types of price discrimination?
18. It is a mistake to believe that ALL oligopolists face a kinked demand curve. Why?
19. List 4 objectives of firms other than profit maximization.
20. Contestable markets are characterised by 2 features. What are they?
21. What is meant by X-inefficiency?
22. Draw the impact of a pollution tax that reduces but does not eliminate a DWL.
23. Draw buffer stock theory.
24. Show the impact of an increase in GST on a Lorenz Curve.
25. Perfect Labour market has a perfectly elastic supply curve. Why?
26. Draw a monopsony labour market.
27. Why does Christiano Ronaldo have a lot of economic rent?
28. Define HDI, MEW and MPI
29. List 5 limitations of GDP as an indicator of standard of living.
30. Using LF, WAP and unemployed -work out the unemployment and participation rate
31. Draw a reduction in the natural rate of unemployment.
32. Consumption function = ?
33. What are recessionary and inflationary gaps?
34. Give the 2 equations to work out the multiplier.
35. Explain the credit multiplier and what is the equation.
36. How are bonds and interest rates related?
37. Give 2 differences between Keynesians and Monetarists
38. Draw a flow chart to show how microfinance can help developing countries.
39. Why does the Phillips curve no longer have significant relevance?
40. Deflation is…………………………
41. What did Arthur Laffer draw on a paper napkin?
42. How can healthy growth impact the balance of payments?
43. Explain Hot Money
44. Explain the internal and external value of money.
45. Draw a recessionary gap using the 45° line.
46. What is the hysteresis effect?
47. A positive output gap is associated with what conditions in an economy?
48. Name two limitations of the accelerator  theory.
49. What components of the Fisher equation stay constant?
50. Who is Chairman of the US Federal Reserve?I

# AS & A2 Economics Revision with Tutor2u

With the start of CIE AS and A2 Economics papers next week here is a link to a superb set of resources done by Geoff Riley of Tutor2u. You can use the filter to select videos, revision notes, exam questions etc. Choose the OCR Board option as this is closest to the CIE syllabus. Click on the link below:

Tutor2u Economics

# Questions for potential Oxbridge Economics students

That time of year again – here are some questions that I have used for practice Oxbridge interviews for those students hoping to read economics at either Oxford or Cambridge. They might be of interest and could be useful for general class discussion.

• Does the current crisis warrant a reappraisal of economics as broad as the one that followed the Great Depression?
• Paul Krugman said – “The economics profession went astray because economists as a group mistook beauty clad in impressive looking mathematics for truth” Does he have a point here?
• How can we know which economic policies to fight Covid-19 actually work?
• Is now the time to introduce a universal basic income in the aftermath of Covid-19?
• In the aftermath of the financial crisis do you see an end to the Neo-Classical theory and the Washington consensus and a return to the Keynesian Bretton Woods System?
• Is economics becoming too mathematical?
• In the response to the crisis we have seen more of the same – massive Keynesian stimulus in the form of both monetary and fiscal policy. What are your thoughts on this comment?
• Politicians and some economists said that the global economic growth from 2003 – 2007 was different from previous growth periods in history and therefore shouldn’t be alarmist. Do you agree?
• How could economists prevented a crisis like the GFC in 2008?
• How does politics impact on decision-making for economists?
• How has politics fed the belief that markets left to themselves deliver better economic outcomes?
• Can economists be trusted to draw the right conclusions and learn the right lessons from the financial crisis?
• Since the GFC there has been significant mention of the policies of economists Frederick von Hayek and John Maynard Keynes – who, if any, was right?
• You state that you have read Jeffrey Sachs’ book “Common Wealth” – what policies did he advocate to reduce poverty. (Refers to a personal statement)
• In the book “Dead Aid” you mention “Dambisa Moyo’s criticism of shock therapy in developing countries. Can you say the same in developed nations? (Refers to a personal statement)
• Macroeconomics is essentially ideological – do you agree?
• Keynes said “If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” What did he mean?
• In a recession, should governments reduce budget deficits or increase them?
• Do zero-interest rates stimulate economic recovery or suppress it?
• Should welfare benefits be maintained or cut in response to high unemployment?

# A2 Economics – Concentration Ratio

Part of the CIE A2 syllabus deals with the concentration ratio and by good fortune a recent edition of The Economist schools brief looked at this area.

The concentration ratio is the percentage of market share taken up by the largest firms. It could be a 3 firm concentration ratio (market share of 3 biggest) or 5 firms concentration ratio. Concentration ratios are used to determine the market structure and competitiveness of the market. The most commonly used are 4, 5 or 8 firm concentration ratios which measure the proportion of the market’s output provided by the largest 4, 5 or 8 firms.

Example of a hypothetical concentration ratio
The following are the annual sales, in \$m, of the six firms in a hypothetical market:

Firm A = 56
Firm B = 43
Firm C = 22
Firm D = 12
Firm E = 3
Firm F = 1

In this hypothetical case, the 3-firm concentration ratio is 88.3%, that is 121/137 x 100.

According to the OECD, member countries between 2000 and 2014 experienced an increase in concentration ratios. The share of sales accounted for by the top eight firms in a given industry in the EU and North American were as follows:

Some policy makers are unconcerned with industrial concentration as it doesn’t tell you how competitive the market is for a particular good. Although others have blamed falling levels of competition, the stagnant labour markets and growing inequality. Add to that low interest rates and weak investment the rising power of companies has been increasing.

However one could argue that those firms which have high concentrations (especially in the technology sector) have also been very productive. The internet has broken down barriers to entry into markets and enabled firms to deliver goods and services in a very convenient manner at lower prices to a vast consumer market. But although this sounds encouraging there are barriers to new firms entering into this medium:

• a new firm will require masses of data to tailor their services to individual users
• other firms already in the market can see what preferences consumers have and because they already have a client base they can easily provide similar products/services.
• established firms already in the market can buy out new entrants – Facebook bought Instagram and WhatsApp. Between 2009-2019 technology firms made over 400 acquisitions with little interference from regulators.

Source: The Economist – Economics brief – Competition. 8th August 2020

# AS Revision – Indirect Tax

The AS multiple-choice paper is coming up and here is this graphic to explain indirect taxes – a popular question. An indirect tax will have the following effects on the market:

• The supply curve shifts vertically upwards(effectively a shift to the left) by the amount of the tax(gf) per unit. The price increases but not by the full amount of the tax. This is because of the slopes of the demand and supply curves.
• The consumer surplus is reduced from acp to agb. The portion gbhp of the old consumer surplus is transferred to government in the form of tax.
• The producer surplus is reduced from pce to fde. The portion phdf of the old producer surplus is transferred to the government in the form of tax.
• The market is no longer able to reach equilibrium, and there is a loss of allocative efficiency resulting in the deadweight lost shown by the area bcd. This represents a loss of both consumer surplus bhc and the producer surplus hcd that is removed from the market. The deadweight loss also represents a loss of welfare to an individual or group where that loss is not offset by a welfare gain to some other individual or group.

# Economics Speed Essay Game

Rationale

• This is a fun game to help students who hate writing or revising essays/short answers for IGCSE, AS Paper 2 and A2 Paper 4 .
• I see this as both a formative tool that can be used in normal teaching as well as a revision exercise in Term 4.
• I am sure you will have your own ideas and I would be interested as to how you adapt and modify to meet the nature of your individual teaching style and syllabus.

Brainstorming key ideas related to the essay (Term 4)

• Divide class into 2,4 or 6 groups of approx 4 students. You may try to mix abilities or academically stream depending on your cohort. Each team to elect an ‘Examiner’. This person will rotate and change with each game.
• Choose an essay (Most Eco essays have two parts A & B). Half the teams will start with essay A, while half start with essay B.
• Prior to the essay game you may wish to revise the topic and / or give students time as a team to do so.
• The teams get 2 mins to try to name as many mark points as they can. The Examiner cannot help the teams but can simply tick and confirm when they get a mark point.
• The Bonus round! At the end of 2 minutes the Examiner A swaps with Examiner B. Hence all teams have seen both essays. The new team is read the question as well as the mark points already gained by the previous team. Any extra mark points that they brainstorm are bonus points. (You may wish to give these double value!)
• Marks are collated both as a team of 4 students as well as a Super Team of 8 students i.e. the 2 teams that work together on the same essays A & B.
• Team Points can me collated over a lesson or a term. You may wish to offer a prize to the best team and/ or the best Super Team.

Essay Plan (Term 2)

• In pairs, they have 2 mins to plan a logical chain of thought that links the mark points they individually understand.
• Do not encourage them to use point that they do not understand. Remember that aiming for B/C grades do not need full marks.

Writing a draft essay (Term 1)

• Students have 1 min in silence to revise the essay.
• Students have 4 min in silence to revise the essay.
• Student pairs then mark each others essays.

# Economics website for IGCSE AS A2 and IB courses

Want to learn or need assistance with Economics? Are you studying or teaching A Level Economics, Advanced Placement, or International Baccalaureate (IB)?

Help is at hand, elearnEconomics assists individuals studying Economics. This site covers a wide range of courses and individuals have the ability to customise their course or do extension work. It’s simple, easy to use and very cost effective.

eLearnEconomics is a comprehensive online economics learning resource. It is for both students AND teachers. Students study the concepts of each topic with the key notes, then review those concepts with the audio/video and flash card sections and finally test themselves in the written answer and multi-choice sections. The multi-choice section records student scores enabling them to track their progress and build their confidence leading into exams.

Teachers have the ability to monitor students progess within the teachers’ administration section. Students can be arranged into class groups and full reports generated to quickly identify problem areas. These high quality PDF reports can also be presented at parent/teacher evenings. Click the link below to access the site.

elearneconomics