CCEA A Level Economics
CCEA A Level Economics AS 2 Supply-Side Policies and Exchange Rates Exam Questions
Free CCEA A Level Economics revision for AS 2 Supply-Side Policies and Exchange Rates: what you need to know, common mistakes and exam-style questions with answers. Covers market-based and interventionist supply-side policies, productivity, exchange rates and their effects on the economy.
Practise AS 2 Supply-Side Policies and Exchange Rates with past papers
Once you have learnt this topic, find the AS 2 Supply-Side Policies and Exchange Rates questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics AS 2 Supply-Side Policies and Exchange Rates
This topic completes Unit AS 2: Managing the National Economy. Supply-side policies aim to increase the productive capacity of the economy, shifting LRAS to the right, through tax cuts that improve incentives, deregulation, labour market reforms, education and skills, infrastructure investment and measures to raise productivity. You need to distinguish market-based and interventionist approaches and evaluate their costs and time lags. The exchange rate section introduces what an exchange rate is, how changes affect exports, imports, inflation, growth and employment, and the idea of the government or central bank influencing the rate. CCEA questions often ask you to evaluate a supply-side policy or analyse a depreciation of sterling.
What you need to know
- Aim of supply-side policies To increase the quantity and quality of factors of production and their productivity, shifting LRAS right. This allows non-inflationary growth and lower structural unemployment.
- Market-based policies Cutting income and corporation tax to improve incentives, deregulation, privatisation, reducing trade union power and reforming benefits to encourage work.
- Interventionist policies Government spending on education, skills and training, infrastructure such as roads and broadband, and support for research and development.
- Evaluation of supply-side policies They can take years to work, can be costly, may increase inequality (e.g. tax cuts for higher earners) and their success depends on how firms and workers respond.
- Exchange rates The price of one currency in terms of another. A depreciation makes exports cheaper abroad and imports dearer at home; an appreciation does the opposite. Strong Pound Imports Cheap, Exports Dear (SPICED) helps you remember.
- Effects of exchange rate changes A depreciation can raise net exports, AD, output and employment, but may raise inflation through dearer imported raw materials. Governments or central banks can influence the rate through interest rates or buying and selling currency.
Common mistakes in AS 2 Supply-Side Policies and Exchange Rates
- Showing supply-side policy with only an SRAS shift; the aim is to shift LRAS.
- Assuming tax cuts automatically increase work effort; the response depends on incentives and income effects.
- Saying a depreciation always improves the current account immediately; demand takes time to respond.
- Ignoring the inflationary effect of a depreciation through higher import prices.
- Forgetting that interventionist supply-side policies need government spending and have an opportunity cost.
Try three AS 2 Supply-Side Policies and Exchange Rates exam-style questions
1. Explain how increased spending on education and training can shift the long-run aggregate supply curve. (4 marks)
Show the mark scheme answer
Training improves the skills of the labour force; raising labour productivity; reduces structural unemployment by matching skills to jobs; increases productive capacity so LRAS shifts right.
2. Explain the likely effect of a depreciation of sterling on UK inflation. (4 marks)
Show the mark scheme answer
Imports become more expensive in pounds; including raw materials and energy, raising firms' costs (cost-push); imported consumer goods cost more, raising CPI; higher demand for exports may add demand-pull pressure.
3. Evaluate the use of supply-side policies to achieve economic growth. (8 marks)
Show the mark scheme answer
Raise productive capacity allowing growth without inflation; improve competitiveness; reduce structural unemployment; but long time lags; high cost and opportunity cost; market-based policies may increase inequality; little help in a recession caused by low AD; conclusion that they matter for long-term growth but work best alongside demand management.
AS 2 Supply-Side Policies and Exchange Rates FAQs
What does CCEA A Level Economics AS 2 Supply-Side Policies and Exchange Rates cover?
Market-based and interventionist supply-side policies to raise productive capacity and productivity, the meaning of an exchange rate, how changes affect the economy, and influence over the exchange rate.
Which unit is this topic examined in?
It is in Unit AS 2: Managing the National Economy, a 1 hour 30 minute paper with short-answer questions, a case study and an extended response question.
How is exchange rates at AS different from A2?
At AS you focus on what an exchange rate is and how changes affect trade, inflation, growth and jobs. Unit A2 2 extends this to foreign exchange markets, fixed and floating systems, the Marshall-Lerner condition and the J-curve.
