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3 marksClassical Models of the Macroeconomy

CAPE Economics Unit 2 · 2018 · Paper 2 · Question 1(c)(iii)

Figure 1 shows a graph depicting aggregate demand and aggregate supply curves.

In Year 3, assume that prices and wages are completely flexible downward. On Figure 1, identify the equilibrium point and label it 'b'. Also, label the equilibrium price and quantity of output on the axes of the graph.

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Other parts of this question

  1. 1(a)(i)Define 'Value added'.[2 marks]
  2. 1(a)(ii)Define 'Gross investment'.[2 marks]
  3. 1(b)Outline THREE factors that influence aggregate demand.[6 marks]
  4. 1(c)(i)Label the three curves in Figure 1 to show the aggregate demand curve AD1 in Year 1, AD2 in Year 2 (after shifting), and falling back to AD1 in Year 3.[2 marks]
  5. 1(c)(ii)Outline what will happen to equilibrium price and equilibrium quantity from Year 1 to Year 2.[2 marks]
  6. 1(d)(i)Evaluate the statement: 'The expanding underground economy creates problems for economic policymakers.'[4 marks]
  7. 1(d)(ii)Evaluate the statement: 'Economists are concerned about 'double counting' and the 'value added' in the production process.'[4 marks]

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