Below I share a model answer for a 12 mark question. This question is in the style of Edexcel Economics A, section B.
For more practice exam questions for 2023 exams and an online course, check out the link below:
Question
12 mark question: assess the effects of a fall in private sector investment on economic growth in the U.K. economy
(The 12 marker usually comes with an extract for reference. See the end of the article for this extract.)
Exemplar answer
Aggregate demand (AD) is the total demand in the economy over a given time period. AD = C + I + G + X – M. A fall in investment reduces AD, as investment is a component of AD. For the UK investment is about “17% of GDP” but is a very volatile component of AD. This means less spending by firms reduces total demand in the economy. So AD shifts left. This means reduced inflation, with the price level falling from PL to PL1. Also the rate of economic growth falls, with real GDP falling from Y to Y1.
The effect on growth depends on the share of AD that goes towards investment. Investment is a small component of GDP while consumption is the largest component at about 65%. This means that a fall in investment is likely to have a smaller impact on AD and real GDP growth.
The multiplier effect is when a one-off change in an injection, such as investment, leads to an even greater change in real GDP. Lower investment means less income for firms. So workers may receive lower wages. This means the workers may spend less in local shops, reducing the incomes of local shops and so on. So the drop in investment also causes a drop in consumption. This means AD shifts further left from AD1 to AD2, leading to a greater fall in real GDP (Y1 to Y2) and price level (PL1 to PL2). This includes the example of the Cottam coal station, which may cost the local area “£60 million” in terms of job losses and the negative multiplier effect.
This depends on the size of the multiplier. The formula for the multiplier is 1/(MPI+MPS+MPT). Taxes are rising in the UK, with the marginal tax rate rising to 45% for those earning between £120,000 and £150,000. The personal allowance has also been frozen. So the MPT, the marginal propensity to tax, is likely to be higher, reducing the size of the multiplier and the extent of the AD shift. This means a smaller effect of an increase in investment on growth.
Commentary
This answer meets the criteria for a top level answer.
There is good analysis, evaluation and application. Note there are 8 marks for KAA and 4 for evaluation in a 12 mark question.
So this answer would score full marks or close to it.
Other possible points include:
- LRAS effects. For example a fall in productivity.
- The cause of the fall in investment.
- Whether the investment funding is sourced from abroad or not. Then we would need to consider the balance of payments (financial account / current account), including possible exchange rate effects.
Related questions
How much time should you spend on a 12 mark question?
I recommend spending 12-15 minutes.
How should you structure a 12 marker?
Here is a possible structure:
- KAA 1
- Evaluation 1
- KAA 2
- Evaluation 2
Note it is possible to combine the KAA paragraphs into one long KAA paragraph.
Related posts
For more Edexcel Economics practice questions and resources, check out the links below:
Extract
For the 12 mark question, here is a sample short extract. Referring to the extract will help score high application marks.
Private sector investment has fallen relative to GDP for the UK economy from 26% of GDP in the 1990s to 17% in the 2020s. Some economists have argued that low investment has contributed in part to the UK’s poor productivity record in recent decades.Investment is a relatively small component of aggregate demand, standing at 17% for the UK.
Consumption makes up 65% of aggregate demand. Yet investment is much more volatile than consumption. A loss of investment can impact local communities. For example, the closure of the Cottam coal plant in 2019 risked the jobs of about 150 workers. This was in part due to the plant being economically unviable and a government drive to reduce use of polluting fossil fuels. But it still shows the vulnerability of communities to firm closure. The trade union Prospect claimed this would cause harm to local communities totalling £60 million.
Sources: LSE, IPPR, BBC, The Independent, miscellaneous others.
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