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A-Level Economics Paper 2 Essay Practice Paper (3 Questions, 60 Marks, 90 Minutes)
A-Level Economics Paper 2 Essay Practice
A-Level Economics Paper 2 essay practice paper: 3 original essay questions in 90 minutes for 60 marks, covering charges and elasticity, tax incidence, external costs, inflatio
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Paper details Level: A-Level (Year 12-13) | Subject: Economics | Time: 90 minutes | Marks: 60 | Questions: 3
Section A Question 1 Microeconomics: charges, elasticity and external costs (20 marks)
Question 1 (20 marks)
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | A city imposes a charge on single-use shopping bags. Before the charge each bag retailed at $0.50 and 8.0 million bags were used each day. After a charge of $1.00 per bag is imposed on retailers, the retail price rises to $1.35 and daily use falls to 5.6 million bags. Assume retailers face constant marginal cost throughout. (a) Using the midpoint method, calculate the price elasticity of demand and state whether demand is elastic or inelastic. (4 marks) (b) Calculate how much of the $1.00 charge per bag is borne by consumers and by producers, and explain the incidence using elasticity. (6 marks) (c) Discuss whether a charge is more effective than banning the free distribution of single-use bags in reducing solid waste. (10 marks) |
Answer: (a) The price rises from $0.50 to $1.35 while quantity falls from 8.0 million to 5.6 million. Midpoint method: percentage change in price = (1.35 – 0.50) / 0.925 = 91.9 per cent; percentage change in quantity = (5.6 – 8.0) / 6.8 = -35.3 per cent; elasticity of demand = -35.3 / 91.9 = -0.38. The absolute value 0.38 is below 1, so demand is inelastic. (1 mark for each step) (b) The charge is $1.00 per bag and the retail price rises by $0.85, so consumers bear $0.85 (85 per cent) and producers bear $0.15 (15 per cent); the government collects $5.6 million per day. With inelastic demand consumers respond little to price, have weaker bargaining power, and therefore carry most of the tax. (3 marks calculation, 3 marks explanation) (c) Marking points: the charge internalises the external cost and cuts daily use by 2.4 million bags, about 876 million a year; the $5.6 million daily revenue can fund recycling, a lasting source; but inelastic demand limits the fall to 30 per cent and substitutes such as thicker plastic or paper bags may raise total waste; an outright ban removes supply at once with lower administrative cost, but offers no price signal, is harder to enforce and may create a black market. Strong answers compare the size of the reduction, revenue, substitutes and enforcement cost, and note that a charge works best with recycling infrastructure and volume-based charging. (10 marks by level) |
Section B Question 2 Macroeconomics: inflation, real wages and monetary policy (20 marks)
Question 2 (20 marks)
| # | Question | Answer and marking notes |
|---|---|---|
| 2 | An economy records the following consumer price index (2023 = 100) and median nominal wage: 2023 index 100.0, monthly wage $20,000; 2024 index 104.6, monthly wage $21,000; 2025 index 110.9, monthly wage $22,400. Over the same period the unemployment rate rises from 3.0 per cent to 3.4 per cent and then to 4.1 per cent. (a) Calculate the inflation rate for 2024 and for 2025, to one decimal place. (4 marks) (b) Calculate the real monthly wage in 2025 at 2023 prices and its percentage change from 2023, and explain why the nominal wage rose while the real wage barely changed. (6 marks) (c) Discuss whether a central bank rate rise can reduce inflation and unemployment at the same time. (10 marks) |
Answer: (a) inflation in 2024 = (104.6 – 100.0) / 100.0 x 100 per cent = 4.6 per cent; inflation in 2025 = (110.9 – 104.6) / 104.6 x 100 per cent = 6.0 per cent. (2 marks each) (b) real wage in 2025 = 22,400 / 1.109 = $20,198, which is 1.0 per cent above the $20,000 of 2023, while the nominal wage rose 12.0 per cent. Price inflation absorbed almost all of the nominal gain, so purchasing power rose only slightly; wage bargaining also builds in expected inflation. (2 marks real wage, 2 marks percentage, 2 marks explanation) (c) Marking points: a rate rise raises borrowing costs, cuts investment and consumption, reduces aggregate demand and eases price pressure; but job creation slows and unemployment rises, so a short-run trade-off exists (Phillips curve). If inflation is cost-push (energy, supply chains) the effect is weak and the unemployment cost large; if it is demand-pull the policy works better. Once expectations are entrenched a larger rise is needed and unemployment rises further. The exchange rate regime (rates track the US under a currency board), asset prices and debt burdens also matter. A strong answer concludes that improving both at once is possible only briefly under specific conditions, and that productivity and supply-side policy matter in the long run. (10 marks by level) |
Section C Question 3 International trade: depreciation and the current account (20 marks)
Question 3 (20 marks)
| # | Question | Answer and marking notes |
|---|---|---|
| 3 | A developing economy reports the following exchange rate and trade figures: in 2024 one US dollar bought 7.80 LCU, exports were 780 billion LCU and imports 820 billion LCU; in 2025 one US dollar bought 8.19 LCU, exports were 850 billion LCU and imports 870 billion LCU. The export volume index (2024 = 100) was 104 and the import volume index was 99. (a) Calculate the depreciation of the currency in 2025 and the trade balance in US dollars for both years. (4 marks) (b) Using the Marshall-Lerner condition and the J-curve, explain why depreciation may not improve the trade balance immediately. (6 marks) (c) Discuss the view that depreciation is the best policy for a developing country to correct a current account deficit. (10 marks) |
Answer: (a) depreciation = (8.19 – 7.80) / 7.80 x 100 per cent = 5.0 per cent. In 2024, exports were 780 / 7.80 = 100.0 billion dollars and imports 820 / 7.80 = 105.1 billion, a deficit of 5.1 billion; in 2025 exports were 850 / 8.19 = 103.8 billion and imports 870 / 8.19 = 106.2 billion, a deficit of 2.4 billion. (1 mark each) (b) The Marshall-Lerner condition states that depreciation improves the trade balance only when the sum of the absolute price elasticities of export and import demand exceeds one; the J-curve describes how contracts and habits adjust slowly, so import costs rise at once while export volumes lag, worsening the balance before it improves. Here export volume rose only 4 per cent and import volume fell only 1 per cent, so a low-elasticity economy needs longer. (3 marks condition, 3 marks J-curve) (c) Marking points: depreciation raises price competitiveness, attracts foreign investment and tourism revenue; but it raises the cost of imported inputs and energy, feeds imported inflation and increases foreign-currency debt burdens. If exports are low-elastic primaries the effect is small, and competitive devaluation and capital flight are real risks. Alternatives: contractionary fiscal and monetary policy cuts import demand directly; raising productivity and diversifying exports is the long-run remedy; foreign investment and a stable exchange rate support export credit. Strong answers compare speed, inflation cost, external conditions and sustainability, and note structural limits such as a narrow export base and heavy external debt. (10 marks by level) |
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