Edexcel A-Level Economics Past Paper Questions on Recession and Financial Crises

What is the Edexcel A-Level Economics test?

The Edexcel A-Level Economics test is an economics-focused qualification offered to British students in their final two years of secondary school study. A-levels are typically taken as courses intended to lead to University or other further education. A-level economics students will often go on to study economics or a similar subject at University. The Edexcel A-Level Economics test is offered by Pearson Edexcel. The main alternative to Edexcel is the AQA A-Level Economics course. Edexcel is a privately-owned British education and exams body founded in 1996. Edexcel has been owned by Pearson plc. since 2005. Edexcel produces qualifications and tests for the British education system and is the UK’s largest entity offering educational qualifications.

Where did we get these Edexcel Economics A-Level Past Paper Recession and Financial Crises Questions?

We found these Edexcel Economics A-Level Past Paper recession and financial crisis questions by going through past Edexcel A-Level Economics papers according to the current specification. We picked out recession and financial crisis questions and put them together in this list so that you can go through them without having to search through the different Edexcel A-Level Economics papers currently online.

What is a Recession?

A recession is a prolonged period of contraction (negative economic growth) in an economy. A country’s economic output is measured in GDP and so contraction in growth means that GDP has shrunk. The most widely accepted defintion for a recession is two consecutive quarters of economic contraction. A quater is a three-month period (Jan – March, April – June, July – September, October – December), so this would mean 6 months of consecutive economic growth Economic recessions can have many causes, including financial crises, supply-side shocks, excessive inflation, or a loss of econmic investment. The specific cause doesn’t determine whether or not a recession is happening. The only meaningful indication of a recession is economic contraction.

What is a Financial Crisis?

A financial crisis is a dramatic loss in the value of financial assets, a loss of confidence in the financial system, and a lack of fiscal stability at major financial institutions. A financial crisis is often characterised by major financial institutions collapsing and by bank-runs, the inability of companies or individuals to withdraw money from their accounts. Financial crises come in many forms, including stock market crashes, sovereign debt crises, the collapse of economic bubbles, and currency crises. Prominent examples of financial crises include the Great Depression, the 2008 US Housing Crisis, and the 2010 EU Sovereign Debt Crisis. Financial crises will often trigger periods of recession as economies struggle to grow with confidence shaken in their financil system. Financial crises deter investment and may encourage businesses to layoff large portions of their workforce, undercutting consumption and aggregate demand.

What is a Debt Crisis?

A sovereign debt crisis is the inability of a government to service their debt obligations. In laymans terms, this means that a government cannot meet the minimum payments on its debt. Governments commonly borrow money in order to make up the difference between government spending and tax revenue.

Question 1: Edexcel A-Level Economics 9EC0 November 2021 Paper 2

The European Central Bank introduced a new round of quantitative easing (QE) in March 2020, purchasing up to €750 billion of assets. The objective of this QE was to reduce the serious risks to the effectiveness of monetary policy resulting from a significant recession. The European Central Bank’s target for inflation remains at ‘below but close to 2%’.

Evaluate the effectiveness of quantitative easing during ‘a significant recession’. (25 points)

Question 2: Edexcel A-Level Economics 9EC0 May 2019 Paper 2

In 2018, the International Monetary Fund (IMF) lent Argentina $57 billion as part of a bailout package to help prevent the country’s government defaulting on its debts. This financial crisis also caused significant capital flight out of Argentina’s economy. 

(a) Explain the role of the IMF in providing financial assistance to countries such as Argentina. (4 points)

(b) Which one of the following is most likely to happen to Argentina’s currency value as a result of capital flight, assuming it is operating with a floating exchange rate system? (1 point)

A Appreciation

B Depreciation

C Devaluation

D Revaluation

Question 3: Edexcel A-Level Economics 9EC0 May 2019 Paper 2

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

Extract B

Bank of England seeking to prevent future bank bailouts

The Bank of England has ordered big lenders in the UK to find £116 billion of funding to ensure that taxpayers will never again have to bail out the banking sector. The Bank intends to publish details of how each of the big lenders would cope in the event they find themselves in a situation similar to Royal Bank of Scotland and Lloyds Banking Group, which needed £65 billion of taxpayer bailouts during the 2008 Global Financial Crisis. This had a significant negative impact on the UK government’s national debt and, many would argue, increased the need for contractionary fiscal policy. Having said that, the UK government sold all its shares in Lloyds Banking Group in 2017 and, according to the Chancellor of the Exchequer, “recovered every penny of its investment in Lloyds”. Sir Jon Cunliffe, the deputy governor at the Bank responsible for financial stability, said regulators needed to let banks fail in a similar way that traditional companies collapse. This has not been possible in the past because of the risk that savers lose their money and because a system did not exist to allow banks to be put into insolvency. “Just like when other businesses fail, losses arising from bank failure would be imposed on shareholders and investors. This protects the public from loss and incentivises banks to operate more prudently,” said Cunliffe.

Extract C

Bank of England tells lenders to increase capital reserves

The Bank of England has told lenders they will need to build a special reserve worth £11.4 billion by the end of 2018 as it tries to make banks more resilient to the risk posed by mounting consumer debt. This reserve of assets that can be readily turned into cash is a way of forcing banks to set aside capital reserves in good times in order to keep lending to the wider economy at a steady level, even during an economic downturn. In 2017 the Bank of England told UK banks it would raise the reserve ratio, relative to all assets, from zero to 0.5% and also forecast a further increase to 1% by the end of 2017. The move is not intended to directly reduce consumer demand for credit, which in 2017 grew by 10.3% on an annual basis, but it may well lead to banks becoming less willing to lend to consumers. Since the Bank of England has recently become increasingly concerned about consumer borrowing, including rising car loans and credit card debt, this may be no bad thing as far as the Bank of England is concerned, even if it does have a negative impact on the wider economy. Analysts are concerned about the impact on consumer confidence of rising inflation, partly caused by a falling pound. With falling real incomes consumers could become more vulnerable to falling behind with their credit card and personal loan repayments. Despite these concerns, the UK economy recently recorded the lowest rate of unemployment since 1975.

(a) With reference to Extract A, explain the role of forward markets in currencies. (5 points)

(b) With reference to Extract A and Figure 1, examine the likely impact of the change in the sterling exchange rate on the UK economy. (8 points)

(c) With reference to the last paragraph in Extract C, assess the impact of a fall in real incomes on subjective happiness. (10 points)

(d) With reference to Extract C, discuss the potential conflicts between macroeconomic objectives when the central bank attempts to control inflation. (12 points)

(e) Discuss whether providing substantial government financial support to banks is the best policy response during a financial crisis. (15 points)

Question 4: Edexcel A-Level Economics 9EC0 May 2019 Paper 2

Japan’s budget deficit for 2017/18 is expected to be 4.6% of GDP. Its national debt is forecast to increase to above 250% of GDP by 2019. Evaluate the impact of a large fiscal deficit and national debt on a country’s economy. (25 points)