Using the concept of the multiplier, explain how an increase in investment might affect aggregate demand.

Discuss the effectiveness of supply-side policies in reducing unemployment.

Answers may include:

• definitions of investment, aggregate demand, multiplier
• diagram to show the impact of the multiplier on AD
• explanations that investment is one of the components of the aggregate demand and of the multiplier effect
• example(s) of where an increase in investment has affected AD through the multiplier effect.

NB Candidates who do not refer to the concept of the multiplier should not be awarded marks beyond level 2.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of supply-side policies, unemployment
• diagram(s) to show how supply-side polices may have a short-term impact on AD, but more importantly will increase LRAS and/or how supply-side policies will affect the market for labour
• explanation of how supply-side policies (market-based and interventionist) could reduce different types of unemployment
• example(s) of where supply-side polices have been introduced to tackle unemployment
• synthesis or evaluation (discuss).

Discussion may include: consideration of the disadvantages of supply-side policies (political opposition, opportunity cost for the government budget, time lag, increased inequality in income distribution) in reducing unemployment, consideration of alternative (demand-side) policies.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.