Economics (AS & A Level) · Feb / March 2025 · Paper 32 · Question 24

In an economy with unemployed resources the marginal propensity to consume is 0.2. The government increases its budget deficit and finances it by selling bonds to the non-bank private sector. What is the likely consequence of this?

1. AThe currency will depreciate, increasing exports and reducing the trade deficit.
2. BThe increase in real output will be limited as the value of the multiplier is low.
3. CThe money supply will fall, leading to a reduction in aggregate demand.
4. DThere will be a decrease in the rate of interest, causing demand-pull inflation.

As printed in the paper