2.1: Government and the Economy (Paper 2)

Question 1

Define the term economic growth: (1)

Answer 1

Increase in the level output by a nation. (1)

Question 2

State the way economic growth is measured: (1)

Answer 2

Gross Domestic Product (GDP) (1)

Question 3

Explain the limitations of using GDP as a measure of growth: (7)

Answer 3

• Inflation: If the inflation rate is the same as the growth rate it doesn’t mean anything because they are still paying the same amount. (1)
• Population Changes: If the GDP grows by a certain percent, and the population also increases, the increase in population will offset the growth in GDP wherefore GDP will be difficult to calculate. (1)
• Statistical Errors: Gathering data to calculate national income is a huge task and governments collect millions of documents from firms, individuals and other organizations which increases the chance of an error being made in the data therefore it is not accurate. (1)
• The value of home produces goods: Some goods and services are not traded and therefore economic activity is not recorded. (1)
• The hidden economy: Some paid work may be unrecorded. For example, if someone drives you to the airport for $25, this may not be recorded. (1)
• GDP and living standards: GDP is used to measure living standards. However, just because GDP rises, it does not automatically mean that living standards have also risen. (1)
• External Costs: GDP does not take into account the external costs such as environmental costs. For example, the price of plastic is cheap because it does not include the cost of disposal. (1)

Question 4

Explain the effect a ‘boom’ in the economic cycle has on: (3)

• Economic Growth (1)
• Inflation (1)
• Unemployment (1)

Answer 4

• Economic Growth: Increases (1)
• Inflation: Increases (1)
• Unemployment: Decreases (1)

Question 5

Explain the effect a ‘downturn’ in the economic cycle has on: (3)

• Economic Growth (1)
• Inflation (1)
• Unemployment (1)

Answer 5

• Economic Growth: Decreasing (1)
• Inflation: Increasing (1)
• Unemployment: Increasing (1)

Question 6

Explain the effect a ‘recession’ in the economic cycle has on: (3)

• Economic Growth (1)
• Inflation (1)
• Unemployment (1)

Answer 6

• Economic Growth: Decreasing (1)
• Inflation: Decreasing (1)
• Unemployment: Increasing (1)

Question 7

Explain the effect a ‘recovery’ in the economic cycle has on: (3)

• Economic Growth (1)
• Inflation (1)
• Unemployment (1)

Answer 7

• Economic Growth: Increasing (1)
• Inflation: Decreasing (1)
• Unemployment: Increasing (1)

Question 8

Explain the impacts of economic growths on the following: (15)

• Employment: (3)
• Standards of Living: (3)
• Poverty: (2)
• Productive Potential: (2)
• Inflation: (2)
• The environment: (3)

Answer 8

• Employment: Economic growth happens as the result of businesses generating more output. (1) As businesses produce more, they need more workers. (1) Consequently, economic growth raises employment levels and thus reduces unemployment. (1)
• Standards of living: Increases in GDP mean that on average people have more income. (1) With more income, people can buy more goods and services. (1) Also as the economy grows, people can spend less time working because there have been significant improvements in efficiency. (1)
• Poverty: Rapid economic growth in some developing countries has helped to reduce poverty. (1) The expansion of existing businesses and the development of new businesses create jobs and some of which will be taken by the poor. (1)
• Productive Potential: Economic growth can raise the productive potential of a country. (1) This means that a country can produce more goods and services. (1)
• Inflation: If economic growth is too fast, the economy may overheat. (1) This can increase inflation which is bad for the economy. (1)
• The Environment: Environmental groups believe that the benefits of growth are lower than the costs of generating that growth. (1) Economic growth uses up non-renewable resources like coal, oil, gas and ore. (1) This means that future generations will have fewer resources. (1)

Question 9

Define the following terms: (2)

• Inflation (1)
• Deflation (1)

Answer 9

• Inflation: Rate at which prices rise, a general and continuing rise in prices. (1)
• Deflation: Period where the level of aggregate demand is failing. (1)

Question 10

State what is used to measure inflation: (1)

Answer 10

Consumer Price Index (CPI) (1)

Question 11

Explain the types of inflation: (2)

Answer 11

• Demand-pull: Inflation caused by too much demand in the economy relative to supply. (1)
• Cost-push: Inflation caused by rising business costs. (1)

Question 12

Explain the relationship between inflation and interest rates: (1)

Answer 12

When inflation is increasing, banks will increase interest rates to encourage people to spend less and save more. (1)

Question 13

Explain the impacts of inflation on: (19)

• Prices (3)
• Wages (2)
• Exports (2)
• Unemployment (3)
• Menu costs (2)
• Shoe leather costs (1)
• Uncertainty (2)
• Business and consumer confidence (2)
• Investment (2)

Answer 13

• Prices: One of the main problems of inflation is that prices are rising. (1) As a result, inflation reduces the purchasing power of money. (1) This means that people cannot buy as much with their income. (1)
• Wages: When prices rise, workers need to increase their wages to compensate for the loss in purchasing power. (1) As a result of this, firms may need to rise their prices due to the cost of inflation. (1)
• Exports: If inflation is higher at home than other countries, firms may find it difficult to sell in overseas markets due to prices of exports rising. (1) This leads to demand for exports falling which affects the balance of payments negatively. (1)
• Unemployment: High levels of inflation usually mean that the aggregate demand is rising. (1) As a result, firms are keen to produce output since the prices of goods is increasing. (1) This leads to firms recruiting more workers which reduces unemployment. (1)
• Menu costs: If inflations is rapid, firms have to increase their prices frequently. (1) This will cost money because new brochures have to be printed and websites have to be updated. (1)
• Shoe leather costs: When prices change frequently, consumers and firms have to spend more time looking for the lowest prices or the best value of money which involves shopping around and which takes time. (1)
• Uncertainty: If inflation is high and varying, firms don’t know what prices will be in a few months time and predicting years ahead becomes impossible. (1) However decisions have to be made now which affects businesses in the long term. (1)
• Business and consumer confidence: Inflation might make consumers anxious because they become more cautious i.e they are less willing to borrow money, and they start to save more which reduces demand. (1) Businesses may lose confidence and they may postpone growth plans or their spending on product development. (1)
• Investment: Investment requires spending large amounts of money now in hope of it paying off as time progresses. (1) However due to uncertainty, investment plans are likely to be postponed or cancelled. (1)

Question 14

Define the term unemployment: (1)

Answer 14

When those actively seeking work are unable to find a job. (1)

Question 15

Explain how unemployment is measured: (2)

Answer 15

• Unemployment is measured through the LFS (Labour Force Survey) (1)
• In the survey, the ILO (International Labour Organisation defines unemployment. (1)

Question 16

Explain the types of unemployment: (5)

Answer 16

Cyclical: Cyclical unemployment is linked to the economic cycle. During a downturn, business activity is slow and are laid off and this worsens if the economy enters a recession. (1)

Structural: Over time, the structure of an economy changes, for example, the manufacturing sector declines and service sector grows. A problem with this is that workers are slow to switch from one job or region to another. (1)

Seasonal: This is unemployment at particular times of the year. For example in holiday resorts, hotels and tourist attractions, they take on more staff during the holiday season then lay them off after. (1)

Voluntary: When people choose not to work because they may think wages are too low or they may not like the idea of work. (1)

Frictional: When short-term unemployment occurs when people are trying to move in between jobs. The usual period for this is up to 8 weeks. (1)

Question 17

Explain the impacts of unemployment on: (12)

• Output (1)
• Use of scarce resources (2)
• Poverty (1)
• Government spending on benefits (2)
• Tax revenue (2)
• Consumer confidence (1)
• Business confidence (2)
• Society (1)

Answer 17

• Output: If people are unemployment, the productive potential of a country is not being fully exploited and as a result, levels of output ae lower than they could be. (1)
• Use of Scarce Resources: People who are out of work do not make any contribution to production. (1) This is a waste of resources and results in lower levels of national income. (1)
• Poverty: Poverty will increase as a result of unemployment because people are not earning income. (1)
• Government spending on benefits: In most developed countries, when people are unemployed they are entitled to receive financial benefits from the state. (1) However if there is high unemployment, the government has to allocate more money to unemployment benefit and this results in an opportunity cost. (1)
• Tax Revenue: When unemployment rises, tax revenues will fall because most taxes are linked to income and spending. (1) This means that the government has less to spend and may have to cut public sector services. (1)
• Consumer confidence: During periods of high unemployment, consumer confidence will fall because most people who find themselves without a job have to suffer hardship. (1)
• Business confidence: When firms lay off workers, they have to pay them redundancy money and this will cause the remaining workers to be demotivated because they fear they are the next in line to be unemployed. (1) As a result of this, the firm will be left with spare capacity when laying people off and a fall in demand. (1)
• Society: In some towns and villages, a large proportion of the population may be employed to the same business but if this business shuts down, there will be high unemployment and this results in the run down of communities because people cannot afford to maintain their houses etc. (1)

Question 18

Define the term current account of balance of payments: (1)

Answer 18

Part of the balance of payments where all exports and imports are recorded. (1)

Question 19

Define the following terms: (2)

• Current account deficit: (1)
• Current account surplus: (1)

Answer 19

• Current account deficit: When value of imports exceeds the value of exports. (1)
• Current account surplus: When value of exports exceeds the value of imports. (1)

Question 20

Define the following terms: (2)

• Invisible trade (1)
• Visible trade: (1)

Answer 20

• Invisible Trade: Trade in services (1)
• Visible Trade: Trade in physical goods (1)

Question 21

Explain the relationship between current account and exchange rates: (4)

Answer 21

• If a currencies exchange rate gets stronger, exports become more expensive and imports become cheaper. (1) This might result in fewer exports being sold and more imports being bought which has a negative impact on the current account. (1)
• If a country has a surplus on the current account resulting from rising sales of goods abroad, demand for that country’s currency will rise. (1) This increase in demand for currency could drive up the exchange rate and helps it get stronger. (1)

Question 22

State an example of real word exchange rates: (1)

Answer 22

• The exchange rate fell after the UK left the EU in brexit. (1)

Question 23

Explain the reasons for deficits and surpluses: (5)

Answer 23

• Quality of Domestic Goods: If a country develops a reputation for high-quality goods, it is likely to enjoy rising sales from overseas buyers. This will drive up the demand for exports and help to improve a current account balance. (1)
• Quality of Foreign Goods: If goods and services overseas are superior to those produced domestically, there will be an increase in demand for these imports. This will have a negative impact on the current balance allowing a current account deficit to increase. There will also be less demand for home produced goods which leads to lower domestic output and employment. (1)
• Price of Domestic Goods: If domestic goods are expensive, then demand from overseas buyers is likely to fall, and this could lead to a worsening of the current balance. (1)
• Price of Foreign Goods: If foreign goods are cheaper than those produced at home, there will be rapid demand for imports. This will have a negative effect on the current account, reducing the size of a surplus. (1)
• Exchange Rates: Since exchange rate affects the prices of domestic goods and foreign goods, any changed in the exchange rate can have an impact on the current account. (1)

Question 24

Explain the impacts of a current account deficit: (4)

Answer 24

• Leakage from the economy: A persistent current account deficit suggests that a country is becoming increasingly dependent on imports. This means that consumers are buying goods produced outside the domestic economy which leads to money flowing out of the economy which is a leakage in the economy. (1)
• Inflation: If prices of imports go up, this will be reflected in the general price level and this leads to rising import prices and higher inflation domestically. (1)
• Low Demand for exports: A country with a high current account deficit might be struggling to sell goods and services abroad. If demand for exports are low, it might mean that the quality of goods is poor or the price is too high. Unless the demand for exports can be reversed, a country may suffer a progressive decline in economic growth and a rise in unemployment. (1)
• Funding the deficit: If a country has a continuing current account deficit, it will need foreign currency to pay for the rising quantity of imports that are being purchased. If the foreign currency reserves of a country run low, it may be necessary to borrow. (1)

Question 25

Define the following terms: (2)

• Macroeconomics (1)
• Microeconomics (1)

Answer 25

• Macroeconomics: Study of large economic systems such as those of a whole country or area of the world. (1)
• Microeconomics: Study of small economic systems that are part of national or international systems. (1)

Question 26

Define the term national income: (1)

Answer 26

Value of income, output or expenditure over a period of time. (1)

Question 27

Define the term budget deficit: (1)

Answer 27

Amount by which government spending is greater than government revenue. (1)

Question 28

Define the term GDP: (2)

Answer 28

Market value of all final goods and services produced in a period. (1) It is an internationally recognised measure of national income. (1)

Question 29

Define the following terms: (4)

• Boom (1)
• Depression (1)
• Downturn (1)
• Recession (1)

Answer 29

• Boom: Peak of the economic cycle where GDP is growing at its fastest. (1)
• Depression: Bottom of the economic cycle where GDP starts to fall with significant increases in unemployment. (1)
• Downturn: Period in the economic cycle where GDP grows, but more slowly. (1)
• Recession: Period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in 2 successive quarters. (1)

Question 30

Define the term overheat: (1)

Answer 30

When demand rises too fast, causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates. (1)

Question 31

Define the term unsustainable growth: (1)

Answer 31

Economic growth that it is not possible to sustain without causing environmental problems. (1)

Question 32

Define the term aggregate demand: (1)

Answer 32

Total demand in the economy including consumption, investment, government expenditure and exports minus imports. (1)

Question 33

Define the following terms: (2)

• Consumer Price Index (CPI) (1)
• Retail Price Index (RPI) (1)

Answer 33

• Consumer Price Index (CPI): Measure of the general price level. (1)
• Retail Price Index (RPI): Measure of the general price level, which includes house prices and council tax. (1)

Question 34

Define the following terms: (2)

• Demand-pull inflation (1)
• Cost-push inflation (1)

Answer 34

• Demand-pull inflation: Inflation caused by too much demand in the economy relative to supply. (1)
• Cost-push inflation: Inflation caused by rising business costs. (1)

Question 35

Define the term interest rates: (2)

Answer 35

Price paid to lenders for borrowed money. (1) It is the price of money. (1)

Question 36

Define the term monetarists: (1)

Answer 36

Economists who believe there is a strong link between growth in the money supply and inflation. (1)

Question 37

Define the term purchasing power of money: (1)

Answer 37

Amount of goods and services that can be bought with a fixed sum of money. (1)

Question 38

Define the following terms: (2)

• Menu costs (1)
• Shoe leather costs (1)

Answer 38

• Menu costs: Costs to firms of having to make repeated price changes. (1)
• Shoe leather costs: Costs to firms and consumers of searching for new suppliers when inflation is high. (1)

Question 39

Define the term hyperinflation: (2)

Answer 39

Very high levels of inflation. (1) Rising prices get out of control. (1)

Question 40

Define the term transactions: (1)

Answer 40

Payment, or the process of making one. (1)

Question 41

Define the following terms: (5)

• Cyclical/demand deficient unemployment: (1)
• Structural unemployment (1)
• Frictional unemployment (1)
• Seasonal unemployment (1)
• Voluntary unemployment (1)

Answer 41

• Cyclical/demand deficient unemployment: Unemployment caused by falling demand as a result of a downturn in the economic cycle. (1)
• Structural unemployment: Unemployment caused by many changes in the structure of the economy such as the decline in an industry. (1)
• Frictional unemployment: When workers are unemployed for a short period of time as they move from one job to another. (1)
• Seasonal unemployment: Unemployment caused when seasonal workers, such as those in the holiday industry, are laid off because the season has ended. (1)
• Voluntary unemployment: Unemployment resulting from people choosing not to work. (1)

Question 42

Define the term laying off: (1)

Answer 42

To stop employing someone because there is no work for them to do. (1)

Question 43

Define the term balance of payments: (1)

Answer 43

Record of all transactions relating to international trade. (1)

Question 44

Define the term capital and financial account: (1)

Answer 44

The part of the balance of payments where flows of savings, investment and currencies are recorded. (1)

Question 45

Define the following terms: (2)

• Exports (1)
• Imports (1)

Answer 45

• Exports: Goods and services sold overseas. (1)
• Imports: Goods and services bought from overseas. (1)

Question 46

Define the term current balance: (1)

Answer 46

Difference between total exports and total imports. (1)

Question 47

Define the term balance of trade/visible balance: (1)

Answer 47

Difference between visible exports and visible imports. (1)

Question 48

Define the following terms: (2)

• Primary income (1)
• Secondary income (1)

Answer 48

• Primary income: Money received from the loan of production factors abroad. (1)
• Secondary income: Government transfers to and from overseas agencies such as the EU. (1)

Question 49

Define the term exchange rates: (1)

Answer 49

• Price of one currency in terms of another. (1)

Question 50

Define the term income inequality: (1)

Answer 50

Differences in income that exist between the different groups of earners in society, that is, the gap between the rich and the poor. (1)

Question 51

Define the following terms: (2)

• Relative poverty (1)
• Absolute poverty (1)

Answer 51

• Relative poverty: The standard of living is below the typical living standards in that society. (1)
• Absolute poverty: Where people do not have enough resources to meet all of their basic human needs. (1)

Question 52

Explain reasons to reduce poverty and inequality: (3)

Answer 52

• Meet basic needs: If absolute poverty can be completely eliminated, the basic needs of people will be met and this would avid the loss of life from starvation and help children to grow up healthily. (1)
• Raise living standards: If poverty can be reduced living standards would rise because the basic needs of people would be met and as a result, more people would be educated which means more employment, income and tax revenue which can improve economic growth and public services. (1)
• Ethical reasons: People think that it is the moral duty of both people and governments, to reduce poverty. It could be argued that the sacrifice needed by the “better off” to reduce poverty is very small indeed. (1)

Question 53

Explain the government intervention methods to reduce inequality and poverty: (3)

Answer 53

• Progressive taxation: If a government uses a progressive tax system, the gap between the rick and the poor might be closed because people on higher incomes will be paying more tax. (1)
• Redistribution through benefit payments: In many developed countries, governments have a welfare system which is used to redistribute income in favour of the poor. Most systems use tax revenues to make direct payments to those on low incomes or those who cannot work at all. (1)
• Investment in education and healthcare: If people are more educated, they are able to develop a range of skills which makes them more employable. Health programmes can reduce child mortality, rates, increased life expectancy and reduce suffering. (1)

Question 54

Explain business activities that damages the environment: (5)

Answer 54

• Mining: If minerals or a material wants to be mined, a large scale extracting of rock and crushing rocks from the earth is needed to obtain this small quantity. This could lead to radioactive materials being exposed which damages the environment. (1)
• Power generation: When generating energy from fossil fuels, this can have harmful impacts like carbon emissions, ash disposal and the release of hot water. Nuclear power stations pose threats and a leakage of this power station can be catastrophic. (1)
• Chemical processing: Chemicals can have a negative impact on human health and the environment when their production when their production or use is not managed sustainably. (1)
• Agriculture: Using chemicals like fertilizers and pesticides are beneficial to increasing crop yields, however if there is heavy rainfall, it can get washed into bodies of river and can harm aquatic life. (1)
• Construction: Construction activities such as land clearing, operation of diesel engines, demolition, burning and working with toxic materials contribute to air pollution. (1)

Question 55

Explain ways in which businesses damage the environment: (4)

Answer 55

• Visual pollution: Business activities may result in something physical looking unattractive like smoking, dumping of materials, equipment and other objects near construction sites. (1)
• Noise pollution: If excessive noise results from a business activity, it can cause disturbances to everyday life which can be a problem for people and reduce their quality of living. (1)
• Air pollution: Factories, machines and vehicles that discharge emissions into the atmosphere are responsible for the global levels of air pollution and this air pollution contains harmful gases which can impact a persons life. (1)
• Water pollution: Business activity can produce harmful chemicals or products which often make their way into waterways which leads to the contamination of oceans, rivers and lakes. (1)

Question 56

Explain the government intervention that can be used to protect the environment: (6)

Answer 56

• Taxation: Many governments impose taxes on those that damage the environment. Taxation ensures that the social costs resulting from production and consumption are met by those who impose them. Some governments tax petrol heavily to reduce car use and carbon emissions. (1)
• Subsidy: Subsidies such as grants and tax allowances can be offered as an incentive to reduce activities that damage the environment, for example a firm may recieve a subsidy if it builds a plastics recycling plant. (1)
• Regulation: Legalization, regulations, guidelines and codes of practice exist to help protect the environment. Some countries have an environmental agency which takes action against those who break environmental laws. (1)
• Fines: The use of fines for those who break environmental laws are common in many countries and many firms are responsive to financial penalties imposed because fines will reduce their profits. (1)
• Pollution permits: Governments can issue pollution permits which are documents that give businesses the right to discharge a certain amount of polluting material. (1)
• Park provision: In many countries, governments establish national parks where business activity is illegal. These large areas of land aim to preserve and protect areas of natural beauty, wildlife, historic sites and beautiful scenery. (1)

Question 57

Define the term fiscal policy: (1)

Answer 57

Decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy. (1)

Question 58

Define the following terms: (2)

• Direct taxes (1)
• Indirect taxes (1)

Answer 58

• Direct taxes: Taxes levied on the income earned by firms and individuals. (1)
• Indirect taxes: Taxes levied on spending, such as VAT. (1)

Question 59

State examples of what governments spend on: (8)

Answer 59

• Social protection (1)
• Health care (1)
• Education (1)
• Defence (1)
• Interest (1)
• Public order/safety (1)
• Social services (1)
• Other (1)

Question 60

Explain the differences between fiscal deficit and fiscal surplus: (2)

Answer 60

• Fiscal deficit: Amount by which government spending exceeds government revenue. (1)
• Fiscal surplus: Amount by which government revenue exceeds government spending. (1)

Question 61

Explain the impact of a: (2)

• Fiscal deficit (1)
• Fiscal surplus (1)

Answer 61

• Fiscal deficit: In a year where the government plans to overspend, it would have to borrow money to fund the deficit and if it builds up the national debt will get bigger. (1)
• Fiscal surplus: It is likely to be positive, if a government collects more revenue than it spends in a year, the surplus could be used in a number of ways. (1)

Question 62

Explain the impact of a fiscal on the following macroeconomic objectives: (5)

• Inflation (1)
• Economic Growth (1)
• Unemployment (1)
• Current account deficit (1)
• The environment (1)

Answer 62

• Inflation: Contractional fiscal policy can be used to reduce inflation by taking measures to reduce demand like increasing taxes or cuts in spending. (1)
• Economic growth: Expansionary fiscal policy can be used to increase economic growth which includes measures like increasing government expenditure to increase aggregate demand. (1)
• Unemployment: Expansionary fiscal policy can be used to decrease unemployment by increasing government expenditure and cutting taxes to increase demand which increases demand meaning firms would have to employ more workers to meet with this. (1)
• Current account deficit: If there is a large deficit on the current account, contractionary fiscal policy can be used to reduce demand which reduces the demand for imports. (1)
• The environment: Taxes such as landfill tax can help to reduce environmental damage an some governments use subsidies to encourage activities that are environmentally friendly. (1)

Question 63

Define the term supply-side policy: (1)

Answer 63

Government measures designed to increase aggregate supply in the economy. (1)

Question 64

Explain the impact of supply-side policies on: (2)

• Productivity (1)
• Total output (1)

Answer 64

• Productivity: Supply side policies generally improve the productivity of production factors where resources are used more effectively and the productive potential of the economy can be increased. (1)
• Total output: Supply side policies aim to increase the productive potential of the economy and with increased volumes of output national income will rise and living standards will be improved. (1)

Question 65

Explain the impact of the supply-side policy ‘privatisation’ on macroeconomic objectives: (2)

Answer 65

• Redistribution of income: It will widen the income gaps andincrease costs for essential services. (1)
• Reduces unemployment: It will create more job opportunities as staff is needed because demand increases.

Question 66

Explain the impact of the supply-side policy ‘deregulation’ on macroeconomic objectives: (3)

Answer 66

• Increases economic growth: It stimulates competition, increase in supply and demand, also decreases in barriers for entry for businesses and removal of government helps reduce restriction. (1)
• Decreases unemployment: It increases business growth which means that more people need to be employed. (1)
• Increases inflation: It could lead to high inflation due to lower prices caused by deregulation. (1)

Question 67

Explain the impact of the supply-side policy ‘education and training’ on macroeconomic objectives: (4)

Answer 67

• Increases unemployment: Larger amounts of education and training can lead to a higher skilled workforce, which leads to employees being hired due to businesses wanting to hire more skilled workers. (1)
• Redistribution of income: If the government makes a large investment into education and training for the poor, this will lead to more skilled workers which can decrease the gap between the rich and poor. (1)
• Economic growth: If there is a larger investment in education and training, the workforce become more skilled leading to an increase in productivity, increased total output and economic growth. (1)
• Balance of Payments: If there is a larger investment in education and training, the workforce become more skilled which leads to goods being produced and the quality of the good being greater causing people to buy them and increasing the balance of payments. (1)

Question 68

Explain the impact of the supply-side policy ‘policies to boost regions with high unemployment’ on macroeconomic objectives (2)

Answer 68

• Reduces unemployment: They find projects which help to create jobs and this could be in areas such as infrastructure or technology. (1)
• Economic Growth: As unemployment rates go down, the people get more income, thus byting more so the country and government produce more which increases GDP and economic growth. (1)

Question 69

Explain the impact of the supply-side policy ‘infrastructure spending’ on macroeconomic objectives: (1)

Answer 69

• Reduces unemployment: It helps provide more jobs for people to build them. (1)

Question 70

Explain the impact of the supply-side policy ‘lower business taxes to stimulate investment’ on macroeconomic objectives: (3)

Answer 70

• Reduces unemployment: If businesses are taxed less, they will have more money to spend which leads to them investing more and can hire more workers. (1)
• Economic growth: When businesses are taxrd less, they will grow, have more employees, spend more and sell more which leads to economic growth. (1)
• Balance of payments: When businesses are taxed less, they will be able to grow, spend more on products to increase their quality which will lead to their products being consumed and imports increase which has a positive effect on the balance of payments. (1)

Question 71

Explain the impact of the supply-side policy ‘lower income tax rates to encourage working’ on macroeconomic objectives: (2)

Answer 71

• Economic growth: Lower income taxes increase economic growth because people have more disposable income so they will buy more, and businesses can also produce more output. (1)
• Reduces unemployment: Due to lower income taxes, the demand for labour increases due to the increase in demand and this lowers unemployment and increases GDP which measures economic growth. (1)

Question 72

Define the term monetary policy: (1)

Answer 72

Use of interest rates and the money supply to control aggregate demand in the economy. (1)

Question 73

Define the term rate of interest/interest rate: (1)

Answer 73

Price of borrowing money. (1)

Question 74

Explain the roles of central banks: (4)

Answer 74

• Implementing the government’s monetary policy and regulating the banking system. (1)
• Acting as a lender of last resort to commercial banks. (1)
• Controlling inflation and stabalising a nation’s currency. (1)
• Setting interest rates. (1)

Question 75

Explain the impacts of changes in interest rates on macroeconomic objectives: (6)

• Inflation (2)
• Unemployment (1)
• Economic growth (1)
• The current balance (2)

Answer 75

• Inflation: Monetarists believe that inflation is caused by money supply growing too quickly. (1) They say that the way to reduce inflation is to slow down the speed of money supply which leads to the interest rate being raised. (1)
• Unemployment: A government might use lower interest rates to reduce unemployment because there would be an increase in demand for loans which can lead to aggregate demand and spending by firms to increase and because of this businesses need to recruit more staff. (1)
• Economic growth: Monetary policy might be used to help smooth out the small variations in the economic cycle and it may help a country get out of a recession by lowering interest rates. (1)
• The current balance: To reduce a deficit, a government might tighten monetary policy which would lower aggregate demand and reduce spending on imports. (1) If interest rates are raised, the exchange rate may increase which would make exports more expensive and imports cheaper which worsens the current balance. (1)

Question 76

Explain how the mechanism by which interest rate changes impact consumers and firms. (4)

• Consumers (2)
• Firms (2)

Answer 76

• Consumers: When interest rates fall, demand for loans will rise and consumers are more likely to borrow money to buy goods and those with mortgage would find that their mortgage payments will fall. (1) If interest rates rise, the opposite will happen. (1)
• Firms: If interest rates fall, they will borrow money to spend on their business and output and it also stimulates investment. (1) If interest rates rise, this will raise costs, lower profits, reduce business confidence and make entrepreneurs more cautious and investments will fall as a result. (1)

Question 77

Define the term quantitative easing: (1)

Answer 77

Buying of financial assets, such as government bonds from commercial banks, which results in a flow of money from the central bank to commercial banks. (1)

Question 78

Explain an advantage and disadvantage of government controls like regulation, legislation, fines and pollution permits: (2)

• Advantage: (1)
• Disadvantage: (1)

Answer 78

• Advantage: They reduce exploitation of vulnerable groups or sectors. (1)
• Disadvantage: They may impose costs on firms that might inhibit their growth and development. (1)

Question 79

Define the term policy instruments: (1)

Answer 79

Tools governments use to implement their policies, such as interest rates, rates of taxation, levels of government spending. (1)

Question 80

Define the term budget: (1)

Answer 80

Governments spending and revenue plans for the next year. (1)

Question 81

Define the term value-added tax (VAT): (2)

Answer 81

Tax on some goods and services. (1) Businesses pay value-added tax on most goods and services they buy and if they are VAT registered, charge value-added tax on the goods and services they sell. (1)

Question 82

Define the following terms: (2)

• Fiscal deficit (1)
• Fiscal surplus (1)

Answer 82

• Fiscal deficit: Amount by which government spending exceeds government revenue. (1)
• Fiscal surplus: Amount by which government revenue exceeds government spending. (1)

Question 83

Define the term national debt: (1)

Answer 83

The total amount of money owed by a country. (1)

Question 84

Define the following terms: (2)

• Expansionary fiscal policy (1)
• Contractionary fiscal policy (1)

Answer 84

• Expansionary fiscal policy: Fiscal measures designed to stimulate demand in the economy. (1)
• Contractionary fiscal policy: Fiscal measures designed to reduce demand in the economy. (1)

Question 85

Define the term money supply: (1)

Answer 85

Amount of money circulating in the economy. (1)

Question 86

Define the term base rate: (1)

Answer 86

Rate of interest set by government or regional central banks for lending to other banks, which in turn influences all other rates in the economy. (1)

Question 87

Define the term mortgage: (2)

Answer 87

Legal arrangement where you borrow money from a financial institution to by land or a house and you pay back the money over a period of years. (1) If you do not make your regular payments, the lender normally has the right to take the property and sell it in order to get back their money. (1)

Question 88

Define the term real economy: (1)

Answer 88

Part of the economy that is concerned with actually producing goods and services as opposed to the part of the economy that is concerned with buying and selling on the financial markets. (1)

Question 89

Define the term aggregate supply: (1)

Answer 89

The total amount of goods and services produced in a country at a given price level in a given time period. (1)

Question 90

Define the term offset: (1)

Answer 90

Something that has the effect of reducing or balancing a sum of money so that the situation remains the same. (1)

Question 91

Define the term austerity: (1)

Answer 91

Official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend. (1)