Paper 2 brief

Question 1

Consequences of Inflation for the Government?

Answer 1

Government as an employer- inflation can lead to pressure on government due to increased wages for its employees which can lead to costly industrial disputes and if wages are agreed, increased government spending.
Tax revenue- if there is inflation, some tax revenue may increase such as VAT as it is a percentage of higher prices and Income tax as it is a percentage of higher incomes and people may be dragged into higher tax brackets however fixed taxes may fall in real terms.

Question 2

What is Price Stability?

Answer 2

When the general price level either stays the same or rises at a low rate over time.

Question 3

What is Inflation?

Answer 3

A sustained increase in the general price level.

Question 4

Causes of Inflation?

Answer 4

Too much demand known as Demand-Pull. When total demand rises faster than total supply. Increased Incomes because consumers are able to afford more goods and services meaning increased competition for the goods and services leading to higher prices. More likely in an economy where its operating close to its productive capacity as firms can’t respond as easily to a change in demand. Economy close to full employment so difficult to find unemployed workers to produce more output, may have to turn to capital machinery.

Question 5

Cause of Inflation?

Answer 5

Rise in costs of goods and services known as Cost-Push inflation. This is caused by increased production cost (e.g. wage/salary, raw materials, tax, fall in productivity) which firms generally try to pass down to consumers to maintain profits leading to increase in general price level.

Question 6

Consequences of Inflation on Consumers?

Answer 6

Loss of consumer Confidence- inflation makes it difficult for consumers to prioritise their income which may stop them buying goods and services.
Shoe Leather Costs- as prices change consumers and firms have to keep comparing prices of different goods from differing suppliers costing time and effort.

Question 7

Consequences of Inflation on Producers?

Answer 7

Increased production cost- increases price of inputs, therefore increasing costs and sometimes reducing profits.
Labour market disputes- firms may need to spend more time negotiating wages with workers meaning wages for the negotiators and possibly increased wages for workers.

Question 8

Direct tax with examples?

Answer 8

A tax on income and wealth
Income tax- paid on all incomes
National Insurance
Corporation tax- paid by firms on the profits made.

Question 9

Indirect tax with examples?

Answer 9

A tax on spending which is imposed on the producer but may then be passed to consumers through price increases.
VAT- three different rates (20%, 5%, or 0%)
Excise duties- taxes on specific goods e.g. tobacco.
Customs Duties- Taxes on imports of goods into the country.

Question 10

Government budget types?

Answer 10

Balanced Budget- where the total tax revenue expected by the government is equal to the expected expenditure.
Budget Surplus- where the expected revenue from tax is higher than the amount of expected expenditure.
Budget Deficit- where the expected revenue from tax is lower than the expected expenditure so government has ti use reserves or borrow money.

Question 11

Economic Objectives?

Answer 11

-Economic growth
-low unemployment
-price stability
-improved balance of payments
-fair distribution of income

Question 12

What are the effects of Budget surplus and deficit?

Answer 12

Surplus will reduce growth and inflation.
Deficit will increase economic growth and employment.

Question 13

What is monetary policy?

Answer 13

A policy that aims to control the total supply of money in the economy to try to achieve the Government’s economic objectives, in particular price stability.

Question 14

Benefits of Fiscal policy?

Answer 14

-Economic Growth.
-Low unemployment.
-Faster acting- than monetary and supply-side.

Question 15

Objective, Interest rates and effect?

Answer 15

Economic growth:
-if interest rates are reduced this will lead to increased spending, output and employment.
Low Unemployment:
-if interest rates are reduced will lead to increased spending, output and employment.
Price stability:
-If interest rates are increased it will lead to reduced spending, so more price stability.
A healthier balance of payments:
-if interest rates are increased it will lead to reduced spending, including spending on imports.

Question 16

Monetary policy affecting growth if interest rates are reduced?

Answer 16

Spending and Borrowing by consumers increases because borrowing is cheaper so disposable income rises, spending incurs a lower opportunity cost, Rising consumption leads to increased demand for goods and services and thus increase in total output.
Borrowing for investment by firms increases because borrowing is cheaper so firms can increase investment leading to more output.

Question 17

Effects of Monetary policy on consumers?

Answer 17

Opportunity cost of spending- Consumers are swayed either to spend or save.
Income- Retired people who rely on savings for income may want to spend less or more depending on interest rates.
Mortgage owners- those with mortgages now will pay less/more interest so will have more/less disposable income so will spend more/less.

Question 18

The effects of Monetary policy on savers?

Answer 18

Consumption- this would rise or fall as opportunity cost of consuming is less/more. Those who depend on income from savings may have to reduce consumption of interest rates increase.
Fall in real price level- If prices are falling then a cut in interest rates may not affect savings as people can consume more due to the price change.

Question 19

What is supply-side policy

Answer 19

Any policy that helps to increase a country’s productive potential.

Question 20

Education and training?

Answer 20

Better edu and training improves workers skills and the quality of the labour. This increases productivity and economic growth and reduces unemployment.

Question 21

Privatisation?

Answer 21

Privatisation should increase comp leading to greater efficiency and output and lower prices/inflation. Exports are more competitive helping to improve balance of payments.

Question 22

Benefits of Supply-Side policies?

Answer 22

-Reduced Inflation- Markets kept more efficient so output rises with demand.
-Increased employment- more output requires more workers.

Question 23

Costs of Supply-Side policies?

Answer 23

-Time Lags- Policies take a long time to become effective so the conditions in the economy may have changed.
-Opposition to policies- Controlling trade unions or monopolies may be unpopular with those affected leading to strikes or less investment respectively.

Question 24

What is a method of measuring unemployment?

Answer 24

Claimant count- includes people who are claiming unemployment-related benefits including jobseekers allowance and universal credit.

Question 25

Equation for unemployment rate?

Answer 25

Number unemployed divided by workforce times 100

Question 26

Frictional unemployment?

Answer 26

Workers without employment moving one job to the next.

Question 27

Cyclical unemployment?

Answer 27

Workers without employment due to fall in demand for goods and services.

Question 28

Seasonal unemployment?

Answer 28

Workers without employment because of a decrease in demand at certain times of year.

Question 29

Structural unemployment?

Answer 29

Workers without employment due to decline of industry.

Question 30

Consequences of differences in distribution of income?

Answer 30

Poverty.- people without jobs may not be able to afford basic necessities to survive.
Education.- in countries with no state education, families that are in poverty won’t be able to afford education continuing the cycle of poverty.

Question 31

Income vs Wealth?

Answer 31

Income is flow of money over time whereas as wealth is monetary value of assets owned at a specific time.

Question 32

Causes of differences in income?

Answer 32

Wage gaps:
Wage rates are based on demand and supply so equilibrium price varies.
Age:
Both young and old are likely to have a lower share of the income.

Question 33

Benefits of Inequality?

Answer 33

Incentives: people who could earn a higher wage may try to work harder for it.
Trickle-down effect: If some people are better off, then they may invest in the economy or start a business leading to more income for others.