paper 2

Question 1

Economic growth definition + caused by

Answer 1

Economic growth is an increase in real gpd in an economy in a year caused by an increase in AD or an increase in LRAS

Question 2

AD equation

Answer 2

AD = C + I + G + (x - m)

Question 3

Factors that increase the AD variables

Answer 3

lower interest rates, lower income or corporate tax, higher consumer or business confidence, higher government spending, weaker exchange rate

Question 4

Causes of long run economic growth

Answer 4

increase in the quantity of factors of production, increase in quality of factors of production, increase in productive efficiency

Question 5

what is budget surplus + use

Answer 5

a budget surplus occurs when tax revenue is greater than government expenditure. The government uses the surplus revenue to pay off public sector debt

Question 6

What is budget deficit + how to reduce

Answer 6

a budget deficit occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues

Question 7

What is the multiplier effect

Answer 7

the multiplier effect occurs when a initial injection into the circular flow causes a bigger final increase in real national income

Question 8

Multiplier effect equation

Answer 8

1 / 1 - MPC

Question 9

What is fiscal policy

Answer 9

fiscal policy are government plans concerning spending, borrowing and taxation

Question 10

what is expansionary fiscal policy?

Answer 10

An expansionary fiscal policy involves the government aiming to increase aggregate demand through increasing government expenditure and/or lowering direct and indirect taxes, which is financed by an increase in the size of the budget deficit.

Question 11

What is contractionary fiscal policy?

Answer 11

An contractionary fiscal policy involves the government aiming to decrease their budget deficit. The primary aim is not to decrease AD but to slow the rate of growth of the national debt by bringing government borrowing down to lower levels. Tax revenue greater than government expenditure therefore budget surplus

Question 12

How would expansionary fiscal policy effect economic growth ?

Answer 12

increases economic growth

Question 13

How would expansionary fiscal policy reduce unemployment?

Answer 13

In a recession if AD shifts right there is going to be more goods and services being produced in the economy, firms therefore going to need more workers to produce that output, therefore output increases and employment increases

Question 14

How would expansionary fiscal policy effect inflation ?

Answer 14

AD shifts to the right therefore inflation is increased

Question 15

The multiplier effect works because?

Answer 15

the multiplier is the chain of income and expenditure passing through the economy

Question 16

Why is the multiplier effect not effective in the UK?

Answer 16

the multiplier effect is not effective in the UK because of the high marginal rate or tax and the high prosperity to import goods and there is a high level of withdraw also the multiplier effect is a slow process

Question 17

What does the impact of fiscal policy depend on ?

Answer 17

the impact of fiscal policy depends on the position of the economy on the LRAS

Question 18

Index number equation

Answer 18

RAW NUMBER / BASE YEAR RAW NUMBER X 100

Question 19

% change equation

Answer 19

initial - final / initial

Question 20

IF LOWERED HOW TO INTEREST RATES EFFECT CONSUMPTION ?

Answer 20

lower interest rates make it cheaper for consumers to borrow but also cheaper for businesses to invest so consumption will increase however low interest rates can weaken the exchange rate which can boost net exports

Question 21

IF INCOME AND CORPORATION TAX ARE LOWERED HOW DOES THIS AFFECT CONSUMPTION

Answer 21

If income tax is lowered consumers will have more disposable income therefore an increase in consumption. If corporate tax is lowered firms will retain more retained profit therefore more disposable income therefore an increase in consumption.

Question 22

WHAT IS THE RELATIONSHIP BETWEEN NET EXPORTS AND EXCHANGE RATE

Answer 22

When the exchange rate is high the price of goods at home is higher than the relative price of goods abroad. In this case, import is likely because foreign goods are cheaper. However when the exchange rate is low the price of goods at home are cheaper than goods abroad therefore export is more likely.

Question 23

WEALTH EFFECT DEFINITION

Answer 23

The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise

Question 24

AGGREGATE DEMAND DEFINITION + why the AD curve slopes downwards from left to right.

Answer 24

aggregate demand: is the total demand for all goods and services within an economy

Aggregate demand sloping downward can be explained by

Real Income effect: at a lower price level, the spending power of consumers’ income is greater and therefore they are able to buy more goods and services.

International effect: At lower price levels, domestic prices become relatively cheaper (more competitive) and so the number of exports increase.

The interest rate effect: at high price levels, consumers / firms do not make large deposits at the bank and so there are few ‘loanable funds’, which causes interest rates to rise which in turn causes investment and consumption to fall.

Question 25

marginal propensity to save’ and explain how an increase in the marginal propensity to save (MPS) will affect the multiplier.

Answer 25

MPS is the proportion of additional income that is saved

If MPS increases, this means that less money will flow around the circular flow of income after each round of spending [1]. Therefore, leakages have increased and, therefore, the multiplier will be lower

Question 26

EXPLAIN HOW THE Bank of England can increase economic growth rate with by decreasing bank rate

Answer 26

When the Bank of England reduces Bank Rate, commercial banks will also end up reducing their lending rates because of competitive pressure in the financial market (Bank Rate is effectively a cost of production for commercial banks0

As a result, consumers will be less incentivised to save and more incentivised to spend.

Business, too, will be less incentivised to save and more incentivised to spend (i.e. invest)

Assets prices are likely to rise as people seek alternative forms of investment (instead of saving).

Demand for assets rises and this puts upward pressure on prices. This creates a wealth effect and a
further stimulus for spending.