PAPER 3

Question 1

Micro Causes of Income Inequality

Answer 1

• Education Differences - Those who are more educated will likely earn more than someone with less education
• Age - Older workers are likely to have greater experience and human capital than younger workers to will likely earn more
• Tech Advancements - Likely to complement the skills of high income workers while replacing the jobs of many low income workers

Question 2

Macro Causes of Income Inequality

Answer 2

• One Sector Dominance - If one sector in an economy is the driving force for growth, workers in that sector are likely to be on higher income than those working outside that industry
• Recession - Firms would be more inclined to let go of young/lower skilled workers as they’re less valuable and more easily replaceable
• Globalisation - Newly imported sectors will mean increased unemployment domestically. Foreign competition may see domestic firms let go off workers to cut costs.
• Imposition of certain Gov’t Policies (or lack thereof); e.g. Increase in Regressive Taxes like VAT

Question 3

Micro Consequences of Income Inequality

Answer 3

• Social Costs - Effects of Homelessness, Poverty, Crime etc. would need to be rectified by Gov’t Spending; burdens tax payer
• Incentive to become Educated in pursuit of higher wages; increased productivity and decreased Cost of Production
• Incentive for Enterprise and Work

Question 4

Macro Consequences of Income Inequality

Answer 4

• Gov’t Finances - More Spending on Benefits and Social Costs will decrease spending elsewhere. Also, lower overall Tax Rev. which can hurt Budget Deficit
• Poor Living Standards for those on lower incomes
• Can decrease Economic Growth - Higher Income Earners are more likely to save than Lower Income Earners; less consumption in economy

Question 5

Policies to Reduce Income Inequality

Answer 5

Micro - (Min/Max) Wage
Macro - Progressive Income Tax, GS on Welfare, GS on Education/Health

Question 6

Micro Effects of Market Structures

Answer 6

• (Productive, Allocative, X) Efficiency?
• (Monop, Olig, Contestable) Many firms may adopt Anti-Competitive Behaviours like Predatory Pricing, Limit Pricing and heavy advertising
• Potential for Price Discrimination

Question 7

Macro Effects of Market Structures

Answer 7

• Dynamic Efficiency in a Market Structure could boost LRAS/Productivity
• Competitive Markets will see many Jobs Created due to high quantity and labour being in derived demand
• Competitive Markets will generally have lower prices; decreasing poverty and inequality levels

Question 8

Micro Consequences of Minimum Wage

Answer 8

• Incentivises people in work to work harder and for those out of work to seek employment; can increase productive capacity of workforce and shift PPF
• Less Profit due to increased Costs of Production
• Decreases Inequality

Question 9

Macro Consequences of Minimum Wage

Answer 9

• Incentivises investment into labour-enhancing capital; LRAS increases
• Firms may not be able to afford higher wages so may go out of business or shed workers; unemployment increases
• Firms may pass increased cost onto consumers with higher prices; Cost-Push Inflation and decreased Int’l Competitiveness (Less Cons. Surplus)

Question 10

Macro Consequences of Unemployment

Answer 10

• Lost output - Productivity decreases and less spending in the economy
• Worsening of Gov’t Finances due to lower Tax Rev. from less workers and increased Benefits payments to those out of work
• Inflation - PHILLIPS CURVE
• Potential Current Account Improvements - Less people in work so less spending on imports

Question 11

Micro Consequences of Unemployment

Answer 11

• Social Costs - Worse Crime, Depression, Anxiety, Divorce; could put pressure on public services like Courts, Healthcare and Police
• May worsen Market Failures from Negative Externalities; Drugs, Alcohol etc.

Question 12

Macro Consequences of Economic Growth

Answer 12

• Increased Incomes which will improve Living Standards and alleviate Poverty
• Lower unemployment due to increased Aggregate Demand and labour being in derived demand
• Worsening of Current Account due to potential Demand-Pull Inflation making exports less competitive and due to increase demand for high quality imports

Question 13

Micro Consequences of Economic Growth

Answer 13

• Potential Market Failures through Negative Externalities and less Environmental Concern
• Worse Income Inequality (Eval: Depends on where Growth has come from)
• Increased Business Profits which could increase level of Dynamic Efficiency

Question 14

Micro Effects of Expansionary Monetary Policy (IR Decrease, QE)

Answer 14

• Impact on Savers - Lower Rates of Return on Savings which can negatively impact Pensioners, Early Retired and those who rely on are or are saving to afford something.
• House Prices - Lower IR makes it cheaper to borrow money and get a mortgage; Increased Demand for Houses (Increased Wealth for Home Owners but harder for buyers to access the market)
• Can decrease the amount of debt repayment on business and household loans (Eval: Depends on if loans are fixed/variable IR)

Question 15

Macro Effects of Expansionary Monetary Policy (IR Decrease, QE)

Answer 15

• Increased Economic Growth due to increased Investment and Consumption - AD right - decreases in Cyclical Unemployment
• Demand Pull Inflation
• Current Account Position worsens; Inflation may decrease competitiveness of Exports and higher Growth and Employment will see increased Income levels for Import Expenditure (Eval: However, if IR cuts cause weaker ER due to Hot Money Outflows, could improve CA; depends on which effect dominates)