Policies

Question 1

Explain one advantage and one disadvantage to government spending more on healthcare and education.

Answer 1

One advantage is that it will increase G which increases aggregate demand and AD shifts to the right increasing real GDP. Workforce will become healthier and more productive, so LRAS shifts to the right increasing the productive potential of the economy as improvement in factors of production.

A disadvantage is that it will worsen the government’s budget deficit due to increased borrowing and spending. Also, spending may lead to useless degrees and unproductive bureaucracies.

Question 2

Explain one advantage and disadvantage to the government of increasing VAT

Answer 2

An increase in VAT will increase tax revenue for the government, which will improve the budget deficit.
However, an increase in VAT will increase costs for firms, which will shift SRAS inwards. This can reduce economic growth and leads to cost push inflation.