unemployment and inflation questions

Question 1

Explain ways in which fiscal policy measures can be used to reduce the level of income inequality in the UK.

Answer 1

Taxation
increase income tax (tax brackets) (ID), as this is a progressive tax (EXP) (1) as highest earners will pay more (EXP) (1)
- as increased government revenue can be redistributed
(EXP) (1) For example, increased welfare spending (DEV)
(1)
increase tax-free allowances (ID) to increase disposable income for lower income earners (EXP) (1)
switch emphasis from regressive to progressive taxation (ID) to reduce the burden of taxation on low income earners (EXP) (1)

Expenditure
increase spending on infrastructure projects/training (ID) to allow more people to enter the labour market (EXP) (1) for example extending the Borders railway (1)
increase job seekers’ allowance (ID) which will increase disposable incomes for unemployed (EXP) (1) increase pay for lower paid public sector workers (ID) for example nurses (EXP) (1)

Question 2

Explain the ways in which supply side policies can be used to create economic growth

Answer 2

Grants may be awarded (ID) which could be used to invest in capital improving productivity (1). Increased productivity means more output can be produced without increasing input (DEV) (1).
Education may be improved (ID) to improve efficiency of workers (1). More efficient workers will reduce wastage/errors (DEV) (1).
More/better training may be provided (ID) to improve productivity/flexibility (1). More flexible staff will reduce stoppages/bottlenecks (DEV) (1).
Industry may be deregulated (ID) to increase opportunities for competition (1). More competition encourages increased efficiency (DEV) (1).
Minimum wage may be increased (ID) to incentivise more people to join the labour force (1).
Subsidies may be offered (ID) to reduce the unit cost of production leading to higher output (1).
Tax breaks may be awarded to new firms (ID), which would have the effect of reducing costs leading to higher output (1).
Labour mobility/flexibility may be improved (ID) for example zero hour contracts which makes it easier to meet demand (1)

Question 3

Describe the positive and negative effects of high levels of unemployment on an economy.

Answer 3

Negative effect of high unemployment:
Reduced income/falling standards of living (1).
More competition for jobs (1).
Less tax revenue for government (1) eg less income tax
as less people working/less VAT as less disposable
income/spending (DEV) (1).
Wage levels may fall as workers are forced to accept
less skilled/less well-paid jobs (1).
Economic growth may slow due to reduced AD (1).
Economic growth may slow due to deskilling of
workforce (1).
Increased JSA costs for government (1) which may
increase budget deficit (DEV) (1).

High levels of people claiming JSA, so less room for government to spend on healthcare or education (negative)
Less spending in the economy due to reduced disposable income of households means less spending in the economy and so less economic growth. (negative).
Lower standing of living as people have less incomes they can afford less things such as housing(negative)
Lost output – fall in real GDP
Reduced taxation (income, VAT & corporation) revenue ( and so the government might have to reduce public spending)
Budget deficit due to paying out higher JSA
Taxation onto indirect such as goods since the lower tax revenue

Positive effects of high unemployment:
Opportunity for entrepreneurial activity/retraining (1).
Firms have more choice when hiring employees (1)
allowing them to select better quality staff, improving
efficiency/productivity (DEV) (1).
Firms have reduced costs due to fewer demands for
wage rises/people willing to work for less improving
profitability/potential for growth

Question 4

Explain how fiscal policy could be used to stimulate economic growth.

Answer 4

Spending
Increase spending (ID) would increase circular flow of income/money flowing in the economy/AD. (1)
Eg increasing spending on public sector wages would lead to more disposable income/consumer spending.
(1 development mark)
Eg increasing spending on training schemes which will increase productivity/output. (1)
Increased demand will signal firms to respond by producing more/increasing output. (1 development mark)

Taxation
Reduce taxation (ID) would increase circular flow of income/money flowing in the economy/AD. (1)
Eg reduced corporation tax would increase funds available for firms to invest. (1 development mark)
Eg reduced Income Tax/VAT would lead to more disposable income/consumer spending. (1 development mark)
Increased demand will signal firms to respond by producing more/increasing output. (1 development mark)

Question 5

Describe a fiscal policy measure which could be used by governments of Eurozone countries to achieve economic growth.

Answer 5

Change in foreign direct investment (1 mark)
Change in demand/supply for UK exports/imports/ pounds (1 mark)
Change in interest rates in the UK (1 mark)
Change in number of foreign holiday makers visiting
the UK/UK holidaymakers travelling abroad. (1 mark)
Change in the rate of inflation.
Reduction in tax (1 mark) increases disposable incomes so consumers may spend more.
(1 development mark)
OR
Increases in government spending (1 mark) will
increase public sector jobs/public/private sector contracts/incentives to work etc. (1 development mark)