Unit 2.3

Question 1

Demand side policies

Answer 1

Any policies which can impact the level of demand in the economy . AD consists of C + I + G + NX.
Demand Side policies can be:
-Fiscal
-Monetary
They can be expansionary or Contractionary

Question 2

7 Macro economic objectives

Answer 2

-Reduce government debt/ balance budget
-Economic growth
-Reduce carbon emissions - sustainability
-Low Inflation
-Low unemployment
-Reduce income inequality
-Reduce current account deficit- increase exports

Question 3

Expansionary Policies

Answer 3

Aim to stimulate the level of economic activity (typically in times of recession), raise national income and in turn stimulate growth and reduce unemployment

Question 4

Contractionary Polices

Answer 4

May be used if the economy is growing too quickly and inflationary pressures are building (boom) to try to reduce the level of economic activity and national income

Question 5

Fiscal Policy

Answer 5

The use of government spending and taxation to influence the level of Aggregate Demand (AD) in the economy.
Fiscal policy involves changes in government spending, taxation and the level of government borrowing to help achieve some of the micro and macroeconomic objectives of the government.
State sector spending is also known as public sector spending.

Question 6

Expansionary Fiscal policy

Answer 6

Will result in an increase in AD in the economy through the fiscal policy transmission mechanism.
Government actions which will cause a rise in AD:
-Cut in personal income tax
-Cut in indirect taxes
-Cut in corporation tax
-Cut in tax from interest from savings
-Increased government spending

Question 7

Contractionary Fiscal Policy

Answer 7

When the economy is overheating and AD is too high, the government will intervene to reduce AD in the economy.
Government Fiscal Actions which will cause a decrease in AD:
-Rise in personal income tax
-Rise in Indirect taxes
-Rise in corporation tax
-Rise in tax from interest from savings
-Decreased government spending

Question 8

Purpose of Fiscal Policy

Answer 8

-Stimulate economic growth in a period of recession
-To stabilise economic growth, avoiding the boom and bust economic cycle
-Reduce the rate of inflation ( Uk government has a target of 2%)

Question 9

Other effects of fiscal polciy

Answer 9

Fiscal Policy can have AS benefits as well as AD benefits:
-Taxation and work incentives
-Taxation and business investment decisions
-Redistribute income

Question 10

Key roles for fiscal policy

Answer 10

Correcting for market failures:
-Carbon taxes per tonne of C02 (Sweden, Canada) and Carbon border taxes (proposed by the EU)
-Sugar drinks levy (2018)
-Subsidies to help people afford social housing

Changing the final distribution of income and wealth:
-Progressive direct taxes (marginal tax rates, new wealth tax)

Stabilizing & stimulating aggregate demand and GDP growth:
-Changes in income tax, NICs and VAT
-Changes in state welfare / public sector pay policies

Improving the economy’s supply-side potential (LRAS):
-Increased state spending in education and public health
-Funding for infrastructure spending including energy & transport

Responding to crises caused by external shocks:
-Fiscal activism during the pandemic including Job Retention Scheme and other measures

Question 11

Main Instruments of Fiscal Policy

Answer 11

Government spending:
-Welfare benefits and other transfers
-Current spending on public services such as education
-Capital spending (such as infrastructure)

Taxation:
-Indirect taxes when people spend on goods and services
-Direct taxes on income and wealth

Fiscal Balance ( deficit or surplus) :
-Budget deficit when G>T
-Budget surplus when T>G
-Budget balance when G=T

Question 12

Government spending

Answer 12

Government spending, also known as public expenditure, refers to money that a government allocates to fund various state-provided programmes and public services. These expenditures are typically financed through taxes and government borrowing (such as issuing bonds).

Question 13

Main types of government spending

Answer 13

-Transfer payments - Welfare spending- also known as social transfers
- Recurring spending- Public spending - public and merit goods
-Investment projects- state investment - capital investment projects

Question 14

Difference between current and capital spending

Answer 14

-Current government spending - on providing public services:

-salaries of NHS employees
-Drugs used in public health care
-road maintenance budget
-Army logistics supplies

-Capital Spending- a new public infrastructure:

-Construction of new motorways and bridges
-New equipment used in the NHS
-Flood defence schemes
-Defence equipment

Question 15

Significance of government spending for the UK

Answer 15

-Is a key Component of Aggregate Demand
-Helps to stabilise demand in a recession
-Has a Regional Economic Impact
-Important in providing Public & Merit Goods
-Driver of long run growth
-Can help achieve greater Equity in Society

Question 16

Taxation

Answer 16

The process by which governments collect revenue from individuals, businesses, and other entities to finance public services, infrastructure, and various government functions.

Question 17

The Laffer curve

Answer 17

A theoretical idea beloved by free market economists who believe in tax cutting as a means of stimulating work incentives and economic growth. They argue that lower taxes can increase growth and can therefore contribute to higher direct and indirect tax revenues from the government.

Question 18

Why might total tax revenue fall if tax rate increases

Answer 18

-Increased tax avoidance- there are greater incentives to seek out tax relief and make maximum use of tax allowances.
-Strong incentives to evade taxes (illegal) - non-declaration of income and wealth by people and businesses (hidden/ shadow)
-Possible disincentive effects in the labor markets- depending on which taxes have been increased (more economically inactive)
-Possible brain drain effects- including the loss of highly skilled and high-income taxpayers who might leave a country.

Question 19

Main reasons for tax

Answer 19

Revenue Generation: Tax revenues are used to fund government programmes and services such as education, healthcare, infrastructure development, defence and social welfare.
* Redistribution of Income and Wealth: Progressive taxation, where higher income individuals pay a higher percentage of their income in taxes, is one method to achieve this.
* Economic Stabilization: Governments may implement countercydlical fiscal polices, such as reducing taxes during economic downturns to stimulate spending or increasing taes during economic booms to cool down inflation.
* Regulation and Incentives: For example, higher taxes on tobacco and alcohol can discourage. consumption, while tax incentives for research and development can encourage inmotion.
* Public Goods: Taxes are essential for financing pure public goods and services that are none excludable and non-rivalrous. These are goods and services that benefit society as a whole and would not be adequately provided by the private sector.

Question 20

Adam smith tax principles

Answer 20

In “The Wealth of Nations” (1776), Adam Smith argued that taxation should follow four principles:
* Fairness
* Certainty
* Convenience
* Efficiency

Question 21

Equity

Answer 21

Taxation should be fair and equitable, meaning that individuals and businesses with similar financial capacities should pay similar amounts of tax. Equity can be achieved through progressive, proportional, or regressive taxation systems.

Question 22

Efficiency

Answer 22

Taxation should minimize economic distortions and deadweight losses. An efficient tax system should not discourage productive activities or create unnecessary administrative burdens.

Question 23

Economic Neutrality

Answer 23

Taxes should not distort economic decision-making. In other words, they should not unduly influence individuals or businesses to engage in specific economic activities solely for tax reasons.

Question 24

Horizontal Equity

Answer 24

Similar taxpayers in similar circumstances should be treated equally in terms of their tax liabilities.

Question 25

Vertical Equity

Answer 25

Tax burdens should be distributed in a way that is fair and reflects differences in the ability to pay. This principle is closely related to the ability-to-pay principle. Direct taxation is levied on income, wealth and profit

Question 26

Direct Taxes

Answer 26

include income tax, inheritance tax, national insurance contributions, capital gains tax, and corporation tax The burden of a direct tax cannot be passed on.

Question 27

Indirect taxes

Answer 27

are taxes on spending: Examples of indirect taxes include excise duties on fuel, cigarettes and alcohol. Producers may be able to pass on an indirect tax - depending on the coefficient of price elasticity of demand and supply.

Question 28

Ability to pay principle

Answer 28

The ability-to-pay principle suggests that individuals or entities with a greater ability to pay taxes should contribute a larger share of their income or wealth to the government in the form of taxes.
This principle is closely related to the idea of tax fairness and progressive taxation.

Question 29

Tax Base

Answer 29

The tax base in a country is the base of what is taxed and who pays a tax
What is taxed? Income, Wealth (inheritance tax), Spending on goods and services, Pollution (Green taxation), Data / Financial Transactions
Who is paying tax?: Households and Businesses
The tax burden can be judged at a micro and a macroeconomic level

Question 30

(micro) incidence of taxes

Answer 30

The microeconomic perspective also examines the incidence of taxes, which is about who ultimately bears the economic burden of a tax. For example, if a business is taxed, it may pass on some of the tax burden to consumers through higher prices, or it may reduce employee compensation or investment in the business.

Question 31

(macro) tax burden

Answer 31

This refers to the total amount of taxes collected by the government as a percentage of the Gross Domestic Product (GDP) or national income. It provides insights into the overall level of taxation in an economy.

Question 32

Progressive tax

Answer 32

A progressive tax is a type of tax system in which the marginal and average tax rate increases as the amount of taxable income increases. The basic idea behind progressive taxation is to tax individuals and corporations at a higher rate as their income increases, under the principle that those with higher incomes can afford to pay more in taxes. In a progressive tax system, the tax rate is typically applied in brackets, with each bracket having a higher tax rate than the previous one. For example, in the UK the income tax system is progressive, with different marginal tax rates for different levels of income.

Question 33

Regressive tax

Answer 33

A regressive tax is one where the average tax rate as a % decreases as the amount of taxable income increases, so lower-income taxpayers pay a higher percentage of their income in taxes than higher-income taxpayers. Examples of regressive taxes can include sales taxes and excise duties. In other words, a regressive tax puts a greater burden on lower-income taxpayers than higher-income taxpayers. For example, a sales tax such as VAT on groceries would affect a lower-income person more than a higher-income person, since a lower-income person spends a greater portion of their income on groceries than a higher-income person.

Question 34

Proportional tax

Answer 34

Proportional taxes, also known as a flat tax, are a type of tax system where the marginal and average tax rate remains constant or uniform regardless of an individual’s or entity’s income, wealth, or financial situation. In other words, everyone pays the same percentage of their income or wealth in taxes. The tax rate does not change as income or wealth increases or decreases. In a proportional tax system, the tax rate remains the same for all taxpayers. For example, if the proportional tax rate is set at 20%, every taxpayer, regardless of their income, will pay 20% of their income as taxes.

Question 35

Budget deficit

Answer 35

Occurs when a government spends more money (total expenditure) than it collects in revenue ( total income) during a specific period, typically a fiscal year.
Implications- to cover the deficit, the government may need to borrow money by issuing bonds, which can lead to an increase in the overall debt level.
Budget deficits can be used strategically during economic downturns to stimulate economic growth or during emergencies but should be managed carefully to avoid unsustainable levels of debt.
Effects on debt- budget deficits contribute to the accommodation of government debt, which needs to be repaid in the future, often with interest.
The UK has been in a deficit for the last 20 or so years.

Question 36

Budget Surplus

Answer 36

Occurs when a government collects more money (total income) than it spends (total expenditure) during a specific period.
Implications- a budget surplus allows a government to save or pay down debt, invest in infrastructure, or reduce taxes.
Budget surpluses can be used to prepare for economic downturns, reduce the debt burden, or invest in long-term projects.
Effects on debt: Budget surpluses can be used to reduce or eliminate government debt.
UK public sector debt- is set to remain at around £2,500 billion for the next 5 years.

Question 37

Automatic Stabilisers

Answer 37

Automatic stabilisers are automatic fiscal changes as an economy moves through different stages of the business cycle - such as a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when the unemployment rate is rising.

Question 38

Impact of automatic stabilisers

Answer 38

-Impact depends on whether a government allows the automatic stabilisers to operate fully - and does not introduce fiscal austerity measures such as real spending cuts during a slowdown / recession
-Impact depends on the relative generosity of the welfare system such as base levels of payment for universal credit and unemployment support. Some governments have capped total welfare payments.
-Impact depends on the marginal propensity to spend and save of those households whose income is boosted by welfare during a recession

Question 39

govt spending in boom and recession

Answer 39

During an economic recession, real output and employment contracts.
As real incomes fall, people pay less in direct and indirect taxes and company tax payments also drop
And government spending on welfare support such as
Universal Credit increases
Combined, this will increase the budget deficit
A fiscal deficit is a net injection into the circular flow - thus helping to limit the depth / severity of a recession

During periods of rapid economic growth (a boom phase)
Tax revenues will rise as household real incomes and corporate profits grow - unemployment is declining
Government welfare spending then falls as more people are in work and require less state financial support
As a result, government finances improve including a falling budget deficit / possible fiscal surplus
Consequently, fiscal policy is taking income out of the circular flow - automatic stabilisers help moderate a boom

Question 40

Budget deficits- negative effects on AD

Answer 40

• Increased Borrowing: To finance a budget deficit, the government often needs to borrow money through the issuance of bonds or other debt instruments.
  When the government competes with private borrowers for funds in the financial markets, it can lead to higher interest rates.
• Higher Interest Rates: Higher interest rates can lead to reduced private sector investment and borrowing. This is known as the “crowding out” effect, where increased government borrowing reduces the availability of funds for private sector investment, which can offset the stimulative impact of the deficit.
• Expectations of Higher Taxes: A growing fiscal deficit might lead some households and businesses to expect higher taxes in the future causing them to cut back on spending and save more in anticipation. This lowers AD.

Question 41

Crowding out

Answer 41

Crowding out can happen when an increase in government borrowing leads to a rise in demand for loanable funds which in turn causes market interest rates to rise. This can then squeeze or crowd-out capital investment spending by private sector businesses. It can also occur when rising government borrowing ultimately leads to a higher tax burden which cuts real disposable incomes for households and reduces post-tax profits for businesses.

Question 42

Budget balance

Answer 42

• Fiscal Balance = Total Tax Revenue - Total Expenditure
• Surplus: When the fiscal balance is positive (Total Revenue > Total
  Expenditure), the government is said to have a budget surplus.
• Deficit: When the fiscal balance is negative (Total Revenue < Total
  Expenditure), the government is running a budget deficit. This indicates that the government is spending more money than it is collecting in revenue.
• Balanced Budget: When the fiscal balance is zero (Total Revenue = Total
  Expenditure), the government has a balanced budget. In this case, the government’s revenue exactly matches its spending, with no surplus or deficit.

Question 43

How is budget deficit financed

Answer 43

• Issuing Government Bonds: Governments issue bonds, such as treasury bonds c government securities, to raise funds. These bonds are sold to investors, includir individuals, financial institutions, and foreign governments.
• International Borrowing: Governments can also borrow from international organizations such as the International Monetary Fund (IMF) or World Bank, or through the issuance of bonds in global financial markets.
• Central Bank Financing: In some cases, governments may rely on their central banks to finance budget deficits. The central bank can purchase government bonds or provide loans to the government. This approach, known as “monetizing the debt,” can have implications for inflation and monetary policy, and it is typically used with caution.

Question 44

National debt

Answer 44

• Accumulation Over Time: National debt is the result of a country consistently running budget deficits, where the government’s expenditures exceed its revenues. When this happens, the government borrows money to cover the deficit, leading to an increase in the debt.
• Purpose: Governments often use debt to finance critical infrastructure projects, public services, and other expenditures. It can also be used as an economic tool during recessions to stimulate economic growth.
• Debt Servicing: Servicing the national debt involves paying interest on the outstanding debt and, when necessary, repaying the principal amount borrowed.

Question 45

Budget deficit impact on AD

Answer 45

• Direct Increase in Government Spending (G): When a government runs a budget deficit, it is essentially spending more money than it collects in revenue. This often involves increasing government expenditures, which directly contributes to the “G” component of aggregate demand.
• Lower taxes: A budget deficit might also be due to a reduction in either direct or indirect taxes which then causes a rise in household disposable incomes ar
• in theory a higher level of aggregate demand.
• Multiplier Effect: The increase in government spending can have a multiplier effect on aggregate demand. As government spending rises, it can lead to increased income for individuals and businesses, leading to higher consumption and investment, further boosting aggregate demand.

Question 46

Fiscal Multiplier

Answer 46

The fiscal multiplier estimates the final change in real national income (GDP) that results from an initial (exogenous) change in government spending and/or revenue plans.

Question 47

Monetary Policy

Answer 47

Includes changes in the base rate of interest and or the money supply to influence the rate of growth of aggregate demand.

• a fall in interest rates would mean that the AD curve would shift to the right
• This is because consumers would have more disposable income due to smaller interest payments for mortgages + loans etc
  -Also an incentive to save less, so more disposable

Question 48

Purpose of Interest Rate changes

Answer 48

The major purpose of a rise in interest rates is to ‘cool down’ an economy that is overheating ie to reduce inflationary pressures due to high aggregate demand.

The exact opposite applies to a fall in interest rates. A cut in interest rates is often used to aid economic recovery and boost consumer demand, make exports more competitive, and encourage capital investment by firms.

Question 49

Advantages of Monetary Policy

Answer 49

-It has short action and implementations
-It is flexible (can change 0.1% at a time or more)
-Central bank is independent - political neutrality
-Works well to slow down the economy in a boom and increase economic growth in a recession as has more of an impact on disposable income.

Question 50

Disadvantages of Monetary Policy

Answer 50

-May be ineffective in a recession- firms may be reluctant to invest, even though it is cheap to borrow because they cannot see any increase in demand
-Not very good in deflationary situations (falling prices, no possibility of negative interest rates)
-High-interest rates may affect investment and aggregate supply
-Increases in AD are likely to be inflationary

Question 51

Impact of monetary policy on firms

Answer 51

-Demand for goods and services is likely to alter depending on the change in interest rates
-The cost of borrowing is likely to change with changes in interest rates
-Company share prices may fall as interest rates rise. This may mean investors look elsewhere to invest.

Question 52

The multiplier effect of reduction in the base rate

Answer 52

Base rate reduced.
Other interest rates in the economy follow suit.
The cost of borrowing for consumers and businesses falls.
There is a rise in consumption (C) and in investment (I).
More goods and services are consumed meaning that businesses respond by increasing output.
To do this, businesses are likely to take on more workers and so unemployment falls.
AD has increased and the economy has grown.

Question 53

How income tax works in the UK

Answer 53

Basic Rate is 20% between 12,571 and 50,270.
Higher rate is 40% and is paid on earnings between 50,271 and 125,140.
45% is paid on all earnings above 125,140.

Question 54

Tax free personal allowance in UK

Answer 54

You lose £1 of your tax-free personal allowance for every £2 that your income goes over £100,000. Anyone earning over £125,140 no longer has any tax free personal allowance.

Question 55

Corporation tax in UK

Answer 55

Corporation tax is 25% on profits over £250,000

Question 56

National insurance changes following April 2024

Answer 56

The government cut National insurance by 2p in April.
The Rate of NI changed from 10% to 8% for 27 million voters from 6th April 2024.
Rate will fall from 8% to 6% for 2 million self employed people.

Question 57

Demand Side Economic Policies - 2008 financial crisis

Answer 57

The financial crisis sparked the use of demand-side economic policy by the US government. The Obama administration lowered interest rates. It also cut taxes for the middle class. It put together a $787 billion stimulus package

Question 58

Demand Side Economic Policies - 1930 Great Deperession

Answer 58

Demand-side economics is another name for Keynesian economic theory. States demand for goods and services is a force behind healthy economic activity.
Pushed for policies that increased government spending and decreased taxes.
-During the great depression factories sat idle due to lack of demand
- Increased spending and lower taxes introduced to increase consumption

Question 59

Supply Side Policies

Answer 59

Supply-side policies are a set of economic measures and strategies that aim to improve the long-run productive capacity and efficiency of an economy.
The primary goal of supply-side policies is to stimulate long-term economic growth, increase productivity, and create a more favourable environment for businesses to operate.

Question 60

Trend Growth

Answer 60

Trend growth is the long term non-inflationary increase in GDP caused by an increase in a country’s productive capacity. The trend rate of economic growth is the average sustainable rate of economic growth over time.

Question 61

Main Aims of Supply Side Policies

Answer 61

-Improve incentives to work and invest in people’s skills (human capital)
-Increase labour and capital productivity
-Increase occupational and geographical mobility of labour
-Increase capital investment and research and development spending
-Promote contestability and stimulate innovation (dynamic efficiency)
-Encourage start-ups and expansion of new businesses especially those with significant export potential / promote economic diversification
-Improve price & non-price competitiveness in global markets
-Improve the trend rate of sustainable growth of real GDP to help support improved living standards & better regional economic balance

Question 62

Main UK supply side weaknesses

Answer 62

• Low R&D spending - 1.74% of GDP in 2019, lower than in comparable countries like the US (3.1%) and Germany (3.2%).
  -Low Investment - Business investment fell to just 10% of GDP in 2020. Overall, UK investment is lower than OECD average.
  -Skills Shortages- 1.3 million job vacancies. Reported that by 2024 there will be a shortfall of four million highly skilled workers
  -Economic inactivity - 400,000 rise in economic inactivity since 2020. Inactivity now 20% of the population of working age
  -Low Labour mobility- Low housing affordability (to buy and rent) and structural barriers to social mobility. In 2021, only 6,000 new social housing units supplied in UK.
  -Ageing Infrastructure - 5 million homes at risk of flooding. Major rise in serious pollution incidents from water/sewerage.
  Inadequate transport network
  -Regional economic imbalances- GDP per head (2019, £)
  London: £56,199
  Northeast: £24,068
  UK: £33,151
  -Productivity Gap - In 2019, ranked on GDP per hour worked, the UK came fourth highest out of the G7 countries. UK productivity 15% below the US & France

Question 63

Examples of recent UK supply side policies

Answer 63

-Privatisation – Royal Mail in 2016 (Channel 4 has been proposed)
-Deregulation of the UK retail energy market
-Creation of new 8 Free Ports and Regional Enterprise Zones
-Tax free childcare: £500 every 3 months (up to £2,000 a year) for each child
-Creating 20 Institutes of Technology, roll-out of T Levels, new National Skills Fund
-Unemployment: Kickstart scheme for long term unemployed, Apprenticeship Levy on Firms
-Reforms to the UK immigration system (moving to a points-based system)
-Super-deduction tax incentive for business capital investment (125% tax allowance)
-Major infrastructure projects (+ creating the new UK Infrastructure Bank)
-Lower Thames Crossing, London Super-Sewer
-Funding for rollout of electric vehicle charging infrastructure
-UK Gigabit Programme and the Shared Rural Network.
-Relaxation of planning for renewables (off-shore wind) / UK Emissions Trading Scheme

Question 64

Market based supply-side policies

Answer 64

-Tax cuts
-Cutting red tape
-Privatisation and liberilisation
-Free trade and capital mobility across borders
-Flexible labour markets
-Deregulation of markets

Question 65

Supply side policies to improve incentives

Answer 65

-Tax Cuts: Lowering income, corporate, and capital gains taxes can provide individuals and businesses with more disposable income and greater after-tax profits, thereby incentivizing work, investment, and entrepreneurial activities.
-Deregulation: Reducing government regulations and bureaucratic red tape can lower compliance costs and make it easier for firms to operate, expand, and innovate. It can lead more firms to enter markets to make them more contestable / competitive.
-Trade Liberalisation: Reducing trade barriers, such as tariffs and quotas, can stimulate international trade and stimulate investment in exports
-Intellectual Property Protection: Strong intellectual property rights protection encourages innovation and entrepreneurship by ensuring that creators and inventors can profit from their ideas and inventions.

Question 66

Free market approaches to the supply side

Answer 66

-These policies emphasize minimal government intervention and regulation while promoting individual initiative, entrepreneurship, and competition
-Tax Cuts: Lowering tax rates, especially on businesses and high-income earners, is a fundamental aspect of free-market-based supply-side policies.
-Deregulation of markets: Reducing bureaucratic hurdles is another core element.
-Labour Market Flexibility: Advocates often support labour market reforms that reduce restrictions on hiring and firing
-Privatization: Transferring state-owned assets and services to the private sector is a way to inject market competition and efficiency
-Trade Liberalization: Reducing trade barriers, such as tariffs and quotas can enhance the competitiveness of domestic industries.

Question 67

Supply side policies to improve competition

Answer 67

-Competition Policy: Authorities can break up monopolies or prevent mergers that might create dominant market players.
-Deregulation: Removing unnecessary regulations can lower barriers to entry for new competitors and make it easier for smaller firms to enter markets dominated by large corporations. This can stimulate competition and innovation.
-Market Access: Policies that facilitate access to markets including licensing reforms and reduced market entry costs, can enhance competition.
-Open Data and Interoperability Standards: Mandating open data and interoperability standards can encourage competition by enabling different companies to build products or services that can seamlessly work together, promoting innovation.

Question 68

Supply side policies to reform labour market

Answer 68

-Labour Market Deregulation: Reducing regulations and restrictions on the labour market can make it easier for employers to hire and fire workers, adjust wages based on productivity, and adapt to changing economic conditions.
-Reducing Trade Union Power: Policies that limit the influence of unions or make it easier for workers to opt out of union membership can lead to more flexible labor negotiations and potentially lower labour costs for employers.
-Immigration Reforms: Creating a more flexible immigration system that attracts high-skilled workers can help increase a country’s productive capacity.
-Gender and Diversity Inclusion: Encouraging gender and diversity inclusion in the labor force can expand the talent pool and improve competitiveness by harnessing a broader range of skills and perspectives.

Question 69

Migration and labour supply to key sectors

Answer 69

-Many industries and occupations in the UK are highly dependent on net inflows of workers from overseas – they include:
-Agriculture
-Hospitality and tourism
-Health and social care
-Construction
-Transport and logistics
-Labour market dynamics can change over time due to factors like changes in immigration policies and global events (e.g., Brexit, the COVID-19 pandemic).

Question 70

Criticism of market based supply side policies

Answer 70

-Income Inequality: Tax cuts that primarily benefit high-income earners and reductions in social safety nets can lead to a wider wealth gap, as those at the top benefit disproportionately.
-Reduced Social Safety Nets: Critics argue that these policies can lead to reduced public services, including healthcare, education, and welfare programmes. Weaker social safety nets can leave vulnerable populations without essential support.
-Underinvestment in Public Goods: There may be underinvestment in critical public goods like infrastructure, healthcare, and education, which are essential for long-term economic growth.
-Market Failures: Free markets are not perfect and can lead to market failures, such as externalities (costs or benefits imposed on third parties) and public goods problems (goods with non-excludable and non-rivalrous consumption).
-Financial Instability: Deregulation and lack of oversight in financial markets can contribute to financial instability. Critics argue that this was evident in the 2008 financial crisis, which many attribute, at least in part, to excessive risk-taking and lax regulation in the financial sector.

Question 71

Examples of interventionist supply side policies

Answer 71

-State investment in key public services and infrastructure including transport, energy and housing
-A commitment to a minimum wage to improve work incentives & productivity
-Higher taxes on the wealthy to fund public and merit goods
-An active regional policy to inject extra demand into areas of persistently high unemployment / lower per capita income
-Selective import controls to allow domestic industries to expand
-Management of the exchange rate to improve export competitiveness
-Nationalisation of and tougher regulation of key industries / utilities

Question 72

Criticism of interventionist supply side policies

Answer 72

-Bureaucracy and Inefficiency: Critics argue that government intervention can lead to bureaucratic inefficiencies, which may slow down economic processes and result in the misallocation of resources.
-Crowding Out Private Sector: Interventions, particularly those involving public ownership or control of industries, may crowd out private investment and entrepreneurship.
-Reduced Incentives: Critics claim that high taxation and extensive regulation can reduce individuals’ and businesses’ incentives to work, invest, and innovate.
-Ineffective Redistribution: High levels of taxation can lead to capital flight and tax evasion, undermining the intended redistribution.
-Costly and Inefficient State Enterprises: State-owned enterprises can become inefficient and financially burdensome, as they may not operate with the same degree of cost-efficiency and innovation as private companies.

Question 73

Conflicts and trade offs between objectives - Economic Growth vs Inflation

Answer 73

-Increasing GDP is likely to come with inflationary pressures, particularly with positive output gaps and when AD is growing faster than AS.
-Solution - increase AS

Question 74

Conflicts and trade offs between objectives - Economic Growth vs Current Account Deficit

Answer 74

-When the economy is growing consumers have higher levels of spending. UK has high MPM ( imports) which would widen the current account deficit.
-Opposite would be true for export led growth such as Bangladesh, China and Germany.

Question 75

Conflicts and trade offs between objectives- Economic Growth vs Budget Deficit

Answer 75

-To reduce a budget deficit, could increase tax and/ or lower government expenditure but this would lead to lower AD - this conflicting with economic growth.

Question 76

Conflicts and trade offs between objectives - Economic Growth vs The Enviroment

Answer 76

-Increased growth is likely to come with negative externalities such as pollution and use of non-renewable resources, particularly from manufacturing.

Question 77

Conflicts and trade offs between objectives- Unemployment vs Inflation

Answer 77

-Low unemployment rates can result in inflationary pressures. This can be explained by the Phillips Curve.

Question 78

Phillips Curve

Answer 78

As Unemployment decreases, inflation rises due to increased wage costs.
-Shows trade off between inflation and unemployment.
-As employment increases shortages in labour could cause an increase in wage levels.
-If economy is growing and employment increasing- suppliers would raise prices to increase profit.

On a long run aggregate supply curve:
If demand shifts on flat part - GDP output has increased but no inflation, lots of unemployment, labour cheap. Firms dont need to increase prices as wages low.

If on rising part:
The economy nearing full capacity, low unemployment, so people demand higher wages which will increase costs and therefore inflation