Econ Paper2 Past Papers Essay Part
Micro-economy
22/F/M/24
2(a) With the help of a demand and supply diagram, explain how the introduction of an indirect
tax affects equilibrium in a market and consider the extent to which the incidence of the tax will
fall on the consumer.
Indirect tax is the type of tax which charge directly on income and profits, it involves income tax
and corporate tax.
2(b)
Macro-economy
---tax, income, output, employment, GDP, gov spending, interest rate, exchange
rate, inflation, economic growth, purchasing power, AD, AS
22/F/M/24
5(a) With the help of an aggregate demand and aggregate supply diagram, explain how a
decrease in interest rates could cause economic growth and consider whether economic growth
will always result in inflation.[8]
KU:
AD and AS definition. Economic growth is measured by the increase in real GDP.
definition of interest rate
Definition of inflation, and there are two causes of inflation, one is called demand-pull inflation
which is caused by increase in AD, and the other one is cost-push inflation which is caused by
increase in cost of production.
AN:
diagram + a decrease in interest rates will cause economic growth. First of all, reduction in
interest rate means the cost of borrowing reduced and the return of saving reduced, so more
people are willing to purchase and firms are more willing to invest, therefore, both consumption
and investment increases.Because consumption and investment are components of AD, so the
AD will increases. In the diagram, the Ad curve shift to right, and the output increases from Y1 to
Y2, and rice level increases form P1 to P2. Thus, real GDP increases, the economy growth.
EV:
1. whether there is spare capacity in the economy, if there is spare capacity in the economy / AS
increases faster than AD, the increase in AD will not cause inflation. + diagram
if the economy is operating at full capacity, there will be no spare resources to satisfy AD, so
inflation
2. the economy may be capital-intensive: a decreases in interest rate -- buy more capital -productivity increases, so AS increases and cannot cause inflation
3. the source of growth may be long term in nature
(b) Assess whether economic growth is always desirable for an economy. [12]
KU&AN:
economic growth in measure by increase in real GDP in the short run and increase in productive
potential in the long run.
Benefits of economic growth:
1. reduce unemployment rate: real output increases -- require more workers to produce,
therefore, more labour are hired
2. reduce government spending: on unemployment benefits, and money can be used to other
areas, providing public goods and merit goods, such as healthcare and education.
3. higher income when economy is growing: national output increases means national income
increases, so income increases and living standards raise.
4. tax revenue increases: income increases
5. raise consumers and firms confidence: be more willing to purchase and invest in the future, so
C and I will increase in the future, and met future increase in AD.
6. Lower government borrowing / national debt decreases: Economic growth creates higher tax
revenues, and there is less need to spend money on benefits such as unemployment benefit.
Therefore economic growth helps to reduce government borrowing.
7. international competitiveness: multinational companies are more willing to invest in the
economy
Costs of economic growth:
1. pollutant: if the economy is using a lot of non-renewable resources
2. inequality in income: because growth can benefit a small section of society more than others.
For example, those with assets and wealth will see a proportionally bigger rise in the market
value of rents and their wealth. Those unskilled without wealth may benefit much less from
growth.
3. may cause inflation if there is not enough resources / If AD increases faster than AS, then
economic growth will lead to higher inflation as firms put up prices.
EV: consideration that fully assesses the relative perspectives of economic growth for an economy
and an arrived at a reasoned conclusion concerning which viewpoint is most likely
1. if the economy is
21/M/J/24
4(a) Explain three of the components of aggregate demand and consider the extent to which
they may be increased without leading to inflation. [8]
KU:
definition of AD
list three components of AD + explain their definition
AN: why the components can be increased without leading to inflation.
1. when the economy is operating at full capacity or AD increases less than AS + diagram + in
Keynesian diagram, the AS curve is vertical part, when AD increases, the ad curve shift to right
and the output will not rise but price level increased--inflation , called demand-pull inflation.
when the economy is operating at spare capacity or AD increases faster than AS + diagram +
the AS curve is horizontal part, when AD increases there is no increase in price level.
2. if some components of AD increases but other components decreases with larger proportion
than increase.
EV:
1. the extent to which increase in AD will not lead to inflation depends on the extent that AD
increases.
2.depends on the extent of speed of rising in AD and the speed of rising in AS. If AS does not
increase with same rare of AD, than inflation occurs.
3. depends on the economy condition, for developing countries, it is more likely that increases in
AD without leading to inflation, as the capacity is spare and is increasing.
4(b) The Chinese government has re-emphasized its commitment to re-balancing the economy
from one focused mainly on investment and exports to one aiming to increase the proportion
spent on domestic consumption. Assess the extent to which it would be possible to achieve this
by fiscal policy alone.[12]
KU&AN:
5(a) Explain three causes of unemployment and consider which cause is likely to be most
damaging to a high-income economy. [8]
5(b)Assess which expansionary macroeconomic policy would be most likely to enable a
government to meet its economic objective of a low rate of unemployment.[12]
22/M/J/24
4(a)With the help of a diagram, explain what is meant by the circular flow of income in an open
economy and consider the extent to which it can explain economic growth in such an economy.
[8]
4(b) Assess whether supply-side policy is the most effective way to achieve long-run economic
growth.[12]
23/M/J/24
4 (a) With the help of a diagram, explain how increases in aggregate demand affect the level of
real output and the price level in an economy and consider when such increases may become a
problem. [8]
4(b) Assess whether increases in aggregate demand are the best way of reducing
unemployment in a high-income country.[12]