Economics Oct 2023

1. C

2. C

3. C

4. B

5. A

6. D

4 Minutes for section A

#Section B

1. The CPI is supposed to reflect the average consumers basket of goods they purchase and due to changes in consumer tastes and fashions (where what people buy changes), the basket must change to adapt to what people are buying as meat free sasuages have come into fashion and more and more people are buying them therefore it should be included in the CPI wheras less people are buying suits and coal therefore they should both be removed.

2. Full marks awarded

3. 25.62 billion dollars

4. In lower income households and contries like guineia, an increase in real income leads to an increase in happiness as shown by Guinea’s real GDP per capita increased from $4 127 to $5 434 between 2013 and 201 and the world happiness score incerasing by less than 2. This is due to lower income households being able to afford necessities such as healthcare and education and basic nutrtion but also now having disposable income to spend on leisure activies such as going out with friends to bars or resturants which is something they were not able to do before - this increases their happiness however in ultra high income families this effect is not always true

5. A current account deficit is when a country imports more than it exports such as in spain in jan 2022 with a current account deficit of -3.16 billion euro. Wheras a curremt account surplus is when a country exports more than it imports such as spain in oct 2021 with a 3.31 billion euro surplus which means more money is flowing into economy (an injection).

11 minutes for section B

#Section C

12 (a) Define the term ‘real GDP’ (Figure 1). (2) Real GDP, is the total value of a countries output in a given year, adjusted for inflation in regards to the base year

(b) With reference to Figure 2, explain how ILO unemployment is measured. (4) LIO unemployment is mesaured by a survey given to a large sample of 16-24 yos for people who have been out of work for atleast 4 weeks and are able to start working in 2 weeks for example in jan 2022 youth unemployment was at 15.3 percent meaning that 15.3 percent of people aged 16-24 were out of work for atleast 4 weeks and were willing and able to start work in 2 weeks, this is reffered to as frictional unemployment.

(c) With reference to Extract A, analyse two causes of China’s high youth unemployment rate. (6) One cause of chinas high youth unemployment is the low economic growth rate as seen by the 2022 forecast which was reduced from 5.5 percent to 4.3 percent. This means that fewer jobs are being created as the economy and demand for a firms goods and services are only growing by a small 4.3 percent and if a firm already has spare capcity they do not need to hire new student graduate workers therefore this increases chinas youth unemployemnt rate. Another cause of chinas high youth unemployment is the supply of jobs that are available for student graduates being low where only 0.7 jobs were available for each graduate. This means since there is a low supply were 30 percent of graduates are left without jobs for them. Meaning there is an oversupply of student graduatees who are willing to work and an undersupply of jobs for them meaning that even if all jobs are filled, people are still needing jobs. (12 mins for a b and c)

(d) With reference to Extract A, examine how a reflationary fiscal policy will impact China’s circular flow of income. (8)

Reflationary fiscal policy is when china increases fiscal/government spending by 75 billion dollars and decreases taxes/itnroduces tax cuts for businesses. This would mean more money is injected into the chineese economy and less money is leaked out of the economy through taxes which essentially increases the multiplier effect. Where money circulates more through the economy and this money that would have leaked out of the circular flow of income now can circulate through it a couple more times therefore further shifting AD to the right and compounds and compounds on itself resulting in a higher real GDP from y1 to y2 to y3 as ad shifts from ad1 to ad2 to ad3. However this depends on the Marginal propsenity to withdraw where if people have a high MPW such as through high MPS, this would mean the muliplier effect would not be weakened and result in a minoreffect of this extra cash in the chineese economy, where they would have a small mulitplier of 2x or 3x as opposed to economies with high MPCs and therefore high mulitplier effeects of 5x or 7x which would result in greater effects on the circular flow of income and increase real economic growth. By providing 100 percent tax breaks on research and development spending, this means that firms are signifcantly incentivised to invest more in RnD which results in more money being paid to reasearchers and more reasearchers being employed at higher salaries which means the circular flow of income has more money circulating through it as where money would have leaked out by paying taxes they are now paid to workers therefore resulting in more money circulating through the economy and therefore undergoing a mulitplier effect which compounds and compounds onto itself shifting ad further and furthre to the right resulting in an increase in real gdp and economic growth from y1 to y2 to y3 which further compounds on itself and making the circuluar flow of income better and better resulting in better living standards for millions of people that are not apart of the intial higher paid RnD employees. However this depends on if firms actually take advantage of these tax breaks and are incentiviesed into investing into RnD, where if they do not invest a considerate ammount of money into RnD, these aforementioned effects would be minor as for a multiplier effect to be significant, you would have to have a large initial investment and for some firms like coca cola and other firms that may be complacent in their current position and choose not to invest and take advantage of this; though it is a powerful incentive not all firms may start investing into RnD therefore not having a strong impact on the circular flow of income. - 16 minutes for this question

(e) With reference to the information provided and your own knowledge, discuss the likely effects of a reflationary monetary policy on the economy of China. (14)

By the central bank of china decreasing the base rate from 3.7 percent to 3.65 percent, this means that commerical banks can borrow money at a lower interest rate about a 0.05 percent decrease in interest rate which means commerical banks would be more willing to offer loans to consumers and pass on these savings onto consumers by offering lower interest rates to potential customers which means that taking out loans would be less expensive for consumers or firms (meaning their roi on a project return does not have to be as signifcant to make logical and profitable sense) which is PED is elastic, means more consumers and firms take out loans to fund their consumption and investment and therefore consume and invest more which are both signiifcant parts of AD, therefore increasing AD and therefore shifting AD to the right from AD1 to AD2 resulting in an increase in real GDP from Y1 to Y2 which is benefical for the chineese economy as it is now stronger and bigger which is further compounded by the mulitplier effect as since there is now more money circulating through the ecnoomy and if there is a low MPW which is possible as MPT has been reduced as china has also introdudced reinflationary fiscal policy and introducing tax breaks for businesses which means a greater mulitplier effect which leads to grreater economic growth from ad2 to ad3 which results in an increase from y2 to y3. However these effects depend on the magnitude of the decrease and how how price elastic demand for loans are and if banks actually decrease their lending rarte. Since it is a small decrease only 0.05 percent in the base rate of interest and if PED is inelastic then their would be an insignifcant effect in how commerical banks decerase their loan interest rate and therefore consumers would not be signficantly more willing to take out these loans and niether would banks be signifcantly more willing to offer these loans at lower rates. Reinflationary monetary policy would also result in a greater long run economic growth/increased productive potnetial from LRAS 1 to LRAS 2 which also allows for greater non inflationary economic growth. As since the central banks decreased their base rate of interest by 0.05 percent and assuming commerical banks passed these costs onto their consuemers being firms, which now face a lower interest rate which makes taking loans out less expensive and more enticing to firms if demand for loans is elastic; which means firms now have access to cheaper crediit and can now borrow money for cheaper therefore meaning they would take out more loans and coupled with the fiscal policy of introducing 100 percent tax breaks for RnD, firms would take out loans and invest into RnD resulting in new technology and innovations which would shift LRAS to the right from LRAS 1 to LRAS 2 which increases chinas productive potential and allows for a higher level non inflationary growth which means the economy can grow without overheating and expericing inflation which is overall better for the economy as this means if AD shifts to the right as suggested in paragraph 1 then real economic growth increases withhout price level signifcantly increases if we follow the keynesian lras and therefore meaning people now have better living standards as goods do not experience inflation at the same rate therefore meaing they can afford more items that would maximise their welfare and increase their living standard. However this depends on if firms actually take advantage of these tax breaks and are incentiviesed into investing into RnD, where if they do not invest a considerate ammount of money into RnD, these aforementioned effects would be minor as for a multiplier effect to be significant, you would have to have a large initial investment and for some firms like coca cola and other firms that may be complacent in their current position and choose not to invest and take advantage of this; though it is a powerful incentive not all firms may start investing into RnD therefore not having a strong impact on the circular flow of income. On balance, china introducing reinflatoinary monetary policy would result in an increased economic growth and an increased productive potential. However this depends on the magnitude of the decrease in the base rate of interest and since the rate of decrease was small only 0.05 percent, the real effect on the economy would be insigncant, eseentially barely noticable. - 17 mins

#Section D

In 2022 the Government of India introduced new legislation with the aim of reducing pollution. It is predicted that this will cause India’s real GDP to increase at a slower rate. Evaluate the view that there will always be conflicts between macroeconomic objectives. Refer to a country of your choice in your answer.

In July 2021 Rwanda’s inflation rate was –1.1% and in November 2021 it was –3.4%. Evaluate possible causes of deflation. Refer to a country of your choice in your answer.

KAA Deflation can be caused by a decrease in agredagate demand such as by an increase in unemployment. As since more people are unemployed and therefore do not have wage/earn an income and have to rely on savings or unemployment benefits, they will not be less willing to consume non-esssential goods as they a a decreased ammount of disposable income which means non essentials and essentials goods take up a greater proportion of their income therefore they will be less willing to purchase goods and the goods that they already purchase will be purchased in fewer quanitites. And since, consumption is the most signifcant part of AD, this would result in AD shifting to the left from AD1 to AD2 which causes the real GDP to decrease from y1 to y2 and causes disinflation as price level decreases from pl1 to pl2 as deflation is a decrease in the average price levels of an economy therefore anything that decreases consumption, such as more people being unemployed and therefore not having an income therefore consuming left,, will result in deflation.

Eval However this depends if consumers have massive savings or not, where if consumers have signifcant savings then in the short run, even without income their consumption would not signifcantly decrease therefore AD would not signifcantly shift to the left therefore would not cause deflation further to this the government can always step in by providing greater unemployment benefits or by using reinflationary fiscal policy where they boost government spending and decerase taxes which results in more money in the economy and through the multiplier effect which compounds on itself resulting in more and more consumption which results in an increased AD which offsets any deflation and return inflation to its target of 2 percent.

KAA

Deflation can also be caused by an increase in an economies productive potential/LRAS as it increases non inflationary economic growth and if the economy was operating near the keynesian LRAS where there is a signifcant ammount of inflation caused for every increase in GDP from y2 to y3, where it results in a disportionately bigger increase in price level than increase in GDP, therefore by shifting the keynesiann LRAS to the right, for example by opening a countries borders and allowing immirgration to happen and gaining more workers that would hencefourth shift LRAS to the right as the economy can now produce more due to a larger workforce. This would mean that if consumption stays the same, that by increasing the LRAS and productive potential, more non inflationary growth is possible as there is an increase in spare capacity therefore instead of operating at y1 pl1 where AD inteserects lras1 in the intermediate zone where PL rises dispropationately more than an increase in gdp resulting in hyper inflation, AD now intersects LRAS2 where there is signifcant unemployed resources at the spare capacity zone where PL decreases signifcnatly from pl1 to pl2 resulting in defaltion as the price level in the economy signifcantly decreases therefore deflation is caused.

EVAL However this depends on the magnitude that LRAS is increased where smaller increases in LRAS for example if only 1 million unskilled workers immigrate to USA, this would porbably cause an insignfcant increase in LRAS if not increase AD and result in higher a higher price level and therfore inflation; wheras if 100 million skilled workers immigrate to the USA, this could signifcantly shift LRAS therefore result in a signifcant increase in lRAS and signifcant decrease in PL and signifcant deflation.

Final Judgment On balance, deflation can be casued by a decrease in AD or an increase in LRAS

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