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Paper 2 Practice HL

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1. Use a diagram to explain how the incidence (burden) of a tax is shared among producers and consumers when an ad valorem indirect tax is placed on a good which has relatively inelastic demand. An indirect tax is a tax set on goods or services such as value added tax (VAT) in the UK. However, such can be divided in several types of taxes. One, for instance, is an ad valorem tax; tax added as a percentage of the value of the good or service. When referring to the incidence of a tax, it is referred to the tax burden on the tax payer. Such taxes are paid by consumers and producers, depending not only on its prices but, consequently, depending on the demand and supply of that certain good. When an ad valorem tax is placed on a good which has a relatively inelastic demand (goods such as alcohol which demand will have almost no reaction to a change in price), the tax burden is shared among producers and consumers. ...read more.


in comparison to consumers who will pay a higher proportion of it (CKEF). 3. Explain how an increase in government spending can lead to crowding out. Government spending is a budget on how money within an economy will be used to provide public goods or services such as street lighting, hospitals, public schools, etc. In other words, it is the budget or plan set by a government to invest within its own economy. Governments spending tend to be greater than income from taxes, profits, rents and interest which therefore leads to an increase in the demand for borrowing in the form of, for example, loanable funds. A loanable fund is money which is available for lending to individuals and institutions. This increase in government spending and borrowing will have some effect on the rate of interest; in this case, an increase of it. ...read more.


Abroad investment may enter a less developed country (LDC) by the incoming of multinationals (MNC's). MNC's are companies operating in a number of countries while having its headquarters in another specific one. MNC's bring many advantages for less developed countries such as increase in technology, employment and choice. This allows for the country to increase its growth and development yet they also have negative consequences. For example, if profits generated by the MNC leaves the country, or if the MNC itself decides to leave from that certain country, then this may result in a negative net property income from abroad which will therefore lead GNP to be lower than GDP. Therefore, in this case, GDP is higher than GNP. However, it may happen that GNP has a greater value than GDP in some LDC's where there is a positive net property abroad. ...read more.

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