Using the data and your knowledge of recent economic events, assess the contribution that fiscal and monetary policies can make in maintaining a stable economy

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AS ECONOMICS UNIT 2

  FISCAL POLICY  MODEL ANSWERS  JANUARY 2011

  1. Using extract D identify two significant points of comparison between public sector revenue and public expenditure over the period shown  (8 marks)

  • Throughout the period, public spending as a share of GDP is always higher than tax revenue as a share of GDP (2) – approximately 3% of GDP up to 2007/08 (2)
  • The gap between the two is smallest at the beginning – about 3% (2) and highest at the end about 9% (2)
  • Both grow as a share of GDP up until 2007/08 (2) – Spending rises from 39% too 41% and tax receipts rise from 36% to 38% (2)
  • After 2007/08 spending rises rapidly, from 43% to 46% of GDP (2), whilst tax receipts fall and then rise staying about 38% of GDP (2)
  • The gap between is spending and tax receipts of forecast to widen rapidly after 2008/09 (2) from 5% of GDP to 9% of GDP (2)

  1. Explain two ways in which fiscal policy can influence the pattern of economic  activity reasons (12 marks)
  • Up to 2 marks for correct definition of  fiscal policy
  • Up to 2 marks for definition of pattern of economic activity

  • Taxes on demerit goods eg alcohol (2) – if taxes are increased, consumption will go down and stocks will pile up (2). This will mean producers profits will fall (2) and they will switch production and resources into the production of other goods which are more profitable (2)
  • If government reduces subsidies for education, eg EMA (2) this will mean fewer students staying on at college (2) and they will look for work instead (2) allowing firms to offer jobs at lower wages (2)
  • If the government raises income tax rates (2), this will reduce disposable income meaning consumers spending power falls (2). AD will also fall meaning that firms output and profits fall (2) and they will lay off workers meaning there is less economic activity taking place throughout the economy (2)
  • If governments increase welfare payments (2), this will give poor people an increase in spending power (2).Since they spend most of any extra income earned, this will boost the level of economic activity in the economy (2) leading to increased production and output and economic growth (2)
  • Subsidies to firms to locate in the UK (2) – if the government does this, it will attract inward investment (2) as firms set up in the UK and start producing goods (2). They will need workers which will boost incomes and spending in the wider economy (2)
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  1. Using the data and your knowledge of recent economic events, assess the contribution that fiscal and monetary policies can make in maintaining a stable economy (25 marks)

As stable economy is one which has low rates on inflation and unemployment and a steady rate of economic growth along with a current account stability. Fiscal policy involves the use of government spending and tax receipts to influence the level and pattern of economic activity, whilst monetary policy uses interest rates to achieve the same.

Fiscal and monetary policy can be used to influence short term AD with ...

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