A2 Economics Ch.

61-73
Name:___________________
Marks:_______/66
1. Explain the term national debt. (2)
2. Examine the uses of discretionary fiscal policy to improve macroeconomic
performance. (12)
-Define discretionary fiscal policy: govt deliberately changes taxation/ govt spending
-inflationary: cut taxes and raise spending -> describe effects (increase economic
growth, decrease unemployment, etc)
-may use AD AS diagram
(7 marks)
Evaluation:
-automatic stabilizer and explain (3 marks)
-govt may boost AD for election (short slighted)/ other limitations: lack of economic
knowledge (2 marks)
3. Explain why labour costs are relatively more significant than capital costs in
production. (4)
4. Evaluate the problems of rising budget deficit. (20)
-govt borrow to finance: increase national debt ->pay interest (opportunity costs: other
spending like education)
-govt borrowing increases -> increase interest rate -> crowding out effect: govt
spending reduce the funds available for private sector
-if printing money to finance -> inflation rises
-unsustainable : taxation < spending ->country roll over debts -> taxes must rise in the
future/ the country may deflaut
(3x 4 marks =12 marks)
Evaluation: (Potential benefits of a budget deficit)
1. Government borrowing can benefit economic growth: A budget deficit can have
positive macroeconomic effects in the long run if it is used to finance extra capital
spending that leads to an increase in the stock of national assets. For example,

higher spending on the transport infrastructure improves the supply-side capacity

of the economy promoting long-run growth. And increased public-sector
investment in health and education can bring positive effects on labour
productivity and employment. The social benefits of increased capital spending
can be estimated through use of cost-benefit analysis.
2. The budget deficit as a tool of demand management: Changing the level of
borrowing as a way of fine-tuning or managing the level of aggregate demand. An
increase in borrowing can be a stimulus to demand when other sectors of the
economy are suffering from weak spending. The fiscal stimulus is important in
stabilizing demand. The argument is that the government can and should use fiscal
policy to keep real national output closer to potential GDP so that we avoid a large
negative output gap. Maintaining a high level of demand helps to sustain growth
and keep unemployment low.
(2 x 4 marks = 8 marks)
5. Evaluate the effects of globalizations on individual countries. (16 marks)
6. Explain how the devaluation of a currency can improve the countrys current
account position. (6 marks)
-define and draw J curve effects (3) + explain (3)
7. Explain how long-term exchange rate is determined. (6 marks)
-define PPP (3) + explain (3)