26

Government economic
objectives and policies
Revision answers
1 i) Economic growth
ii) Low inflation
iii) Low unemployment
2 i) It makes products made within the country less competitive; foreign goods
seem cheaper.
ii) It reduces people’s real incomes (what they can afford to buy with their
income).
3 It increases output and GDP.
It reduces the cost of unemployment benefits paid by the government.
4 Economic growth is an increase in the real value of goods and services produced
by a country, measured by increases in real GDP.
5

Boom

Boom Recession Growth

GDP ($)

Slump

Growth

Years

6 Direct taxes have to be paid directly from incomes of individuals and businesses.
Indirect taxes are added to the prices of goods and services.
7 i) Interest rate increases could reduce demand as customers will be paying
higher interest costs on loans so will have less to spend on hotels.
ii) If the hotel has any loans not on a fixed interest rate, the interest costs on
these will increase, reducing profits.
8 i) They could lower prices of hotel rooms to attract customers whose income
after paying interest has fallen.
ii) They could advertise the hotel in other countries to attract foreign tourists
who may not be affected by higher interest rates.
9 Lower direct taxes will increase consumers’ disposable incomes so the demand
for foreign holidays is likely to increase.
10 Firm A: Firm A will not be affected much by higher income tax as its customers are
mainly abroad. It will be affected by higher interest costs, reducing profits. Lower
corporation tax will help to increase profit after tax. Higher interest rates may
cause currency to appreciate, making exports more expensive (see Chapter 28).
Firm B: Higher income taxes will not affect Firm B much as bread is an essential
good so will be bought anyway. If currency appreciates imported flour will
become cheaper. Profits after tax will be higher as corporation tax has been
reduced.
Conclusion: Firm A is likely to be more affected.

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 1
 26 Government economic objectives and policies

Answers to activities
Activity 26.1
a) $750
b) i) $22 000
ii) Fall in real income as inflation is higher than the increase in income. This
means that Joe can afford to buy less this year than last year.
c) i) Imports
ii) Exports
iii) Imports
iv) Exports (of hotel services)

Activity 26.2
TVs; foreign holidays; jewellery; home computers. These are all non essential
products and consumers will reduce demand for these if income taxes rise rather
than reduce demand for essential goods.

Activity 26.3
a) Lower income tax will increase consumers’ disposable incomes and make them
more likely to buy products such as computers.
b) Lower corporation tax will encourage this business to expand as it will have
higher profits after tax. This will be an important source of internal finance.
c) Higher import tariffs will increase the price of components bought by this
business making the costs rise and the products become less competitive.
d) Higher interest rates will discourage this business from expanding if it has to
borrow the finance. Also, consumers may be discouraged from buying expensive
goods on credit.
e) Higher indirect taxes on luxury goods such as computers will reduce demand.
This business might be encouraged to export more output.
f) New training colleges should increase the supply of well qualified workers. This
will encourage the business to expand in this country.
g) Competition policies will force this business to become more competitive and
it may be forced to delay expansion if the government believes it is creating a
monopoly.

Activity 26.4
a) Lower GDP means that the total value of goods and services being produced has
fallen. This is sometimes called ‘negative economic growth’.
b) i) Milk: little impact as this is an essential/important food product.
ii) Leather goods: demand is likely to fall a lot as lower living standards leave
consumers with less money to spend on luxuries.
c) i) To reduce cost of unemployment benefits: the Spanish government is heavily
in debt.
ii) To increase output of goods and services: to increase GDP.

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 2
 26 Government economic objectives and policies

Sample answers to Paper 1 style questions

(with mark annotations for Question 2)
1 a) An increase in average prices.
b) i) Reduce inflation.
ii) Keep unemployment low.
Other answers possible.
c) i)  Direct taxes: taxes that are imposed on incomes such as wages and
company profits. When people or companies receive income it is taxed
directly.
ii) Indirect taxes: taxes that are put on prices of goods and services which
raise their prices. When people buy goods in a shop, a proportion of their
expenditure is paid to the government.
d) i)  Higher rates will increase interest costs for businesses with high debts
(high gearing) and this will reduce their profits.
ii) Higher rates will reduce the incomes of consumers with high debts (e.g.
to buy houses). This will reduce their spending, especially on non-essential
goods so businesses such as restaurants will have less demand.
e) Yes: higher GDP will mean that output is increasing, unemployment is likely
to fall and people’s incomes will increase too. Businesses will be able to sell
more and probably increase prices too.
No: some businesses produce essential goods and the demand for these
might not increase: if they are cheap alternatives to more expensive goods,
the demand could fall. If inflation results from rapid economic growth then
businesses that export products may become less competitive.
Overall judgement needed, for example, it depends on the type of product
the business makes.
2 a) Increase in a country’s Gross Domestic Product over time. [2K]
b) i) Reduce spending power of consumers.
ii) More supply of potential workers. [2K]
c) i) A business with rapidly rising costs may be forced to put up prices or suffer
a fall in profits. [1K; 1An]
ii) A business that sells non-essential items might find that demand is elastic
to an increase in price so sales fall substantially. [1K; 1An]
d) i) If the tax increases are on products (indirect taxes) then the business could
increase prices and the demand for luxury goods might not fall if there is
strong brand loyalty. [1K; 1App; 1An]
ii) If the tax increases are on incomes (direct taxes) then the business could
start to produce less luxurious and less expensive products as consumers’
disposable incomes will be lower. [1K; 1App; 1An]
e) Yes: it will help to improve transport (infrastructure) effectiveness in the
country and this could encourage more businesses to invest in the country.
More tourists might be encouraged to visit the country. It may increase
business for construction industries.
No: it will be very disruptive as the roads and airports are being built; the
money spent in these ways has an opportunity cost and it might be better to
lower taxes or offer businesses subsidies instead.
Student’s overall conclusion. [1K; 1App; 2An] + [2Eval]

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 3
 26 Government economic objectives and policies

Answers to revision test

 1 4)
 2 3)
 3 2)
 4 1)
 5 3)
 6 3)
 7 1)
 8 4)
 9 3)
10 4)
11 1)
12 2)

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 4