Answer scheme- Sem 2 Economics Exam Y9

Please check all your answers.

1 A 11 B 21 D
2 C 12 D 22 D
3 C 13 C 23 A
4 A 14 C 24 B
5 D 15 C 25 B
6 A 16 B 26 D
7 D 17 C 27 C
8 C 18 B 28 A
9 C 19 B 29 A
10 A 20 A 30 C

Section B
Q1.
a) Does Brazil receive most of its tax revenue from direct or indirect taxes?
Explain your answer. [2]
Sales tax (1)  indirect tax, as it is a tax on expenditure (1).
b) Describe two ways in which taxes place a burden on Brazilian firms. [4]
Taxes place a burden on Brazilian firms as:
- Brazilians have to spend time and effort filling out tax forms (1)
o Passage mentions that the average firm in the country spends
2,600 hours to process the tax. (1)
- High level of taxation discourages investment (1)
o High corporation tax, in particular, would reduce both ability
and willingness for firms to invest. (1)
c) Explain one advantage and one disadvantage of regulations. [4]
Advantage:
- Regulations such as a restriction on the amount of pollution a firm
can emit and the ages till which children have to attend school (1)
o Able to protect vulnerable parties such as the environment and
children (1)
Disadvantage:
- The cost of ensuring these rules are followed (enforcement), results
in more government expenditure on regular inspections (1)
 o Opportunity cost that the government could have used these
resources on instead, for example, better infrastructure or
retraining of unemployed (1)
d) Identify from the passage three reasons why a Brazilian would probably prefer
to work for the government than a private sector firm. [3]
Brazilian may prefer to work for the government rather than a private
sector firms because of:
- Better pay (1)
- More favourable pension (1)
- Better working conditions (1)
e) You are a Brazilian government minister. Discuss whether you would
recommend that the government should cut taxes. [7]
As a Brazilian government minister, I would consider a number of factors before
deciding whether the government should cut taxes. These include the state of the
government's finances, the state of the Brazilian economy, how firms and
households will react to the change in taxation and other countries' tax rates. 

If the government has a budget surplus, it would reduce tax rates or remove some
taxes and still raise enough in tax revenue to cover its spending. I might be reluctant
to recommend a cut in taxes if the government has a large budget deficit. In this
case, a cut in taxes would increase the size of the budget deficit and may put
pressure on the government to cut its spending on, for instance, education and
health care. In the longer term, however, a cut in taxes may lead to a balanced
budget or even a budget surplus if it stimulates an increase in economic activity. For
instance, a cut in income tax will lower revenue from this source in the short term. In
the longer term, even with people paying less in tax per US $ earned, if more people
are working and earning higher wages, more will be received in income tax revenue. 

Indeed, I would be likely to recommend a cut in taxes if the economy is experiencing

high unemployment and slow economic growth or a recession. This is because a cut
in income tax, for instance, would increase disposable income and so would be
expected to raise consumption and so increase aggregate demand. Higher spending
in such circumstances would raise the country's output.

The passage mentions that the tax burden is high and is discouraging investment. I
would do a survey of entrepreneurs. If I find that the tax rates are discouraging firms
from spending on capital goods, I would cut corporation tax. Such a cut would be
expected to raise investment which, in turn, would be expected to increase both
aggregate demand and aggregate supply.

I would also recommend a cut in income tax if I believed it would provide an incentive
for workers to work more hours and more people to enter the labour force. There is,
however, a risk that if people are satisfied with their current level of disposable
income, they may work fewer hours if tax rates are cut.
 In addition, I would recommend a cut in Brazilian taxes if the tax rates are above
other countries and the difference is discouraging foreign direct investment, tourism
and the sales of domestic products. A number of countries have recently been cutting
their tax rates and simplifying their tax systems to encourage multinational
companies to set up in their countries. 

Lower indirect taxes may attract more tourists, particularly those on shopping trips
and may encourage the country's consumers to buy more domestic products rather
than imports.

Q2.

a) State two possible macroeconomic goals that the government could have. [2]
Any two:
- Full employment/ low unemployment (1)
- Low and stable inflation (1)
- Economic growth (1)
- Income and wealth redistribution (1)
- Balance of payments stability (1)
b) State and explain two quality of a good tax. [2]
Any two with explanation:
- Equitable  taxes are based on the taxpayer’s ability to pay (1)
- Economical  easy and cheap to collect to maximise yield (1)
- Convenient  convenient to taxpayer to encourage payment (1)
- Certain  taxpayer should know what, when, where and how to pay
to limit tax evasion (1)
- Efficient  tax system should achieve its aims without any
undesirable side-effects, eg. Disincentives to work (1)
- Flexible taxes should be able to adapt to change without rewriting
economic legislation (1)
c) Why would firms want corporation tax to be reduced? [2]
Corporation tax is a tax on firms' profits. Firms would want a reduction
in corporation tax as it would enable them to keep more of the profits
they earn. This, in turn, will enable them to pay out higher dividends to
shareholders and/or to buy more capital goods.
d) Explain how firms might benefit from an increase in government spending on
education and infrastructure. [6]
Firms might benefit from an increase in government spending on
education and infrastructure in a variety of ways. One is that some of
the extra spending may go directly to private sector firms. The
government may order, for instance, books from some of the country's
publishers and computers from some of the country's producers. In the
majority of countries, most government spending on infrastructure goes
to domestic producers. For example, governments often hire private
sector firms to build roads.
Improved infrastructure reduces firms' transport costs. Lower
costs of production can increase firms' profits. They also increase firms'
price competitiveness. Capturing more demand away from rival foreign
firms can enable them to expand.
If the increased government spending on education results in a
more educated labour force, firms will be able to employ more
productive workers. These more productive workers are likely to be able
to work with more advanced technology and produce more, and higher
quality output. The rise in productivity is likely to lower costs of
production and enable the firms to lower their prices. Lower prices and
higher quality should enable firms to sell more products.
A more educated labour force may also reduce firms' training
costs and make their training more effective.
e) Discuss one way a government and one way a central bank might influence
private sector firms. [8]
A government may impose rules on private sector firms in terms
of what they produce, how they produce it, how they sell it and in terms
of their dealings with the workers they employ. A government may stop
firms producing products that are regarded as harmful such as non-
prescription drugs. It is likely to impose some limits on how much
pollution firms are allowed to emit, and health and safety standards on
the production of, for instance, food. Firms may not be permitted to sell
certain products to children and shops may have to close on certain
days. A government may make it illegal for firms to get together to fix
prices and may not allow firms to merge if it will give them too much
market power.
There may be a range of rules relating to the employment of
labour. A government may make it illegal for firms to discriminate
against minority groups when employing workers, may set a limit on the
number of hours a week people can work and may set a minimum wage.
A central bank may influence the private sector by changing the
rate of interest. A rise in the rate of interest, for instance, is likely to
harm private sector firms. Those private sector firms that have taken
loans will experience an increase in their costs.
A higher interest rate may make it more difficult for public limited
companies to sell their shares. This is because those people planning to
make a financial investment might now be more inclined to place their
money in a bank account rather than to buy shares.
An increase in the rate of interest is also likely to reduce demand
for firms' products. This is because it will encourage households to save
more and take out fewer loans. Firms selling highly priced products,
such as houses and cars that people often buy, will be particularly hard
hit.
In addition, a rise in the interest rate may raise the exchange rate
as it is likely to attract more money inflows. A higher exchange rate will
raise export prices and lower import prices. This will have an adverse
effect on firms that export a significant proportion of their output but
positively benefit those that import most of their raw materials.