CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Coursebook answers
Chapter 22
Economics in context
Learners’ discussion might include:
• A government would want to avoid a recession as a fall in the country’s output would reduce incomes
and may increase unemployment. It could also result in deflation.
• More spending on university education may enable more people to benefit from a university
education. This may increase their earnings and so they may pay more income tax.
• Government spending and tax decisions can have a significant effect on the economy. They can
influence, for example, aggregate demand, the pay of public sector workers and the products
people buy.
• The answer will depend on the costs and benefits of not achieving the different aims and the current
state of economic performance. For example, if a country is experiencing a high rate of unemployment
and it is considered that the costs of unemployment can be very serious, low unemployment may be
selected as the aim.

Activities
Activity 22.1
Learners’ answers might include:
1 A large national debt will mean that the government will have to pay a considerable amount in
interest on that debt. It may also encourage a government to cut its spending to ensure that it does not
experience budget deficits which would add to the debt.
2 An increase in government spending, financed by higher tax revenue, will not cause a budget deficit
and so will not increase the national debt. If the government spends more than it is raising in taxation,
it will experience a budget deficit at least in the short run. Such a deficit will add to the national debt.
However, in the long run increased government spending may generate more economic activity. This
could cause tax revenue to rise by more than the spending and so may lead to a budget surplus. Some
of the extra revenue could be spent to reduce the national debt.
3 The USA had a ratio much higher than most of the countries shown and significantly exceeded the
IMF recommended limit. However, the USA is generally considered to be a strong economy and does
not seem to have difficulty attracting willing lenders.
4 Russia’s national debt may increase in the future if its government has a series of budget deficits. It
may do this to stimulate economic activity and in the belief that there may be more willing lenders.

Activity 22.2
1 R243bn and – 4.5%.
2 R383.67bn (21% of R1,827bn).
3 Learners’ own answers

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Activity 22.3
1 Capital spending.
2 Learners’ discussion might include:
a The rich can afford to pay more tax. Their high income may also be partly the result of
government spending on education and training. It is generally considered that it is fair they
should pay more. It is more difficult to decide how much more. A very high tax rate may act as a
disincentive and could even persuade some high earners to leave the country.
b The increased spending on infrastructure and reduced corporate tax might reduce cost-push
inflation. Improved infrastructure would reduce transport costs. Low corporate tax may
encourage firms to increase investment which, in the longer run, could cut costs of production.
The higher tax on gold would raise the price of gold products, but the rise in the tax on petrol is
more likely to have an effect on a wide range of products, through increasing transport costs, and
so inflation.
The overall effect on inflation will depend on the relative size of the changes. An improvement in
infrastructure is likely to have a longer-term effect on the price level.
To make a full judgement of the effect of the budget on inflation, further information on the
spending and taxation changes would be needed.

Activity 22.4
Learners’ answers might include:
1 Expansionary, as increasing government spending and lowering taxes and so seeking to increase
aggregate demand.
2 Unemployment may not fall if the reduced taxes do not increase private sector spending. Higher
government spending may be offset by a fall in private sector spending, so that AD does not increase.
Even if AD rises and output increases, unemployment may not fall if firms employ more capital
equipment rate than more labour.

Think like an economist

Learners’ answers might include:
 rguments for include: encouraging more people to enter the labour force, workers to work more hours,
A
more multinational companies to set up in the country and people to save more.
 rguments against include: sales taxes are regressive and place a greater burden on the poor. When
A
someone buys a product with a tax on it, no consideration is taken of the ability of the poor person to bear
the burden of the tax. A poor person will pay the same tax rate as a rich person.

Exam-style questions: Multiple choice

1 B A, C and D are all government macroeconomic aims. A government will aim for low
unemployment. This is sometimes referred to as full employment. A government would
not aim for the same level of employment if that level is low and is accompanied by a high
unemployment rate.
2 C A budget surplus will increase if tax revenue rises and/or government spending falls. A rise in
employment would be likely to increase income tax revenue as more people will be working and
wage rates may increase. It is also likely to increase indirect tax revenue, as with higher incomes,
spending will rise. If higher employment is accompanied by lower unemployment, government
spending on unemployment benefits will fall.
A rise in the retirement age will mean that people work longer. This should raise their incomes
and, so again, more tax revenue will be raised. A higher retirement age is also likely to reduce
government spending on pensions.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 B  inancial institutions and international organisations may be more willing to lend to a country
F
which has experienced a fall in its national debt. This is because they may expect the country’s
government to be more able to pay interest on any amount they lend to it and to pay back the
sum borrowed.
A reduction in the size of a country’s national debt may reduce a budget deficit. This is because
less interest will have to be paid by the government. As the government will have to borrow less,
the rate of interest is likely to fall. A change in the size of the country’s national debt does not have
a direct effect on tax revenue.
4 C  progressive tax is one that takes a greater percentage of the income of the rich. High income
A
earners pay not only more tax than low income earners but also a greater percentage. A describes
a sin tax and is an indirect tax. B also describes an indirect tax. D could apply to a regressive,
proportional or regressive tax.
5 D I t is a regressive tax as the percentage paid in tax declines as income rises. The lowest income
earner pays 33.33% of their income in income tax. The middle-income earner pays 25% of their
income and the high earner pays 20%.
6 B  overnment capital spending is investment spending. It covers spending on capital goods used in
G
the public sector. A and C are current spending and D is spending on a transfer payment.
7 B  high rate of economic growth is likely to raise incomes and expenditure and reduce
A
unemployment. Higher incomes and expenditure will raise tax revenue. Lower unemployment will
reduce government spending on unemployment benefits and other welfare payments.
8 A  contractionary fiscal policy measure is one which lowers aggregate demand either by cutting
A
government spending or raising taxes. B and D are expansionary fiscal policy measures as they
would increase aggregate demand. C is an expansionary monetary policy measure.
9 C  n increase in hours worked would increase incomes and so, even if less tax is paid per $ earned,
A
there may be more $s to tax. A wider tax base would mean more items are taxed and so could
increase tax revenue.
10 D  n expansionary fiscal policy will increase aggregate demand. If the economy is approaching full
A
capacity, a higher AD will increase output and the price level. Higher output is likely to mean a
reduction in unemployment.

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021