Practise applying tax and government spending changes to growth, demand and budget contexts, with clear judgement on policy effectiveness.
In 2019 the new President of the European Central Bank asked governments of eurozone countries to cut taxation and increase government expenditure to stimulate the rate of economic growth.
Evaluate fiscal policy instruments as a means of increasing the rate of economic growth.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance.
The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
- Economic growth- increase in real GDP
- Fiscal policy- use of taxation and government expenditure
- Demand side policy- aimed at influencing AD
- Expansionary policy- aims to increase AD
- Would involve increase in government expenditure and/or decrease taxation
- Increased government expenditure would lead to increased AD - as G is a component of AD
- Decreased income tax would lead to more disposable income and increased consumption and increased AD
- Decreased corporation tax would see firms keep more profit and encourage investment and increased AD
Diagram
- As can be seen the increase in AD leads to an increase in real output from Y to Y1
- With higher real output employment would increases/unemployment decrease
- If private sector investment is encouraged then further increases in economic growth could occur due to the multiplier effect (may be shown diagrammatically with further rightwards shift of AD and a shift in LRAS)
NB: Award a maximum of Level 3 (9 marks) if only one fiscal policy instrument is considered
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.
Use of generic material or irrelevant information or inappropriate examples.
Descriptive approach, which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Fiscal policy may lead to an increase in average price level increasing from P to P1-inflationary pressure
- May create a fiscal deficit- adding to repayments in future
- Many adjustments to tax and government expenditure may have effects on the supply-side
- Supply-side policy may be more effective as does not come with the trade-off with inflationary pressure
- Monetary policy may be more effective - and is the primary responsibility of ECB, rather than advising national governments in areas which are not its responsibility
- The shape of the LRAS curve is important- if it is classical in shape the increase in AD will just cause inflationary pressure with no economic growth in the long run
- Depends on the position of AD on a Keynesian AS curve- on the horizontal section economic growth will be higher and on the vertical section will cause more inflationary pressure
- People may substitute from work to leisure as their disposable income increases
- Government spending generates an opportunity cost- money might be better spent elsewhere
- Coordination issues across the member states
- Magnitude- depends on the size of reduction in taxation/increase in government spending
- Time lag- may take time for tax cuts to take effect and for consumers to realise their disposable income is now higher
- Time lag - government expenditure can be slow due to delays in setting contracts etc
- If there is an increase in government expenditure on investment then there will be an increase in LRAS as well as in AD
- Impacts on potential growth as fiscal policy may boost LRAS dependent on what government spends money on or where they reduce taxation
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.
Question
Number
In quarter 12019 the unemployment rate in South Africa was 27.6\%. In quarter 2 it increased to 29\%. An additional 455000 workers became unemployed.
Evaluate the likely impact of an increase in the unemployment rate on workers, public finances and resource utilisation.
Indicative content