CAIE IGCSE Economics 4.1. Government macroeconomic intervention Question Bank

Read the source material carefully before answering Question 1.

Bermuda is a well-known holiday destination. It offers luxury holidays which are expensive.
Bermuda bans foreign fast-food outlets. It does have one foreign outlet selling fried chicken in the island's capital, Hamilton. This was opened before the ban was introduced in 1997. Some foreign multinational companies (MNCs), which produce other goods and services, operate in Bermuda. Bermuda is considered a tax haven. It does not have any corporation tax, but it does charge high import tariffs particularly on demerit goods which are harmful to health.

Bermuda has a higher literacy rate and a lower population growth rate than most other countries. Its GDP per head is high. Fig. 1.1 shows the relationship between GDP per head ($) and life expectancy (years) in selected countries in 2018.

Bermuda also has a relatively larger tertiary sector than most other countries. Insurance and other financial services contributed $85 \%$ of its GDP in 2018. The Bermudian Monetary Authority (BMA) carries out most of the functions of a central bank. For example, it acts as banker to the government, holds the country's reserves of foreign currency and implements the government's monetary policy. The BMA has been relatively successful in keeping inflation low. However, government policy measures designed to reduce unemployment may affect the inflation rate. This is because policy measures can influence total demand, productivity and firms' costs of production.

Bermudian government policy may change, not only to cut unemployment, but also to reduce market failure. For example, higher indirect taxes on demerit goods may be used but it can be difficult to change people's spending patterns.

Discuss whether or not Bermudian government policy measures designed to reduce unemployment would increase the inflation rate.