IB Economics HL 3.7 Supply-side policies Question Bank

Burundi is a landlocked country in Central Africa. Its economy is heavily reliant on the agricultural sector, which employs 92 % of the labour force but contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million population live in poverty, especially in rural areas. The level of food insecurity (people without access to enough food) is almost twice as high as the average for sub-Saharan African countries with more than 60 % of the population living below the poverty line.

Infrastructure in Burundi is poor. There are no railroads and only three major routes through the country, two of which involve water transport, across Lake Tanganyika. Access to clean water is low, while fewer than 5 % of the population have access to electricity. The literacy rate for those aged 15 and over is 61.6 %, while only 1 % of secondary schools have access to the internet.

The Czech Republic is a member of the European Union (a common market) but not of the Eurozone (a monetary union).

Study the extract and data below and answer the questions that follow.
Unemployment in the United States

(1) Though there are signs that the United States (US) economy is emerging from recession, unemployment remains high at close to 10 % (Figure 1). According to the chairman of the Federal Reserve (the US central bank), the US recovery will bring only a "slow reduction" in unemployment, and consumer confidence will improve only slowly. In this environment, inflation is likely to remain low (Figure 2). These comments are taken to mean the central bank does not plan to tighten monetary policy soon.

(2) Interest rates remain at near-zero levels (Figure 3). Therefore, some economists argue that more fiscal stimulus is needed. Others fear that large increases in the budget deficit, due to higher government spending and lower tax revenues, could create a new crisis leading to more job losses.

(3) Workers are fearful that long-term unemployment will result in a deterioration of their human capital, making it even more difficult to find jobs in the future. Some types of jobs in sectors such as car manufacturing, hard-hit by the recession, might disappear.

(4) An economic stimulus package passed in 2008 did little to reduce unemployment. For example, the unemployment rate for young workers (aged 18-24) has increased to over 52 %. Supporters of the fiscal stimulus argue that without it unemployment would have been even higher. Opponents insist that the benefits of the fiscal stimulus are exaggerated. At the heart of the disagreement lies an argument over the value of the multiplier. For the multiplier to translate into large increases in economic activity, consumers must spend rather than save, and budget deficits must not lead to crowding out.

(5) Some economists favour supply-side policies, such as tax benefits for firms that create new jobs. Another policy is to provide tax benefits to all firms pursuing research and development, in order to stimulate technological innovation and rapid economic growth. 'Restarting the job machine.' Newsweek (US edition), 26 October 2009; and 'The growing job crisis needs solutions now.' www.usnews.com, 13 October 2009.]