EJC Econs N2023 H2 EQ6 - students

2023 H2 A Level Paper 2 Question 6 The use of expansionary demand-side policies designed to achieve economic growth or to lower unemployment may lead to undesirable consequences. (a) Explain why expansionary fiscal policy designed to achieve economic growth or lower unemployment may lead to undesirable consequences. [10] (b) Discuss whether expansionary supply -side policies would be effective in achieving the macroeconomic policy aims for an economy. [15] Part (a) (Question Analysis) Approach Command Word Explain why Start point Expansionary fiscal policy  higher growth + lower u/e End Point Undesirable consequences Content and Context Content • Expansionary fiscal policy for growth / lower u/e • And its consequences Context Generic Suggested Response Introduction • Economic growth refers to the rate at which an economy’s real national income /output increases over a period of time. • Lower unemployment refers to a fall in the proportion of the labor force that is unemployed. Requirement (1) – Undesirable consequence of demand-pull inflation. • Expansionary fiscal policy refers to when the government increases government expenditure (G) and decreases taxes (personal income tax and corporate income tax) to increase aggregate demand (AD) via the components of G, consumption (C) and investment (I) respectively. • AD refers to the total spending on goods & services produced in the economy at each general price level by the four sectors (h/hlds, firms, govt and foreigners). • Assuming the economy is initially operating below full employment output level, along the horizontal range of the AS curve. • With the rise in AD from AD0 to AD1 (Figure 1), total spending exceeds total output produced  unplanned fall in stocks / inventories. Firms step up production of output by hiring more factors of production including labor, leading to the increase in real NY from Y 0 to Y1 in the first round of the multiplier process  triggers the multiplier process where the increase in induced-consumption further increases AD from AD2 to AD5 for a few rounds. The multiplier process stops when the rise in real NY is insignificant to create increases in induced consumption. The real NY increased by multiplied from Y 0 to Y1 to Y5 Actual growth is achieved. Figure 1: Economic (actual) growth

• However, if the economy was on the intermediate or vertical range of the AS, that is operating near or at full employment  resources become increasingly scarce and firms have to compete for them, pulling up prices and costs  GPL increases from P0 to P1, leading to demand-pull inflation (Figure 2). Figure 2: Demand-pull inflation Requirement (2) – Undesirable consequence of crowding out effect • Expansionary fiscal policy can lead to the undesirable consequence of crowding out. Crowding out occurs when governments may borrow to fund their spending. Crowding out is the decrease in private expenditures