RVHS_H1_ECONS_P1_CSQ_2_Soln

1 © RVHS 2017 8819/01 2017 RVHS H1 Prelims II Question 2 Problems in the European Union (suggested answers) (a) Compare the pattern s of the government debt to GDP ratio in Greece and Germany between 2010 and 2015. [2] Government debt to GDP ratio in Greece increased while it decreased in Germany. [1] Government debt in Greece is consistently more than 100% of GDP while that of Germany is less than 100% of GDP. [1] (b) Extract 7 suggests that austerity measures were impo sed on Greece to help reduce its debt. Explain the likely factors th at may influence the effectiveness of these measures. [4] Debt is incurred when the government borrows to fun d a budget deficit. Austerity measures aim to increase tax revenue while decreasi ng government spending. The effectiveness of austerity measures imposed on Gree ce to reduce its debt is thus dependent on its ability to increase tax revenue and decrease government spending. 1. Consumers and investors’ confidence in the Greek economy If Greece succeeds in decreasing its debt, consumer s and investors’ confidence might be raised thereby increasing consumption (C) and in vestment (I) and increasing national income (NY) and employment in the future. This will help to increase tax revenue and reduce government spending, thus helpin g to reduce the debt / avoid more borrowing and chalking up debt, rendering austerity measures effective. Or With a decrease in consumers and investors’ confide nce when Greece’s debt is high, austerity measures may dampen C & I which will result in a fall in tax base and a fall in tax revenue. This reduces the effectiveness of aust erity measures in trying to reduce the debt. 2.Ability of the government to reduce government spending It may be difficult to reduce some forms of governm ent spending such as healthcare. These may be strongly resisted. Hence, failure to reduce government spending with no corresponding increase in tax revenue may mean that the debt is not reduced, rendering austerity measures ineffective. Note: 2 marks for each point well explained.

2 © RVHS 2017 8819/01 (c) Extract 5 mentions that German chancellor Angela Me rkel had refused to put a cap on refugee numbers into Germany. (i) With the help of an AD/AS diagram, explain the impa ct in both the short and the long run of an influx of refugees on the Germany’s economy. [6] The influx of refugees will lead to an increase in consumption (C) as they will also be spending on daily necessities within Germany. In addition, in order to house the refugees, the government will need to spent more on public investment expenditure (G) to construct more housing infrastructure. [1] I n the short run, the increase in C and G will then lead to an increase in aggregate de mand (AD) from AD 0 to AD 1 and a multiple increase in national income (NY) from Y 0 to Y 1, as shown in Figure 1, achieving actual economic gro