RVHS_H2_ECONS_P1_CSQ2_Soln

1 © RVHS 2017 9757/01 2017 RVHS H2 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 9757/01 (c) Extract 5 mentions that German chancellor Angela Merkel had r efused to put a cap on refugee numbers into Germany. Using co st–benefit analysis, explain why this decision was made. [6] For this decision to be made, the benefits must ha ve outweigh the cost of doing this. Benefit of an increase in refugees into Germany Influx of foreigners can help replace the shrinking workforce probably due to Germany’s aging population [1]. This will prevent o r slow down a fall in the quantity of labour and thus, prevent a fall or a slowdown in potential growth in the future. [1] OR As stated in Extract 5, in 5 to 10 years there will be more and more refugees who will start working and pay taxes [1]. This will increase tax revenue for the government [1], which can be used to further their fiscal s