YJC_H2_ECONS_P1_Q2_answers

Question 2: Brexit and its impact Suggested Answers (a) With reference to Extract 6, explain the consequences of Brexit on UK’s internal economy. [6] E4P1: “businesses defer whatever spending they can as investors hate uncertainty” and “US economy has been sluggish of late” E4P2: “spending on big-ticket items is likely to slump” Brexit  Increase in uncertainty / Fall in business (or investors’) confidence in the UK  Fall in investment expenditure (I) as firms delay / shelf investment projects [2m] Sluggish US economy  American households consume less goods and services, including imports from UK  Demand for imports fall  UK’s export revenue (X) falls [2m] Brexit  Bleak economic outlook  UK households spend less  Consumption expenditure (C) falls [2m] I, X and C fall  AD falls  Unplanned accumulation of stocks / inventories  Firms cut back on production, hiring less factors of production, including labour  Cyclical unemployment rises  Factor incomes fall  Induced consumption falls  Real national income falls by multiplies  Negative economic growth; General price level falls [2m] Expect 2 main consequences on UK’s internal economy – real national income and employment should come together Max 4m on how Brexit impacts the components of AD and/or AS. Max 2m on how AD and/or AS changes impacts the internal macro goals. (b) Explain how the following would be affected when interest rates are cut in UK. (i) Consumption expenditure [2] Cut in interest rates  Cost of borrowing falls [1m]  Households borrow to buy big-ticket items  Consumption expenditure (C) rises [1m] Or Cut in interest rates  returns to savings falls [1m]  household cut down on saving and allocate more disposable income to consumption  C rises. [1m] (ii) Investment expenditure [2]

Cut in interest rates  Cost of borrowing falls  Previously unprofitable projects now become profitable [1m]  Investment expenditure (I) rises [1m] (c) Discuss whether the data is useful to assess changes in living standards in the UK from 2015 to 2017. [8] Data provided suggest that living standards in UK has fallen Material standard of living has fallen Extract 4: “Some jobs will go, and wage growth will fall.” Extract 5: “overall inflation up to 3.1 per cent last month, with wage inflation stuck at just over 2 per cent… “; “so real pay levels have been flat.” Table 2: Nominal GDP per capita; trade in goods and services; average annual hours worked per worker Overall inflation at 3.1% while wage inflation stuck at 2%  rise in general price level faster than increase in wages; Nominal GDP per capita falling  Real purchasing power reduced, negatively affecting households’ ability to consume goods and services  Less goods and services consumed Current account deficit falling / Current account balance improving could be due to falling M  Spending on imports