CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Coursebook answers
Unit 5
Exam-style questions: Data response
1 a Learners’ answers may include (any two):
• improved living standards.
• lower unemployment.
• improved healthcare.
b i Learners’ answers might include:
• the inflation rate was higher than the interest rate over the period.
• the interest rate rose in 2018 while the inflation rose over most of the period (exception 2016).
• the interest rate would have been raised to reduce inflation.
ii Learners’ answers might include:
• the Ethiopian government was largely unsuccessful in achieving its macroeconomic aims.
• the country’s economic growth was below the aim of 11% throughout the period.
• the inflation rate was above the aim of 8% in four of the six years.
c Learners’ answers might include:
• a rising labour force increases a country’s productive capacity. If the rise in the labour force
results in an increase in employment, more goods and services will be produced.
• improved healthcare will increase the fitness of workers. This will raise labour productivity
which will enable more goods and services to be produced.
• improved infrastructure is also likely to raise productivity and lower costs of production,
making the countries’ products more internationally competitive and so in higher demand.
d Learners’ answers might include:
Knowledge and understanding
• what a government’s budget position shows.
• definition of a budget deficit.
• what a country’s unemployment rate measures.
Analysis points
• Ethiopia had a growing budget deficit. This may have been caused by a rise in government
spending and/or a fall in tax revenue.
• the effect of higher government spending on AD and cyclical unemployment.
• if the government has spent more on providing information on job vacancies, frictional
unemployment could have fallen.
• the effect of higher government spending on education, training and infrastructure on
workers’ skills and mobility, and so on structural unemployment.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Evaluation points
• a budget deficit may occur because the government adopted expansionary fiscal policy which
could reduce cyclical unemployment. It could also be because it spent more to increase
aggregate supply. Supply-side policy could reduce frictional and structural unemployment.
• a budget deficit might be the result of an increase in unemployment rather than the result of a
government seeking to reduce unemployment.
e Learners’ answers might include:
Knowledge and understanding
• definition of infrastructure.
• examples of infrastructure.
Analysis points
• why in the short run, an increase in Ethiopian government spending on infrastructure may
cause demand-pull inflation.
• why in the long run, the increase in infrastructure may reduce cost-push inflation.
• a diagram showing the effects of an increase in AD and AS on real GDP and the price level.
Evaluation points
• the effect of an increase in government spending on infrastructure on the economy’s price
level will be influenced by the level of economic activity. If the economy is operating with a
high level of unemployment, an increase in AD will be unlikely to cause inflation.
• in the long run, if the quality of the infrastructure is good, the extra spending could reduce
rather than increase inflationary pressure.

Exam-style questions: Essay

2 a Learners’ answers might include:
Knowledge and understanding
• definition of a budget surplus.
• tax revenue comes from both direct taxes and indirect taxes.
Analysis points
• reasons why a government may experience a budget surplus during a high level of economic
activity.
• reasons why the government may decide to spend less and increase taxation.
Evaluation points
• a government may aim for a structural budget surplus but in practice, a budget surplus is
most likely to be a cyclical surplus.
• a budget surplus will reduce aggregate demand. This can be useful when the economy is
working at full capacity as it can prevent demand-pull inflation.
• a budget surplus can be harmful when there is a low level of economic activity. This is because
the resulting lower AD may increase cyclical unemployment and slow down economic growth.
b Learners’ answers might include:
Knowledge and understanding
• definition of demand-pull inflation.
• what fiscal policy designed to reduce demand-pull inflation would involve.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Analysis points
• a cut in government spending may directly reduce the growth of aggregate demand, offsetting
in part the growth of private sector demand.
• higher income tax rates may also reduce the growth of aggregate demand.
• a diagram showing how a smaller increase in AD, resulting from a contractionary fiscal
policy, may result in a smaller rise in the price level.
• why a government is less likely to raise corporate tax.
Evaluation points
• reasons why it is not always easy or beneficial to cut government spending.
• time lags involved in fiscal policy and their effects.
• effect of economic agents not reacting to changes in fiscal policy in the way the government
expects.
• in theory, contractionary fiscal policy should reduce demand-pull inflation. In practice,
however, there can be difficulties reducing government spending and adverse side effects of
both cutting government spending and raising taxes. In addition, there may be time delays in
fiscal policy measures taking effect and, during this period, economic circumstances may have
changed. It is also difficult to predict how households and foreigners will react to changes in
fiscal policy.
3 a Learners’ answers might include:
Knowledge and understanding points
• definition of an economy’s productive capacity.
• what an increase in real GDP means.
Analysis points
• an increase in productive capacity means that the economy’s long-run aggregate supply
(LRAS) curve has shifted to the right.
• a diagram showing how an increase in LRAS causes an increase in productive capacity.
• an increase in productive capacity is the result of a rise in the quantity or quality of resources.
• what can cause an increase in the quantity and quality of resources.
Evaluation points
• an increase in productive capacity often results in a rise in a country’s real GDP but it is
possible that a rise in productive capacity may not result in an increase in a country’s real
GDP if initially there is spare capacity and no increase in AD.
• a diagram showing how an increase in LRAS may result in no change in real GDP.
• in practice, AD tends to increase over time and this usually ensures that at least some of the
increase in productive capacity is used and real GDP increases.
• a diagram showing how an increase in both AD and AS will increase real GDP.
• if firms are experiencing increases in demand for their products, they are likely to employ
more workers and make use of workers’ improved skills and extra capital equipment.
• both AD and LRAS may increase because some of the causes of higher productive capacity
can also contribute to higher AD.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

3 b Knowledge and understanding points

• aims of government spending on training schemes.
• how a country’s economic performance can be assessed.
• indicators of an improvement in a country’s economic performance.
Analysis points
• more government spending on training schemes may increase workers’ skills and their
productivity.
• the effects of a more productive labour force may increase the country’s output of goods and
services, inflation, structural unemployment and the balance of payments.
• the effects of an increase in government spending on AD and cyclical unemployment.
Evaluation points
• increased government spending on training may result in a fall in government spending on
other areas such as healthcare which may reduce macroeconomic performance.
• increased government spending on training may just replace private sector spending on
training resulting in no overall improvement in productivity.
• more workers may emigrate if they become better trained. This could reduce AD,
LRAS and real GDP.
• increased government spending on training may not be effective if it is poorly delivered or it is
in skills which are no longer in demand.
• if increased government spending on training raises AD by more than LRAS, it could result
in demand-pull inflation.

4 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021