Economics 9708/42 — February/March 2020
Cambridge A-Level · A Level Data Response and Essays · worked solutions for every part, with the mark scheme
Topics Effectiveness of Macroeconomic Policies · Externalities, Social Costs and Benefits · Macroeconomic Objectives and Policy Conflicts · Economic Development and Living Standards · Government Policies to Correct Market Failure · Utility Theory · +7 more
Well-being and economic growth
For many years governments have sought to deal with economic performance with policies and tools based on the assumption that consumers would act rationally in response to incentives or sanctions. They have also operated public sector services assuming that the best outcome is achieved through the power of government to regulate, tax and spend.
The tools the government uses are designed to influence consumer demand, often with the aim of increasing economic growth and GDP. But economic growth does not guarantee rising prosperity and well-being, as illustrated by Table 1.1 that compares HDI and GDP of selected countries.
Ideally, all major investment projects in the public sector should require a cost-benefit analysis. This assesses the wider effects of projects. The project may have different effects on a poorer group than on a wealthy group. For example, a poorer group may gain considerably more benefit, or well-being, from a government grant than a richer group.
Some economies have tried to influence economic growth by using an expansionary monetary policy. In some countries this has meant that bank interest rates have been kept very low. It was hoped that this would encourage investment and borrowing and increase spending. Recently there has been some pressure to raise interest rates. But raising interest rates is not always wise.
Higher interest rates could be justified in an economy experiencing economic growth, falling unemployment and an increase in business investment with the result that there are fewer unused resources in the economy.
Against that, higher interest rates could decrease consumer spending and also result in a decrease in investment. This may mean no increase in real wages. It could suggest interest rates should stay low.
Table 1.1 HDI and GDP of selected countries by HDI rank order
| HDI | Rank | GDP (US$ millions) | Rank | |
|---|---|---|---|---|
| Norway | 0.89 | 1 | 370 449 | 31 |
| Australia | 0.86 | 3 | 1 258 978 | 13 |
| Germany | 0.85 | 5 | 3 466 000 | 4 |
| UK | 0.83 | 13 | 2 629 000 | 5 |
| Thailand | 0.58 | 70 | 406 949 | 26 |
| Botswana | 0.43 | 103 | 15 018 | 116 |
| Pakistan | 0.38 | 117 | 284 185 | 42 |
| Eswatini | 0.36 | 121 | 3 770 | 157 |
Sources: RSA Issue 1, 2017; RSA Issue 3, 2016; hdr.undp.org; World Bank
Identify from the article one example, other than expansionary monetary policy, of a macroeconomic policy tool that a government could use and analyse how it might affect the economy.
Explain two merits of using a cost-benefit analysis before starting a major investment project in the public sector.
Consider whether there is any evidence in the information that a high GDP means that the well-being of the population is also higher.
Use the article to consider the reasons why there are different opinions about the level at which central bank interest rates should be fixed.
The rest of this paper
6 more questions- Q2Externalities, Social Costs and Benefits · Government Policies to Correct Market Failure25M
- Q3Utility Theory · Indifference Curves and Budget Lines25M
- Q4Growth and Survival of Firms · Performance of Firms in Different Market Structures25M
- Q5Demand for and Supply of Labour · Wage Determination and Labour Market Intervention25M
- Q6Money and Banking · Macroeconomic Objectives and Policy Conflicts25M
- Q7Effectiveness of Macroeconomic Policies · Economic Growth and Sustainability25M