A Level H1 Economics Policy Evaluation Quiz

Answer Key - A-Level Economics H1 Quiz (Policy Evaluation)

Section A

1. Fiscal Constraint: Limited government budget / need to maintain a balanced budget / risk of increasing national debt. [1]
2. Opportunity Cost: The value of the next best alternative foregone when a government chooses to allocate limited resources to one policy over another. [2]
3. Administrative Constraint: Difficulty in monitoring prices / cost of enforcing the ceiling / bureaucracy in issuing licenses. [1]
4. Gini Coefficient: Decrease (lower Gini = more equality). [1]
5. Reason: To ensure equity of access / to correct under-consumption due to information failure (merit good). [1]

Section B

6. Corporate Tax $\rightarrow$ AD: Increase in corporate tax $\rightarrow$ lower after-tax profits for firms $\rightarrow$ decrease in investment spending ($I$) $\rightarrow$ AD shifts left $\rightarrow$ contraction of economy. [3]
7. Phillips Curve Trade-off: Inverse relationship between inflation and unemployment. To reduce unemployment, AD must increase $\rightarrow$ higher output $\rightarrow$ tighter labor market $\rightarrow$ wage pressure $\rightarrow$ cost-push inflation. [4]
8. Gini Redistribution: Progressive taxes take a higher percentage from high-income earners; transfers (e.g., welfare) provide income to low-income earners $\rightarrow$ narrows the gap between top and bottom $\rightarrow$ Lorenz curve moves closer to equality line $\rightarrow$ Gini falls. [4]
9. Opportunity Cost (Training): The funds used for vocational training could have been spent on other public services (e.g., healthcare, transport). The "cost" is the lost benefit of those alternative services. [3]
10. Subsidy $\rightarrow$ Externality: Subsidy lowers the cost for producers $\rightarrow$ supply shifts right $\rightarrow$ price falls and quantity increases $\rightarrow$ moves consumption toward the socially optimal level ($MSB=MSC$), reducing deadweight loss. [4]
11. Fiscal vs Monetary (Investment): Fiscal contraction (e.g., spending cuts) reduces aggregate demand, potentially lowering business confidence. Monetary contraction (higher interest rates) directly increases the cost of borrowing, reducing investment. [4]
12. Supply-side vs Demand-mgmt: Demand policies can cause inflation if the economy hits capacity. Supply-side policies (e.g., education, tech) increase the productive capacity (LRAS) $\rightarrow$ allows growth without inflationary pressure. [4]
13. PED and Tax: If demand is inelastic ($PED < 1$), a tax increase leads to a small drop in quantity; the tax is effective for revenue but ineffective for reducing consumption. If elastic, the tax significantly reduces consumption. [4]
14. Infrastructure $\rightarrow$ Expansion: Gov spending $\uparrow \rightarrow$ AD $\uparrow \rightarrow$ higher demand for labor/materials $\rightarrow$ increased national income (multiplier effect) $\rightarrow$ expansion of GDP. [3]
15. Public Goods: Non-excludability leads to the "free-rider problem" (people consume without paying) $\rightarrow$ firms cannot make a profit $\rightarrow$ market fails to provide the good despite social demand. [4]

Section C (Marking Frameworks)

16. Healthcare Intervention:

    • Agree: Positive externalities (herd immunity, healthier workforce) $\rightarrow$ under-consumption $\rightarrow$ subsidy/provision.
    • Disagree/Other reasons: Equity (healthcare is a basic right), Information failure (patients don't know optimal care), Monopoly power of drug firms.
    • Judgment: Externality is a key reason, but equity is often the primary driver in developed nations. [8]

17. Stagflation (Inflation + Unemployment):

    • Conflict: Expansionary fiscal/monetary policies to lower unemployment increase inflation. Contractionary policies to lower inflation increase unemployment.
    • Solution: Supply-side policies to shift AS right (lowers prices and raises output).
    • Evaluation: Time lags of supply-side policies; difficulty in coordinating fiscal/monetary mix. [10]

18. Structural Unemployment (Singapore):

    • Supply-side: Reskilling/Upskilling (SkillsFuture) $\rightarrow$ matches labor supply to new demand $\rightarrow$ solves the root cause.
    • Fiscal: Unemployment benefits/stimulus $\rightarrow$ provides short-term relief but doesn't fix the skill gap.
    • Evaluation: Supply-side is more sustainable but takes longer; fiscal is faster for immediate hardship. [10]

19. Tax System Objectives:

    • Inequality: Progressive taxes $\rightarrow$ redistribution $\rightarrow$ social stability.
    • Other objectives: Economic efficiency (avoiding high taxes that discourage work/investment), Revenue generation (funding public goods), Incentivizing behavior (e.g., carbon tax).
    • Judgment: Depends on the state of the economy; in high-inequality societies, redistribution is paramount. [10]

20. Price Stability vs Unemployment:

    • Trade-off: Using interest rates (Monetary Policy). Higher rates $\rightarrow$ lower inflation but lower investment/employment.
    • Singapore Context: Small open economy $\rightarrow$ heavily influenced by global inflation (imported inflation). Exchange rate policy (MAS) is used to manage this.
    • Evaluation: The "impossible trinity" or the difficulty of balancing external stability with internal goals. [10]