A Level H2 Economics Policy Evaluation Quiz

Answer Key - A-Level Economics H2 Quiz (Policy Evaluation)

Section A

1. Automatic Stabilisers: Tax and transfer payments (e.g., progressive income tax, unemployment benefits) that automatically offset fluctuations in real GDP without explicit government action.
2. Discretionary Fiscal Policy: (i) Increasing government expenditure on infrastructure projects; (ii) Implementing targeted tax cuts for low-income households.
3. Reason for phasing out subsidies: To reduce the fiscal burden on the government budget or to correct a negative externality (e.g., pollution) by encouraging a shift toward renewable energy.
4. Efficiency: Allocative efficiency occurs when resources are distributed according to consumer preferences (P=MC); Productive efficiency occurs when goods are produced at the lowest possible cost.
5. Monetary Policy Limitation: In a liquidity trap, interest rates are near zero, and further increases in the money supply fail to lower interest rates or stimulate investment.
6. Progressive Tax: As incomes rise during a boom, taxpayers move into higher tax brackets, increasing tax revenue and slowing down aggregate demand (AD), thus curbing inflation.
7. Education Intervention: To correct positive externalities of consumption (social benefits > private benefits) or to reduce information asymmetry.
8. Crowding-out: Increased government borrowing leads to higher interest rates, which reduces private investment, potentially offsetting the initial increase in AD.

Section B

9. Subsidies for Merit Goods: (i) Positive Externalities: Consumption benefits third parties; (ii) Information Failure: Consumers undervalue the long-term benefit. Subsidies lower price, increasing consumption toward the socially optimal level.
10. AD-AS Diagram: Shift AD curve to the right $\rightarrow$ increase in real GDP (output) and increase in the general price level. (Note: Effect depends on the slope of the AS curve/spare capacity).
11. Automatic Stabilisers Limitation: Magnitude may be insufficient for severe shocks; they lack the "targeted" nature of discretionary policy; they cannot address structural unemployment.
12. Price Ceiling: If set below equilibrium, quantity demanded exceeds quantity supplied $\rightarrow$ shortage. Leads to non-price rationing or black markets.
13. Transmission Mechanism: $\downarrow$ Interest rates $\rightarrow$ $\downarrow$ cost of borrowing $\rightarrow$ $\uparrow$ Investment (I) and Consumption (C) $\rightarrow$ $\uparrow$ AD $\rightarrow$ $\uparrow$ Real GDP $\rightarrow$ $\uparrow$ Demand for labor $\rightarrow$ $\downarrow$ Unemployment.
14. Wage Premium: Higher earnings for graduates suggest higher productivity (human capital). Government subsidies increase the supply of skilled labor, enhancing national competitiveness and economic growth.
15. Demerit Good Tax: Diagram showing MPC and MSC. Tax shifts MPC upwards to internalize the external cost $\rightarrow$ price increases $\rightarrow$ quantity falls from market equilibrium to socially optimal level ($Q_{soc}$).

Section C (Marking Framework)

16. Fiscal Policy Evaluation:

    • Pros of Discretionary: Targeted, can be larger in magnitude, addresses specific sectors.
    • Pros of Automatic: No time lags (recognition/implementation), less political bias.
    • Judgment: Effectiveness depends on the severity of the cycle and the government's fiscal space.

17. Electricity Market:

    • Pros of Intervention: Prevents monopoly pricing, ensures universal access, encourages green energy.
    • Cons: Government failure (inefficiency), lack of profit motive may reduce innovation/quality.
    • Judgment: Depends on the regulatory framework (e.g., price caps vs. direct provision).

18. Supply-side vs Demand-side:

    • Demand-side: Fast impact on GDP/employment, but can cause inflation.
    • Supply-side: Increases potential output (LRAS), non-inflationary growth, but long time lags.
    • Judgment: Complementary approach is best; demand-side for short-term stability, supply-side for long-term prosperity.

19. Education Subsidies & Inequality:

    • Arguments for: Increases human capital for the poor, improves social mobility.
    • Arguments against: May benefit those already advantaged (regressive); does not address structural labor market issues or wage discrimination.
    • Judgment: Necessary but not sufficient; must be paired with progressive taxation or minimum wage laws.

20. Monetary Policy Trade-offs:

    • Conflict: Low interest rates $\rightarrow$ $\uparrow$ Growth/Employment but $\uparrow$ Inflation. High interest rates $\rightarrow$ $\downarrow$ Inflation but $\uparrow$ Unemployment.
    • Evaluation: Role of expectations, the Phillips Curve relationship, and the impact of external shocks (e.g., cost-push inflation).