A Level H2 Economics Policy Evaluation Quiz

Answer Key - A-Level Economics H2 Quiz: Policy Evaluation

Section A

1. Government Failure: Occurs when government intervention in the economy leads to a net welfare loss or a less efficient allocation of resources than would have occurred in a free market. [2m]
2. Reasons for Subsidy: (1) Lower administrative costs compared to direct provision; (2) Maintains the incentive for private firms to innovate/compete. [2m]
3. Difference: Automatic stabilizers (e.g., progressive taxes, unemployment benefits) operate without explicit government action as GDP changes. Discretionary policy requires active legislative change (e.g., a new infrastructure project). [4m]
4. Time Lag: Recognition lag (time to identify the problem) or Implementation lag (time to build infrastructure/train workers). [2m]
5. Pigouvian Tax: A tax equal to the marginal external cost (MEC). It shifts the MPC curve upwards to align with the MSC curve, reducing output to the socially optimal level ($Q_{soc}$). [4m]
6. Monitoring: Tracking the size of the black market (illegal premiums) or monitoring shortage levels (queues). [2m]
7. Liquidity Trap: When interest rates are near zero, further cuts fail to stimulate investment because firms/consumers hold cash due to pessimistic expectations, making monetary policy ineffective. [4m]
8. Relationship: Inverse relationship. A higher MPS leads to a lower multiplier ($k = 1/MPS$). [2m]

Section B

9. EV Subsidy: Diagram showing positive externality (MPB < MSB). Subsidy shifts MPC down/supply right. New equilibrium at $Q_{soc}$ where MSB=MSC. [6m]
10. SGD Appreciation: Increases the cost of exports but lowers the cost of imports in local currency. This reduces the price of imported raw materials/finished goods, lowering the overall domestic price level. [6m]
11. Corporate Tax Cut: Increases after-tax profits $\rightarrow$ higher investment in capital/R&D $\rightarrow$ increase in productivity $\rightarrow$ rightward shift of LRAS. [6m]
12. Policy Mix: Fiscal policy is effective for direct demand injection but has long lags. Monetary policy is faster but may be limited by interest rate floors. Together, they provide a balanced approach to stability. [6m]
13. Price Ceiling: Diagram showing $P_{max}$ below equilibrium. This creates a shortage ($Q_d > Q_s$). Producers have less incentive to supply, leading to a decrease in quantity supplied. [6m]
14. Asymmetric Info: Adverse selection occurs when high-risk individuals are more likely to buy insurance. Insurers raise premiums $\rightarrow$ low-risk individuals exit $\rightarrow$ "death spiral" where only high-risk remain. [6m]
15. Phillips Curve: Short-run trade-off: Lower unemployment $\rightarrow$ higher wage pressure $\rightarrow$ higher inflation. Evaluation: In the long run (LRPC), the economy returns to the Natural Rate of Unemployment regardless of inflation. [6m]

Section C

16. Regulation vs Market-based:
    • Regulation: Certainty of outcome, direct control.
    • Market-based (Taxes/Permits): Provides incentives for innovation, generates revenue, allows firms flexibility.
    • Judgment: Depends on the pollutant and the ability of the government to monitor compliance. [10m]
17. Supply-side Policies:
    • Pros: Increases productive capacity, reduces structural unemployment, non-inflationary growth.
    • Cons: High cost, very long time lags, no guarantee of success.
    • Judgment: Essential for long-term growth but must be paired with demand-side policies to avoid recession during the transition. [10m]
18. Fiscal Policy in Singapore:
    • Pros: Direct impact on GDP, supports citizens during crises.
    • Cons: Small open economy means high leakage (imports), potentially increasing the trade deficit.
    • Judgment: Effectiveness depends on the multiplier and the degree of openness. [10m]
19. Fuel Subsidy Removal:
    • Pros: Corrects overconsumption of fossil fuels, reduces fiscal burden.
    • Cons: Regressive impact on low-income households, potential for cost-push inflation.
    • Judgment: Necessary but should be accompanied by "green" subsidies or cash transfers to mitigate social hardship. [10m]
20. Minimum Wage:
    • Pros: Higher income for workers, reduces working poverty.
    • Cons: Potential for classical unemployment if $W_{min} >$ equilibrium wage; firms may cut hours or automate.
    • Judgment: Effectiveness depends on the elasticity of demand for labor and the level at which the wage is set. [10m]