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2 (a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 1) - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 3
Question 2
2 (a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 1). (b) Examine two likely effects of... show full transcript
Worked Solution & Example Answer:2 (a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 1) - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 3
Step 1
Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 1).
Answer
One key reason for Germany to maintain a low national debt relative to GDP is to ensure fiscal stability and credibility. A lower debt-to-GDP ratio indicates better financial health, allowing the country to respond flexibly to economic challenges. Moreover, a reduced debt burden can minimize interest payments, enabling the government to allocate resources towards public services and infrastructure instead of debt repayment.
Step 2
Examine two likely effects of the forecast change in the rate of unemployment in Germany (Figure 4) on firms in Germany.
Answer
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Increased Consumer Spending: A decrease in unemployment often leads to higher disposable income for consumers. This increase in income can drive higher consumer spending, benefiting firms as they see an uptick in demand for goods and services.
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Labor Cost Considerations: Conversely, if unemployment rates drop significantly, firms may face rising labor costs as they compete for a smaller pool of available workers. This can lead to higher wages being offered, potentially squeezing profit margins if firms cannot pass these costs onto consumers.
Step 3
Discuss the likely impact of investment in new technology on the profitability of firms in Germany, as described in Extract One (c) 20.
Answer
Investment in new technology can significantly enhance the profitability of firms through increased efficiency and reduced production costs. By adopting advanced technologies, firms can automate processes, leading to lower labor costs over time.
Additionally, new technology can enable firms to improve product quality or create innovative products, thereby attracting more customers and potentially allowing for premium pricing strategies.
A cost and revenue diagram can illustrate this effect: as firms invest in technology, the marginal cost curve shifts downwards, leading to higher profit margins and increased overall profitability. In summary, leveraging new technologies can create a competitive edge, allowing firms to thrive in an increasingly challenging economic environment.