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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 2) - 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 2). 2(b) Examine two likely effects o... 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 2) - 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 2).
Answer
One significant reason Germany seeks to avoid an increase in national debt relative to GDP is to maintain fiscal stability and investor confidence. High levels of national debt can lead to concerns about a country’s ability to meet its financial obligations, potentially resulting in increased borrowing costs. For instance, if debt rises significantly, it could lead to higher interest rates as investors demand a premium for the perceived risk. This situation can adversely affect public services and investments, thus hampering long-term economic growth.
Step 2
Examine two likely effects of the forecast change in the rate of unemployment, 2020 to 2021, on firms in Germany. Refer to Figure 4 in your answer.
Answer
The forecast change in the unemployment rate may have several implications for firms in Germany:
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Increased Labor Costs: As unemployment decreases, firms might face upward pressure on wages due to a tighter labor market. This could reduce profit margins and compel firms to adjust pricing strategies to maintain profitability.
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Higher Consumer Demand: A drop in unemployment typically correlates with increased disposable income for households. Firms may experience higher demand for goods and services, encouraging production expansion and investment in capacity to meet this demand. This effect could provide a stimulus for economic growth in the broader economy.
Step 3
Discuss the likely impact of investment in new technology on the profitability of firms in Germany, as described in Extract 1c. Use a cost and revenue diagram to support your answer.
Answer
Investment in new technology is likely to have a positive impact on the profitability of firms in Germany. The implementation of advanced technologies can lead to increased efficiency and productivity, which reduces costs per unit of output. As firms optimize operations through technological advancements, they can lower their average total costs and shift the supply curve to the right, potentially increasing overall market supply.
Additionally, better technology can enable firms to innovate and enhance the quality of their products, allowing them to capture higher prices in the market. In a cost and revenue diagram, this would be represented by a movement in the average revenue curve upwards as firms can increase prices due to enhanced product value, while the average cost curve shifts downwards due to improved efficiency. The resulting profit maximization occurs where marginal cost meets marginal revenue, leading to higher profit levels for firms.
Step 4
Evaluate the microeconomic and macroeconomic factors which are likely to determine the rate of economic growth in Germany relative to other developed economies.
Answer
Microeconomic factors influencing Germany's economic growth include:
- Labor Market Dynamics: With a highly skilled labor force, firms can leverage talent for efficiency and innovation.
- Competition and Market Structure: Germany's competitive manufacturing sector can drive productivity improvements and boost exports.
Macroeconomic factors may involve:
- Monetary Policy: Interest rates set by the European Central Bank influence investment decisions; lower rates can stimulate growth.
- Global Economic Conditions: Germany's export-driven economy is sensitive to global demand, particularly in key sectors such as automotive and machinery. Changes in global economic stability can significantly impact Germany's growth rate compared to other developed nations.
Step 5
Evaluate the microeconomic and macroeconomic impacts of a much more expansionary fiscal policy (Extract 1c line 23) on the German economy.
Answer
An expansionary fiscal policy in Germany may have several microeconomic impacts:
- Increased Government Spending: This could lead to higher demand for goods and services in the short run, stimulating business activities.
- Consumer Confidence: Enhanced public investment can create jobs, which increases household disposable income, thereby boosting consumer spending.
From a macroeconomic perspective:
- Economic Growth: An expansionary fiscal policy might lead to a rise in GDP if government spending effectively stimulates the economy.
- Inflation Pressures: However, if the economy is already near capacity, increased demand can lead to inflation, forcing the central bank to adjust interest rates to temper price increases. Overall, while such a policy can support growth, careful management is essential to avoid overheating the economy.