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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 ... 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 why Germany wishes to avoid an increase in national debt relative to GDP is to maintain fiscal stability and public confidence in the economy. High levels of national debt can lead to increased borrowing costs as investors may require higher interest rates to compensate for perceived risk. This fiscal restraint supports Germany's reputation as a financially prudent nation, which is crucial for its economic policies and stability.
Step 2
Examine two likely effects of the forecast change in the rate of unemployment on the economy, with reference to Figure 4 in your answer.
Answer
The forecast change in the unemployment rate, which shows a gradual decline from previous years, is likely to have two significant effects:
- Increased Consumer Spending: A lower unemployment rate increases disposable income for households as more people are employed. This leads to greater consumer spending, which can stimulate economic growth and increase demand for goods and services.
- Improved Business Investment: As unemployment decreases, firms may experience greater confidence in the economy, leading them to invest more in expansion and hiring. With a more favorable labor market, businesses can attract more skilled workers, enhancing productivity and innovation.
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 significantly impact the profitability of firms in Germany by enhancing efficiency and reducing operational costs. By adopting advanced technologies, firms can improve their production processes, leading to lower average costs. This shift can shift the cost curves downwards in a cost and revenue diagram, increasing the profit margin per unit.
Moreover, new technologies can enable firms to offer innovative products or services, potentially increasing their market share. A cost and revenue diagram can illustrate this effect, showing how a decrease in costs enhances profitability at any given level of output, leading to an overall increase in the firm’s total profits.