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4 The trade cycle (a) At point Z on the diagram, which one of the following is likely to occur? An increase in: A absolute poverty B budget deficit C cyclical unemployment D inflation (b) With reference to the graph, explain the difference between automatic stabilisers and discretionary fiscal policy. - Edexcel - A-Level Economics A - Question 4 - 2022 - Paper 2
Question 4
4 The trade cycle (a) At point Z on the diagram, which one of the following is likely to occur? An increase in: A absolute poverty B budget deficit C cyclical un... show full transcript
Worked Solution & Example Answer:4 The trade cycle (a) At point Z on the diagram, which one of the following is likely to occur? An increase in: A absolute poverty B budget deficit C cyclical unemployment D inflation (b) With reference to the graph, explain the difference between automatic stabilisers and discretionary fiscal policy. - Edexcel - A-Level Economics A - Question 4 - 2022 - Paper 2
Step 1
At point Z on the diagram, which one of the following is likely to occur?
Answer
At point Z, where actual GDP is above the trend GDP, we are experiencing a positive output gap. This scenario typically leads to increased inflation as demand outstrips supply.
Given the options:
- A absolute poverty: This is unlikely as economic growth tends to improve living standards.
- B budget deficit: This is also unlikely in a positive output gap, as higher revenues from economic growth would usually lead to a budget surplus.
- C cyclical unemployment: This would be incorrect as cyclical unemployment is expected to decrease in this phase due to rising demand for labor.
- D inflation: This is the most likely scenario, with upward pressure on prices as demand exceeds supply.
Thus, the correct answer is D inflation.
Step 2
With reference to the graph, explain the difference between automatic stabilisers and discretionary fiscal policy.
Answer
Automatic stabilisers are government mechanisms that automatically adjust spending and taxation without the need for direct intervention by policymakers. For example, in a positive output gap as indicated by point Z on the graph, government revenues tend to increase due to higher taxes, while welfare payments may decrease. This helps to cool down the economy without deliberate action.
In contrast, discretionary fiscal policy involves direct government action to alter taxation or spending in response to economic conditions. This may include new government initiatives, changes in tax rates, or an increase in public spending to stimulate demand or slow down inflation. Discretionary measures are planned and executed based on the government's objectives and economic forecasts.
In summary, automatic stabilisers function without conscious decision-making, while discretionary fiscal policy requires active government intervention.