Paper 2 revision lesson school
Evaluate the macroeconomic effects on the economy of an increase in taxation – 25 marks
Analysis 1 = By increasing income taxes causes a decrease in actual economic growth:
- less disp income = less consumption, which is the biggest component of AD (60%)
- taxation is also a leakage from the CFI and so there will be a negative multiplier effect
= num of times the fall of national income exceeds the initial injection that caused it.
- fall in spending = less D in the economy for goods = less D for labour as labour is
derived demand = increase unemployment = even less consumption in the economy
- now draw AD shift in twice and explain
Eval 1 = However, an increase in the top rate in tax will help reduce income inequality in the
UK
- Draw Lorenz curve with the curved line arrow pointing inwards to the straight line
Analysis 2 = By raising taxes, gov tax revenue will increase = fiscal deficit improve = national
debt decrease and national debt as % of GDP (100%) will fall= credit rating might go up = D
for UK bonds goes up = price of each bond goes up but yield goes down which makes it
easier for them to service future debts and invest into supply side policies in the future
Eval 2 = Depends on where economy is on the Laffer curve
Assess benefits and costs of joining a monetary union – 25 marks
Analysis 1 = Trade creation
- Free trade enables countries to fully tap into their comparative adv = when a country
has a lower opp cost of a good or service relative to another country
- If monetary union – As a producer unfavourable exchange rate movements cant
occur = profit margins aren’t at risk = increase in confidence = increase investment =
comp AD also injection….
- By specialising and then trading, it can help achieve export led growth through
increased trade. Further X is comp of AD….
Eval 1 = Loss of monetary independence – one size doesn’t fit all Germany and Greece. Some
may need high some may need low interest rates
Analysis 2 = trade liberalisation may increase FDI as TNC’s attracted by easier trading
conditions and can avoid the common external tariff
- FDI is investment….
- May improve infrastructure = External EOS = Increase LRAS shift outwards = increase
prod capacity of the country (e.g. improve labour mobility)
- Further, bring their tech = more productive economy = LRAS shift out as increase new
tech (capital goods)
Evaluate the macroeconomic effects on the economy of an increase in taxation – 25 marks
Analysis 1 = By increasing income taxes causes a decrease in actual economic growth:
- less disp income = less consumption, which is the biggest component of AD (60%)
- taxation is also a leakage from the CFI and so there will be a negative multiplier effect
= num of times the fall of national income exceeds the initial injection that caused it.
- fall in spending = less D in the economy for goods = less D for labour as labour is
derived demand = increase unemployment = even less consumption in the economy
- now draw AD shift in twice and explain
Eval 1 = However, an increase in the top rate in tax will help reduce income inequality in the
UK
- Draw Lorenz curve with the curved line arrow pointing inwards to the straight line
Analysis 2 = By raising taxes, gov tax revenue will increase = fiscal deficit improve = national
debt decrease and national debt as % of GDP (100%) will fall= credit rating might go up = D
for UK bonds goes up = price of each bond goes up but yield goes down which makes it
easier for them to service future debts and invest into supply side policies in the future
Eval 2 = Depends on where economy is on the Laffer curve
Assess benefits and costs of joining a monetary union – 25 marks
Analysis 1 = Trade creation
- Free trade enables countries to fully tap into their comparative adv = when a country
has a lower opp cost of a good or service relative to another country
- If monetary union – As a producer unfavourable exchange rate movements cant
occur = profit margins aren’t at risk = increase in confidence = increase investment =
comp AD also injection….
- By specialising and then trading, it can help achieve export led growth through
increased trade. Further X is comp of AD….
Eval 1 = Loss of monetary independence – one size doesn’t fit all Germany and Greece. Some
may need high some may need low interest rates
Analysis 2 = trade liberalisation may increase FDI as TNC’s attracted by easier trading
conditions and can avoid the common external tariff
- FDI is investment….
- May improve infrastructure = External EOS = Increase LRAS shift outwards = increase
prod capacity of the country (e.g. improve labour mobility)
- Further, bring their tech = more productive economy = LRAS shift out as increase new
tech (capital goods)
