📘 IGCSE & O-Level Economics

Important Questions for June 2025 Attempt​

2-Marks Questions with Answers

1. Identify two benefits people may gain from a good education.

●​ Higher income potential through better job opportunities.​

●​ Improved knowledge and skills, leading to higher productivity.​

2. Define external growth of firms.

●​ External growth occurs when a firm expands by merging with or acquiring other firms
rather than increasing its own operations internally.​

3. Define a shortage.

●​ A shortage exists when the quantity demanded of a good or service exceeds the
quantity supplied at the current price.​

4. Define unemployment rate.

●​ The unemployment rate is the percentage of the labor force that is willing and able to
work but is unable to find employment.​

5. Identify two functions of money.

●​ Medium of exchange.​

●​ Store of value.​

6. Identify two reasons why death rates may vary between countries.

●​ Differences in access to healthcare.​

 ●​ Variations in living standards and sanitation.​

7. Identify two influences on which country a person decides to work in.

●​ Higher wages in the destination country.​

●​ Better working conditions or opportunities.​

8. Identify two reasons why rich households spend more than the average
household.

●​ Higher disposable income.​

●​ Greater access to luxury goods and services.​

9. Define opportunity cost.

●​ Opportunity cost is the value of the next best alternative foregone when making a
choice.​

10. Describe a possible opportunity cost of a student going to university.

●​ The student may forgo earning income from a full-time job while pursuing higher
education.​

11. Define 'resources'.

●​ Resources are inputs used in the production of goods and services, such as land, labor,
capital, and enterprise.​

12. Identify two factors of production.

●​ Land​

●​ Labor​

13. What is meant by 'scarce resources'?

 ●​ Scarce resources refer to the limited availability of inputs relative to unlimited wants.​

14. What is meant by the economic problem?

●​ The economic problem arises because resources are scarce, but human wants are
unlimited, leading to the need for choices.​

15. Why can the economic problem never be solved?

●​ The economic problem cannot be solved because human wants continually expand
while resources remain finite.​

16. What is meant by factor of production: capital, land, labour, enterprise?

●​ Capital refers to man-made tools and equipment used in production.​

●​ Land includes all natural resources used in production.​

●​ Labour refers to human effort in production.​

●​ Enterprise is the risk-taking and decision-making ability of entrepreneurs.​

17. Identify the reward for land, labor, capital, and enterprise.

●​ Land: Rent​

●​ Labour: Wages​

●​ Capital: Interest​

●​ Enterprise: Profit​

18. Define production possibility curve (PPC).

●​ A PPC shows the maximum combination of two goods that an economy can produce
using all its resources efficiently.​

19. What is meant by an industry being 'capital-intensive'?

 ●​ A capital-intensive industry relies more on machinery and equipment than on human
labour.​

20. What is meant by an industry being 'labour-intensive'?

●​ A labour-intensive industry relies more on human effort than on machinery and

equipment.​

21. Define 'demand'.

●​ Demand refers to the quantity of a good or service consumers are willing and able to buy
at various prices over a given period.​

22. Identify two influences on what products a person buys.

●​ Income levels​

●​ Personal preferences​

23. Define 'supply'.

●​ Supply refers to the quantity of a good or service that producers are willing and able to
sell at various prices over a given period.​

24. Give an example and define 'a sales tax'.

●​ A sales tax is a government-imposed tax on the sale of goods and services, such as VAT
applied to retail purchases.​

25. Define 'external cost'.

●​ External costs are negative spillover effects on third parties not directly involved in an
economic activity, such as pollution from a factory.​

26. Define 'private cost'.

 ●​ Private costs are the costs directly incurred by individuals or firms engaged in an
economic activity, such as production costs.​

27. Define 'external benefits'.

●​ External benefits are positive spillover effects on third parties not directly involved in an
economic activity, such as education improving societal knowledge.​

28. Define 'monetary policy'.

●​ Monetary policy involves the use of interest rates and money supply adjustments by the
central bank to influence economic activity.​

29. Define 'productivity'.

●​ Productivity measures the output produced per unit of input, such as labour or capital,
over a given period.​

30. Define 'money'.

●​ Money is any medium of exchange that is widely accepted for the payment of goods,
services, and debts.​

31. Identify two functions of money.

●​ Unit of account​

●​ Store of value​

32. Define 'medium of exchange'.

●​ A medium of exchange is an intermediary instrument used to facilitate the sale,

purchase, or trade of goods and services.​

33. Identify two forms of money in the modern world.

 ●​ Banknotes​

●​ Digital currencies​

34. Define 'privatisation'.

●​ Privatisation is the process of transferring ownership of state-owned enterprises to

private individuals or companies.​

35. Define 'nationalisation'.

●​ Nationalisation is the process of transferring private sector assets or industries to

government ownership.​

36. Define a 'multinational company'.

●​ A multinational company is a business that operates in multiple countries while having its
headquarters in one country.​

37. Identify two government economic aims.

●​ Reducing unemployment​

●​ Achieving economic growth​

38. Define 'Gross Domestic Product' (GDP).

●​ Gross Domestic Product (GDP) is the total value of all goods and services produced
within a country over a given period.​

39. Define 'unemployment'.

●​ Unemployment is the situation where people who are willing and able to work are unable
to find jobs.​

40. Define a 'weighted price index'.

 ●​ A weighted price index measures the average change in prices of a basket of goods and
services, with weights reflecting their importance in consumption.

41. Define 'inflation'.

●​ Inflation is the sustained rise in the general price level of goods and services in an
economy over a period of time.​

42. Define 'death rate'.

●​ Death rate refers to the number of deaths per 1,000 people in a population per year.​

43. Define 'birth rate'.

●​ Birth rate is the number of live births per 1,000 people in a population per year.​

44. Identify two characteristics of a developed country.

●​ High levels of income per capita​

●​ Well-developed infrastructure and healthcare systems​

45. Define 'capital good'.

●​ A capital good is a man-made asset used in the production of other goods and services,
such as machinery and tools.​

46. Define 'specialisation'.

●​ Specialisation occurs when individuals, firms, or countries focus on producing a limited

range of goods or services, improving efficiency and productivity.​

47. Define 'trade balance'.

●​ Trade balance is the difference between the value of a country's exports and imports of
goods and services.​
48. Define 'foreign exchange rate'.

●​ A foreign exchange rate is the price of one currency in terms of another currency.​

49. Define 'price discrimination'.

●​ Price discrimination occurs when a firm charges different prices to different consumers
for the same product, based on factors like willingness to pay.​

50. Define 'dumping'.

●​ Dumping is the practice of exporting goods at a price lower than their production cost,
often to gain market share in another country.​

51. Define perfect competition and monopoly.

●​ Perfect competition: A market with a large number of firms selling homogeneous

products.​

●​ Monopoly: A market with a single seller and no close substitutes.​

52. Define 'full employment'.

●​ Full employment occurs when all individuals who are willing and able to work at
prevailing wage rates are employed, excluding natural unemployment.​

53. Define 'equilibrium'.

●​ Equilibrium is the point at which the quantity demanded equals the quantity supplied in a
market, resulting in no excess or shortage.​

54. Define price elasticity of demand (PED).

●​ PED measures the responsiveness of quantity demanded to a change in the price of a

good or service.​

55. Identify two factors that influence PED.

 ●​ Availability of substitutes​

●​ Proportion of income spent on the good​

56. Define price elasticity of supply (PES).

●​ PES measures the responsiveness of quantity supplied to a change in the price of a

good or service.​

57. Identify two factors that influence PES.

●​ Time period for production adjustment​

●​ Availability of spare production capacity​

58. Define elastic and inelastic supply.

●​ Elastic supply: Quantity supplied changes significantly with a small change in price.​

●​ Inelastic supply: Quantity supplied changes little with a significant change in price.​

59. Define elastic and inelastic demand.

●​ Elastic demand: Quantity demanded changes significantly with a small change in price.​

●​ Inelastic demand: Quantity demanded changes little with a significant change in price.​

60. What is meant by protectionism?

●​ Protectionism refers to government policies that restrict imports to protect domestic

industries, such as tariffs or quotas.​

61. Identify two methods of protectionism.

●​ Imposing tariffs​

●​ Setting import quotas​

62. What is meant by tariff and quota?

●​ Tariff: A tax imposed on imported goods to make them more expensive.​

●​ Quota: A limit on the quantity of a good that can be imported.​

63. Define market disequilibrium.

●​ Market disequilibrium occurs when the quantity demanded does not equal the quantity
supplied, leading to either a surplus or a shortage.​

64. Define direct and indirect tax.

●​ Direct tax: A tax levied directly on income or wealth, such as income tax.​

●​ Indirect tax: A tax imposed on goods and services, such as VAT.​

65. Identify examples of direct and indirect tax.

●​ Direct tax: Income tax, corporate tax​

●​ Indirect tax: Sales tax, excise duty​

66. Identify two components of the current account of the balance of

payments.

●​ Trade in goods​

●​ Trade in services​

67. State two benefits a country may gain from immigration.

●​ Increased labour supply​

●​ Contribution to economic growth through taxes and consumption​

68. Define microeconomics and macroeconomics.

 ●​ Microeconomics focuses on the behaviour of individuals, households, and firms.​

●​ Macroeconomics studies the economy as a whole, including issues like inflation and
unemployment.​

69. State two objectives of firms.

●​ Profit maximisation​

●​ Increasing market share​

70. State two objectives of government.

●​ Economic growth​

●​ Reducing unemployment​

71. State two objectives of workers.

●​ Higher wages​

●​ Better working conditions​

72. Define fixed cost and identify its examples.

●​ Fixed cost is a cost that does not change with the level of output, such as rent or
salaries.​

73. Define variable cost and identify its examples.

●​ Variable cost is a cost that varies directly with the level of output, such as raw materials
or electricity costs.​

74. Define absolute poverty.

●​ Absolute poverty refers to a lack of basic necessities, such as food, shelter, and water,
essential for survival.​
75. Define relative poverty.

●​ Relative poverty occurs when individuals earn significantly less than the average income
in their society, limiting their ability to participate fully in social and economic activities.​

76. Define capital-intensive industry.

●​ A capital-intensive industry is one that relies more on machinery and equipment than
human labour in the production process.​

77. Define labour-intensive industry.

●​ A labour-intensive industry is one that relies more on human effort than on capital
(machinery and equipment).​

78. Define merit good.

●​ A merit good is one that provides benefits to both individuals and society and tends to be
under-consumed in a free market (e.g., education).​

79. Define demerit good.

●​ A demerit good is one that imposes costs on both individuals and society and tends to
be over-consumed in a free market (e.g., cigarettes).​

80. Define public good.

●​ A public good is a good that is non-excludable and non-rivalrous, meaning it is

available to all and one person’s consumption does not reduce availability to others (e.g.,
street lighting).

4 - Markers
1. Explain two reasons why a government may discourage cigarette
smoking.

●​ A government may discourage cigarette smoking to reduce the health problems caused
by smoking, such as lung cancer and heart disease, which increase the burden on public
healthcare systems.​

●​ Additionally, discouraging smoking can help lower economic costs related to lost
productivity due to smoking-related illnesses and premature deaths.​

2. Explain two ways a firm can increase its profit.

●​ A firm can increase its profit by reducing its costs of production, for example, by sourcing
cheaper raw materials or improving operational efficiency.​

●​ It can also raise its profit by increasing sales revenue, either by raising the price of its
products if demand is inelastic or by expanding its market share through effective
marketing strategies.​

3. Explain two reasons why low-skilled workers may be highly paid.

●​ Low-skilled workers may be highly paid if there is a shortage of labour in specific

industries, such as construction or farming, leading to higher wages to attract workers.​

●​ Furthermore, these workers may receive higher pay when working in hazardous or
physically demanding conditions that require compensation for the risks and discomfort
involved.​

4. Explain two reasons for a change in the amount of tax revenue a

government receives.

●​ Tax revenue may increase when economic growth leads to higher incomes, resulting in
more income tax being collected.​

●​ Conversely, it may decrease during a recession, as unemployment rises and consumer

spending falls, reducing both income and indirect taxes.​

5. Explain the significance of a production point inside a PPC and a

production point on its PPC.
 ●​ A production point inside a PPC indicates underutilization of resources, such as
unemployment or inefficient use of capital.​

●​ In contrast, a point on the PPC signifies maximum productive efficiency, where all
resources are fully and efficiently employed.​

6. Explain, with examples, the difference between a merit good and a public
good.

●​ A merit good, such as education, benefits both the individual and society, but it is
under-consumed in a free market due to lack of awareness or affordability.​

●​ A public good, like street lighting, is non-excludable and non-rivalrous, meaning it can be
used by everyone without reducing its availability to others.​

7. Explain two causes of an increase in the size of a country's labour force.

●​ An increase in labour force size can result from higher birth rates, which provide a larger
future workforce.​

●​ It can also occur due to immigration, as workers move into the country seeking
employment opportunities.​

8. Explain how improved education may affect the demand for cigarettes
and for fresh fruit.

●​ Improved education can reduce the demand for cigarettes by raising awareness about
their harmful health effects.​

●​ At the same time, it may increase demand for fresh fruit, as people become more
conscious of the benefits of healthy eating.​

9. Explain how a subsidy can correct market failure.

●​ A subsidy can correct market failure by lowering the price of goods with positive
externalities, such as education or public transport.​

●​ This increases consumption and production to a socially optimal level, addressing

underconsumption or underproduction.​
10. Explain two consequences to firms of unemployment.

●​ Unemployment can reduce firms' sales revenue as consumers have less disposable
income to spend on goods and services.​

●​ However, it may also lower firms' production costs as an excess supply of labour can
result in lower wages.​

11. Explain two challenges facing small firms.

●​ Small firms often face difficulty in accessing finance, as banks may perceive them as
higher-risk borrowers.​

●​ Additionally, they struggle to compete with larger firms due to limited economies of scale
and weaker market presence.​

12. Explain two consequences of deflation.

●​ Deflation can lead to lower consumer spending as people delay purchases in

anticipation of further price drops, reducing firms' profits.​

●​ It can also increase the real burden of debt, as the value of money rises, making it
harder for borrowers to repay loans.​

13. Explain two reasons why the value of a country's exports may be
greater than the value of its imports.

●​ A country's exports may exceed its imports if it has a comparative advantage in

producing certain goods, making its products more competitive internationally.​

●​ Additionally, strong global demand for the country’s primary exports, such as oil or
manufactured goods, can contribute to a trade surplus.​

14. Explain two ways a government could decrease the consumption of

demerit goods.

●​ A government can impose higher taxes on demerit goods, such as cigarettes, making
them more expensive and reducing demand.​
 ●​ It can also run public awareness campaigns to educate people about the harmful effects
of consuming such goods.​

15. Explain the difference between absolute poverty and relative poverty.

●​ Absolute poverty refers to a lack of basic necessities, such as food, shelter, and water,
essential for survival.​

●​ Relative poverty occurs when individuals earn significantly less than the average income
in their society, limiting their ability to participate fully in social and economic activities.​

16. Explain how an increase in a worker's income can affect their mobility
of labour.

●​ An increase in income may improve labour mobility by enabling workers to afford

relocation costs for better job opportunities.​

●​ It can also finance further education or training, enhancing their employability in different
sectors or regions.

17. Explain two functions a central bank performs for its government.

●​ A central bank acts as a lender of last resort, providing emergency funding to the
government in times of financial crises.​

●​ It also manages the country’s monetary policy by controlling inflation and stabilising
the economy through interest rate adjustments.​

18. Explain why demand for soap is more price inelastic than demand for a
luxury brand of perfume.

●​ Demand for soap is more price inelastic because it is a necessity, and consumers
cannot easily reduce usage regardless of price changes.​

●​ In contrast, luxury perfume is a non-essential item, making its demand more sensitive
to price fluctuations due to the availability of substitutes and discretionary nature of the
purchase.​

19. Explain two reasons why a country’s foreign exchange rate may
depreciate.
 ●​ A foreign exchange rate may fall if imports rise significantly, increasing demand for
foreign currencies and the supply of domestic currency in global markets.​

●​ It may also depreciate due to a fall in investor confidence, causing foreign investors to
withdraw capital, decreasing demand for the domestic currency.​

20. Explain two ways a government could increase the consumption of

merit goods.

●​ The government can directly subsidise merit goods such as education or healthcare,
lowering their cost to consumers and encouraging higher consumption.​

●​ It can also provide public information campaigns to raise awareness about the
benefits of merit goods, leading to more informed consumption decisions.​

21. Explain two consequences to firms of inflation.

●​ Inflation can increase production costs, especially if raw material or wage costs rise
faster than the selling price of goods, squeezing profit margins.​

●​ It can also create uncertainty in planning, making it harder for firms to forecast costs,
revenues, and investment returns, potentially reducing business confidence.​

22. Explain two causes of cost-push inflation.

●​ One cause is a rise in wages, especially if not matched by productivity, which increases
the cost of production and is passed on as higher prices.​

●​ Another cause is an increase in raw material prices, such as oil, which raises transport
and manufacturing costs across many sectors.​

23. Explain two reasons why governments spend on infrastructure.

●​ Governments spend on infrastructure to stimulate economic growth by improving

transport, communication, and utilities, which attract investment.​

●​ It also helps to reduce unemployment by creating jobs in construction and related

industries during project execution.​
24. Explain two factors that can lead to a fall in consumer spending.

●​ A rise in interest rates makes borrowing more expensive and encourages saving,
reducing the incentive to spend.​

●​ A fall in consumer confidence due to uncertainty or recession can lead households to

postpone or cut back on non-essential purchases.​

25. Explain two ways in which a fall in interest rates might affect
consumers.

●​ A fall in interest rates reduces the cost of borrowing, making it cheaper for consumers
to take loans for purchasing goods like houses or cars, which can increase consumption.​

●​ It also leads to lower returns on savings, which may discourage saving and encourage
current spending instead, boosting demand in the economy.​

26. Explain two reasons why a fall in birth rate may concern a government.

●​ A falling birth rate can result in a shrinking future workforce, leading to potential labour
shortages and lower economic productivity in the long run.​

●​ It can also increase the dependency ratio, as fewer working-age individuals support a
growing elderly population, putting pressure on pension systems and public healthcare.​

27. Explain two ways in which a firm may increase labour productivity.

●​ A firm can invest in employee training, which improves skills and efficiency, leading to
more output per worker.​

●​ It can also upgrade to better machinery or technology, allowing workers to produce

more in less time, thus raising productivity.​

28. Explain two reasons why people may be occupationally immobile.

●​ Individuals may lack the skills or qualifications required for jobs in other industries,
making it difficult to switch occupations.​
 ●​ Personal or family commitments may also prevent retraining or relocation, limiting the
ability to change jobs despite unemployment.​

29. Explain two effects of economic growth on a country’s environment.

●​ Economic growth often leads to higher levels of industrial activity, which can increase
pollution and contribute to environmental degradation.​

●​ It may also result in overexploitation of natural resources, such as deforestation or

fossil fuel use, reducing long-term sustainability.​

30. Explain two reasons why countries trade with each other.

●​ Countries trade to benefit from comparative advantage, allowing them to specialise in

goods they produce efficiently and import others.​

●​ Trade also allows access to a greater variety of goods and services, improving
consumer choice and standard of living.

6 - Markers
1. Analyse the economies of scale a school may gain from an increase in
its size.

Economies of scale refer to cost advantages that a firm, or in this case, a school, experiences
as it increases its scale of operations. A larger school may benefit from technical economies of
scale by utilizing advanced teaching technologies and specialized facilities, such as
laboratories, sports centers, or IT systems, more effectively, lowering the average cost per
student. For instance, the cost of maintaining a science lab is spread over a larger number of
students in a bigger school. The school may also benefit from managerial economies of scale
by hiring specialized staff, such as curriculum planners or career counselors, who improve the
quality of education and resource utilization. Bulk purchasing of supplies like textbooks,
stationery, and uniforms can result in purchasing economies of scale due to discounts from
suppliers. Furthermore, financial economies of scale may arise, as a larger school is likely to
have better credit ratings, making it easier to secure loans at lower interest rates for expansion
or improvement projects. These cost advantages help the school to improve efficiency, lower
fees, or invest in better resources, contributing to its long-term sustainability.
2. Analyse how fiscal policy can increase employment.

Fiscal policy involves government spending and taxation to influence economic activity. An
increase in government spending on infrastructure projects, such as building roads or schools,
creates direct employment opportunities in construction and related industries. This increased
spending also has a multiplier effect, as workers earn wages and spend more on goods and
services, boosting demand and creating additional jobs in retail and other sectors. Reducing
taxes, particularly income taxes, can increase disposable income for households, encouraging
higher consumer spending. Businesses respond to increased demand by hiring more workers to
expand production. Similarly, cutting corporate taxes reduces costs for firms, enabling them to
invest in expansion and hire more employees. These measures shift aggregate demand to the
right, reducing unemployment, especially in a recessionary period. However, the effectiveness
of fiscal policy depends on factors such as the size of the multiplier, the level of spare capacity
in the economy, and the time lag between implementation and impact.

3. Analyse the reasons why the price elasticity of demand for one brand of
luxury chocolates is likely to be different from that of salt.

The price elasticity of demand (PED) measures how responsive quantity demanded is to
changes in price. Luxury chocolates tend to have elastic demand because they are
non-essential items with several substitutes available. Consumers are likely to switch to other
brands or forego luxury chocolates altogether if prices rise. Additionally, the proportion of
income spent on luxury chocolates is relatively high compared to necessities, making
consumers more price-sensitive. In contrast, salt has inelastic demand because it is a necessity
with few or no close substitutes. The proportion of income spent on salt is minimal, so a price
increase has little impact on consumption. Moreover, salt is required for daily use in cooking,
making it essential regardless of price changes. These factors explain why the PED for luxury
chocolates is higher than for salt.

4. Analyse why a country's exports may decrease.

A country's exports may decrease due to several factors. Firstly, an appreciation of the domestic
currency increases the price of exports in foreign markets, reducing their competitiveness.
Foreign consumers may switch to cheaper alternatives from other countries. Secondly, a decline
in global demand for the country's key export products can occur due to economic recessions in
trading partner nations. For example, a fall in demand for oil during a global slowdown directly
impacts oil-exporting countries. Thirdly, protectionist measures like tariffs or quotas imposed by
trading partners make exports more expensive and less attractive. Additionally, rising production
costs, such as higher wages or energy prices, can increase the price of exported goods, making
them less competitive.

5. Analyse the causes of an increase in a government's tax revenue.

Government tax revenue increases when the economy grows, leading to higher incomes and
spending. Economic growth raises employment levels and wages, which increases income tax
collections. Similarly, higher consumer spending boosts sales taxes, such as VAT or GST. Tax
revenue also rises when governments raise tax rates or introduce new taxes, provided the
changes do not discourage economic activity. For example, a higher corporate tax rate can
increase revenue from businesses. Furthermore, improved tax collection methods, such as
stricter enforcement and reducing tax evasion, increase revenue. Inflation may also contribute
to higher tax revenue as nominal incomes and prices rise, even without changes to tax rates.

6. Analyse how an increase in labour productivity in a country can increase

a surplus on the current account of its balance of payments.

An increase in labour productivity means workers produce more output per hour worked,
reducing the cost of production. Lower production costs make domestic goods more competitive
in international markets, boosting exports. Increased export revenue contributes positively to the
current account, leading to a surplus. Additionally, higher productivity can reduce reliance on
imports, as domestic industries become more efficient and capable of meeting local demand.
For instance, if a country’s agricultural productivity improves, it can reduce food imports,
improving the trade balance. Furthermore, the surplus is reinforced as foreign investors become
more attracted to the efficient economy, potentially increasing foreign income inflows through
investments and services exports.

7. Analyse how an increase in government spending could increase life

expectancy.

Government spending on healthcare infrastructure, such as hospitals, clinics, and medical

equipment, improves access to quality healthcare services. This ensures early detection and
treatment of diseases, contributing to longer life expectancy. Spending on education promotes
awareness of health practices, such as proper nutrition and hygiene, which reduce the
incidence of preventable diseases. Investments in clean water and sanitation infrastructure
further improve public health, lowering mortality rates. Additionally, social programs like
pensions and subsidies for essential goods improve living standards, especially for vulnerable
groups, indirectly extending life expectancy. Improved healthcare accessibility and living
conditions collectively enhance the overall health of the population.

8. Analyse why someone who has been unemployed for more than a year
may not get another job.

Long-term unemployment often leads to skill depreciation, as individuals lose touch with
industry practices and new technologies. Employers may prefer candidates with up-to-date
skills, leaving long-term unemployed individuals at a disadvantage. The stigma of long-term
unemployment can also deter employers, who may perceive such individuals as less motivated
or productive. Additionally, psychological effects like loss of confidence can impair performance
in interviews, further reducing job prospects. Moreover, structural unemployment may occur if
the individual’s skills no longer align with the jobs available due to changes in the economy,
such as automation or shifts in demand.

9. Analyse, using a production possibility curve (PPC) diagram, the effect

of advances in technology on an economy.

Advances in technology increase the productive capacity of an economy by making production

more efficient. This is represented by an outward shift of the PPC, showing that more goods and
services can be produced with the same resources. For example, new machinery in agriculture
can increase the output of food without requiring additional labour or land. Similarly,
technological advancements in manufacturing may lower costs and improve productivity. The
outward shift reflects economic growth and indicates that the economy can achieve a higher
standard of living, provided resources are efficiently allocated and fully utilized.

📊 PPC Diagram:​
10. Analyse how tax cuts could increase exports.

Tax cuts increase disposable income for consumers and reduce costs for businesses. Lower
corporate taxes allow firms to reinvest in technology, production processes, or workforce
development, improving the quality and competitiveness of exports. Increased disposable
income may lead to higher domestic consumption, driving economies of scale for businesses.
Larger production volumes reduce average costs, enabling firms to offer lower prices in
international markets, boosting export demand. Additionally, tax cuts can attract foreign
investment, strengthening industries that produce exportable goods and improving trade
balance.

11. Analyse, using a demand and supply diagram, how a rise in income
may affect the market for gold.

A rise in income increases consumers’ purchasing power, leading to higher demand for luxury
goods like gold. This is represented by a rightward shift in the demand curve, causing an
increase in the price and quantity of gold traded in the market. Gold is often considered a luxury
good, meaning its demand is income elastic. As income rises, a proportionately larger amount
of income is spent on gold for investment or jewellery purposes. The increase in price
incentivizes suppliers to expand production or release more gold into the market.

12. Analyse why children from low-income families may have low incomes
as adults.

Children from low-income families often face limited access to quality education and healthcare.
Poor educational attainment restricts their opportunities to acquire skills needed for
higher-paying jobs. They may also experience malnutrition, affecting cognitive development and
productivity as adults. Social mobility is further constrained by a lack of networks and resources,
limiting their ability to access better job opportunities. Additionally, low-income families may
prioritize immediate work over education, perpetuating a cycle of low earnings. Without targeted
interventions, such as scholarships or skills training, this pattern is likely to persist.

13. Analyse how an increase in income tax can affect a country's inflation
rate.

An increase in income tax reduces disposable income for households, leading to lower
consumer spending. This decrease in aggregate demand can reduce demand-pull inflation, as
firms face less pressure to increase prices due to lower demand for goods and services.
Additionally, higher income taxes can discourage spending and encourage savings, further
dampening inflationary pressures. However, if firms face higher taxes and pass these costs onto
consumers through higher prices, it may lead to cost-push inflation. The overall impact on
inflation depends on the balance between reduced consumer demand and potential increases in
production costs. In most cases, higher income taxes are more likely to reduce inflation by
curbing aggregate demand.

14. Analyse why workers may join a trade union.

Workers join trade unions to collectively bargain for better wages, improved working conditions,
and job security. A union provides a stronger voice for workers, making employers more likely to
address their concerns than they would for individual employees. Unions also offer protection
against unfair treatment, such as wrongful dismissal or discrimination, and provide legal support
in disputes with employers. Furthermore, they negotiate for additional benefits, such as
pensions, healthcare, and training programs, which enhance workers’ overall welfare. By joining
a trade union, workers gain collective power, which increases their ability to influence decisions
that affect their working lives.

15. Analyse, using a demand and supply diagram, how a greater awareness
of the health benefits of eating fruit will affect the market for fruit.

Greater awareness of the health benefits of eating fruit increases consumer demand, shifting
the demand curve for fruit to the right. This leads to a rise in both the equilibrium price and
quantity of fruit traded in the market. The higher price incentivizes farmers and suppliers to
produce and supply more fruit, as it becomes more profitable. However, if supply cannot quickly
meet the increased demand due to factors like seasonal constraints, the price may rise
significantly in the short term. Over time, increased awareness may lead to investments in
agriculture, boosting fruit production and stabilising prices.

16. Analyse why a government may have lower unemployment as its main
aim.
Lower unemployment reduces poverty and improves living standards, which are key objectives
for most governments. High employment levels ensure that more people earn incomes,
reducing the need for welfare payments and increasing tax revenue for the government.
Moreover, lower unemployment promotes economic stability by maintaining consumer spending
and supporting aggregate demand. It also reduces social issues such as crime and inequality,
which are often linked to high unemployment rates. A government prioritising low unemployment
can achieve higher productivity, economic growth, and improved social cohesion, making it a
critical macroeconomic objective.

17. Analyse, using a demand and supply diagram, how an increase in

income will affect the market for a luxury brand of perfume.

An increase in income raises consumers’ purchasing power, particularly for luxury goods like
perfume. The demand curve shifts to the right as more consumers can afford higher-priced
perfumes, increasing the equilibrium price and quantity. Since luxury perfumes are income
elastic, their demand rises proportionately more than the increase in income. This creates
opportunities for producers to expand their supply, although the price increase may be limited if
supply can quickly adjust to meet higher demand. In the long run, consistent income growth
may lead to market expansion and innovation within the luxury perfume industry.

18. Analyse how a multinational corporation (MNC) could reduce poverty in

a host country.

An MNC can reduce poverty by creating direct employment opportunities for local workers, often
offering wages higher than those in domestic firms. This provides individuals with a stable
income, improving living standards. MNCs also stimulate economic activity by sourcing raw
materials and services locally, benefiting small and medium-sized businesses. They may invest
in infrastructure, such as roads or utilities, which improves accessibility and economic
development in the host country. Furthermore, MNCs can provide training and skill
development, increasing workers’ employability and long-term earning potential. These
contributions collectively reduce poverty levels and foster sustainable growth.

19. Analyse how the level and pattern of household spending may change
when GDP decreases.

When GDP decreases, household incomes are likely to fall, leading to a reduction in overall
spending. The pattern of spending shifts toward cheaper substitutes and generic brands, as
households seek to maximise utility within tighter budgets. Demand for durable goods, such as
cars or appliances, may decline significantly, as these are often postponed during economic
downturns. Households may prioritise essentials like food and housing while reducing
discretionary spending on luxury goods, travel, and entertainment. This change in spending
behaviour reflects consumer caution and an emphasis on saving, as households prepare for
uncertain economic conditions.
20. Analyse how an increase in government spending could reduce
unemployment.

An increase in government spending, particularly on infrastructure and public services, creates

jobs directly and indirectly by stimulating demand in the economy. This can reduce
unemployment, especially during economic downturns. Higher government spending also
improves business confidence, encouraging private sector investment and job creation.
However, the effectiveness of government spending depends on how it is financed. If funded by
higher taxes or borrowing, it may crowd out private sector investment, reducing its impact on
employment. Additionally, poorly targeted spending may not address structural unemployment,
where workers’ skills do not match available jobs. A balanced and strategic approach is
necessary for sustained reductions in unemployment.

21. Analyse, using a demand and supply diagram, how a greater awareness
of the health benefits of eating fruit will affect the market for fruit.

Greater awareness of the health benefits of eating fruit increases consumer demand, shifting
the demand curve for fruit to the right. This leads to a rise in both the equilibrium price and
quantity of fruit traded in the market. The higher price incentivizes farmers and suppliers to
produce and supply more fruit, as it becomes more profitable. However, if supply cannot quickly
meet the increased demand due to factors like seasonal constraints, the price may rise
significantly in the short term. Over time, increased awareness may lead to investments in
agriculture, boosting fruit production and stabilising prices.

22. Analyse why a government may have lower unemployment as its main
aim.

Lower unemployment reduces poverty and improves living standards, which are key objectives
for most governments. High employment levels ensure that more people earn incomes,
reducing the need for welfare payments and increasing tax revenue for the government.
Moreover, lower unemployment promotes economic stability by maintaining consumer spending
and supporting aggregate demand. It also reduces social issues such as crime and inequality,
which are often linked to high unemployment rates. A government prioritising low unemployment
can achieve higher productivity, economic growth, and improved social cohesion, making it a
critical macroeconomic objective.

23. Analyse, using a demand and supply diagram, how an increase in

income will affect the market for a luxury brand of perfume.

An increase in income raises consumers’ purchasing power, particularly for luxury goods like
perfume. The demand curve shifts to the right as more consumers can afford higher-priced
perfumes, increasing the equilibrium price and quantity. Since luxury perfumes are income
elastic, their demand rises proportionately more than the increase in income. This creates
opportunities for producers to expand their supply, although the price increase may be limited if
supply can quickly adjust to meet higher demand. In the long run, consistent income growth
may lead to market expansion and innovation within the luxury perfume industry.

24. Analyse how a multinational corporation (MNC) could reduce poverty in

a host country.

An MNC can reduce poverty by creating direct employment opportunities for local workers, often
offering wages higher than those in domestic firms. This provides individuals with a stable
income, improving living standards. MNCs also stimulate economic activity by sourcing raw
materials and services locally, benefiting small and medium-sized businesses. They may invest
in infrastructure, such as roads or utilities, which improves accessibility and economic
development in the host country. Furthermore, MNCs can provide training and skill
development, increasing workers’ employability and long-term earning potential. These
contributions collectively reduce poverty levels and foster sustainable growth.

25. Analyse how the level and pattern of household spending may change
when GDP decreases.

When GDP decreases, household incomes are likely to fall, leading to a reduction in overall
spending. The pattern of spending shifts toward cheaper substitutes and generic brands, as
households seek to maximise utility within tighter budgets. Demand for durable goods, such as
cars or appliances, may decline significantly, as these are often postponed during economic
downturns. Households may prioritise essentials like food and housing while reducing
discretionary spending on luxury goods, travel, and entertainment. This change in spending
behaviour reflects consumer caution and an emphasis on saving, as households prepare for
uncertain economic conditions.

8 - Markers
1. Discuss whether or not the discovery of oil in a country will benefit its
economy.

The discovery of oil can significantly benefit a country's economy by boosting its GDP and
improving the current account through increased export revenue. This influx of foreign
exchange can help the government invest in long-term development projects such as
infrastructure, education, and healthcare. For firms, the oil industry generates strong backward
and forward linkages, creating opportunities in sectors like refining, petrochemicals, and
transport. Employment also increases as both skilled and unskilled workers are hired in
extraction, construction, and distribution. With higher national income, households may enjoy
better public services and higher standards of living. Moreover, strong export performance can
lead to a stronger currency, reducing import costs for capital goods and inputs required in
other industries.

However, relying heavily on oil may expose the economy to significant vulnerabilities,
especially due to price volatility in international markets. A fall in global oil prices can sharply
reduce export earnings, leading to macroeconomic instability. Oil dependence may also
discourage investment in other productive sectors — a phenomenon known as Dutch Disease,
where a booming resource sector leads to the decline of manufacturing or agriculture.
Environmental damage from oil extraction can hurt long-term sustainability and lead to negative
externalities such as pollution. Furthermore, if oil revenues are poorly managed or
concentrated in the hands of a few, it can worsen income inequality and fuel corruption. Over
time, the shift towards renewable energy globally may also reduce demand for oil, making such
a discovery less economically viable in the long term.

2. Discuss whether or not a country should import most of the food it

consumes.

Importing most of its food allows a country to take advantage of global agricultural efficiency and
reduce domestic costs by sourcing from lower-cost producers. This practice enables countries
to focus their land, labour, and capital on industries where they hold a comparative advantage,
increasing economic efficiency and potentially raising national income. For consumers,
especially in urban centres, food imports improve access to a wider variety of goods, including
off-season fruits, specialty products, and culturally diverse items. If imports are cheaper,
households — particularly low-income families — benefit from lower prices, improving food
affordability and nutritional intake. It also reduces the need for domestic agricultural subsidies,
freeing up government resources for health, education, or infrastructure. Additionally, importing
food can reduce pressure on limited natural resources like water and arable land, supporting
environmental sustainability in resource-scarce regions.

However, heavy dependence on food imports raises serious concerns about food security and
economic vulnerability. In times of global crises — such as pandemics, wars, or climate
disasters — international supply chains can be disrupted, causing food shortages and price
spikes that hurt consumers, particularly the poor. If local agriculture is neglected in favour of
cheaper imports, farmers may lose their livelihoods, rural unemployment may rise, and
rural-to-urban migration could intensify, putting pressure on urban infrastructure and services. A
weakened domestic farming sector also undermines a nation’s resilience and self-sufficiency,
especially in emergencies. Strategic crops, such as grains or staples, may become subject to
foreign trade policies, making the country vulnerable to export bans or political manipulation.
Moreover, food imports contribute to trade imbalances if not matched by equivalent exports. In
the long run, sustainable food policy should balance imports with the development of a
productive, climate-resilient domestic agriculture sector.

3. Discuss whether or not a government should provide free fruit to

consumers.
Providing free fruit to consumers, especially through schools, hospitals, and public food
schemes, can greatly improve public health outcomes and reduce long-term healthcare costs.
By encouraging healthier eating habits, particularly among children and low-income groups,
governments can address malnutrition, obesity, and lifestyle-related diseases such as diabetes
and cardiovascular problems. These health improvements translate to higher labour productivity,
fewer sick days, and lower public spending on chronic illness treatment. Free fruit programmes
can also support domestic farmers if governments source produce locally, thus boosting rural
incomes and creating demand for agricultural labour. From a welfare standpoint, universal or
targeted provision of nutritious food reduces inequality and shows a strong government
commitment to social protection and human capital development. In urban areas, where fruit
prices are often high, this policy helps marginalised groups access the same quality of nutrition
as the affluent, narrowing health disparities.

However, giving away fruit to the general population may lead to excessive government
expenditure, especially in middle- and low-income countries with constrained budgets. These
funds might otherwise be used for essential services like public transport, sanitation, or
education, which may deliver broader developmental benefits. Universal provision may also
lead to wastage if recipients do not consume the fruit, especially if preferences and perishability
are not considered. Over time, free fruit schemes can distort market dynamics, reducing sales
for private vendors and discouraging competition in the agricultural retail sector. This may harm
small retailers and traders who depend on fruit sales for income. Additionally, such programmes
are susceptible to corruption, misallocation, and logistical inefficiencies. A better alternative may
be to offer fruit vouchers or subsidies targeted specifically at vulnerable populations or to invest
in awareness campaigns that shift dietary behaviour while preserving market incentives and
efficiency.

4. Discuss whether or not having a high proportion of a country's

population over the age of 64 is a benefit to its economy.

A larger elderly population can offer economic and social advantages in specific sectors. Older
individuals create sustained demand for healthcare services, pharmaceuticals, and
age-specific housing and leisure industries. This stimulates growth in the tertiary sector,
leading to increased employment opportunities, especially for caregivers, nurses, and hospitality
staff. Elderly citizens who are financially stable often have accumulated savings and assets,
allowing them to support consumption and investment even in retirement. Many contribute
through volunteer work or part-time employment, reducing the burden on state resources and
preserving social capital. In some cases, their continued economic participation can mitigate the
effects of a shrinking workforce. Their presence also helps foster multi-generational households,
which can reduce childcare costs for younger families and promote intergenerational knowledge
transfer, strengthening social cohesion.

Despite these benefits, a high proportion of elderly people generally increases the dependency
ratio, putting financial pressure on the working-age population. Governments are forced to
divert significant funds to pensions, public healthcare, and social services, increasing
opportunity costs and potentially requiring higher direct taxes or borrowing. A shrinking
labour force may cause labour shortages, reducing productivity and slowing economic
growth, especially in sectors requiring physical work or digital skills. Additionally, fewer workers
mean less aggregate demand for some goods and services, weakening business investment.
Over time, if absolute poverty among the elderly rises due to inadequate pensions,
governments may face rising inequality and social unrest. This demographic shift can also limit
innovation and economic dynamism, which are often driven by younger, mobile workers.

5. Discuss whether or not a government should encourage firms to merge.

Mergers can result in significant economies of scale, where average costs fall as production
increases, allowing firms to lower prices for consumers or increase profits. Larger firms may
benefit from technical economies, such as investing in better machinery, and managerial
economies, by hiring specialised staff. These efficiency gains can boost international
competitiveness and lead to increased exports, strengthening the current account. Mergers
may also enable firms to pool resources for research and development, fostering innovation
and improving product quality. From the government’s perspective, encouraging mergers in
industries like infrastructure or banking can create national champions with the financial clout to
undertake major investments and stabilise employment in key sectors.

However, encouraging too many mergers can reduce market competition, leading to
monopoly power and higher prices for consumers in the long run. Reduced competition may
decrease the incentive for firms to be efficient or innovative, which harms productivity and
dynamic efficiency. Mergers often result in redundancies, as firms eliminate overlapping
departments, increasing frictional unemployment in the short term. There’s also the risk that
merged firms may become “too big to fail,” increasing the risk of moral hazard and pressuring
governments to bail them out during downturns. Additionally, large corporations may use their
influence to shape regulations in their favour, creating barriers to entry for smaller competitors.
Governments must carefully assess whether the benefits of any merger outweigh the potential
costs to consumers and market fairness.

6. Discuss whether or not a rise in a country's foreign exchange rate would

benefit its economy.

An increase in the exchange rate (appreciation of the domestic currency) reduces the cost of
imported goods and raw materials, benefiting both firms and consumers. Lower import prices
can reduce cost-push inflation, especially in countries reliant on imported energy, machinery,
or intermediate goods. For households, this improves real incomes as they can afford more
with the same amount of money, increasing consumer surplus. Importing capital goods at
cheaper rates can help firms modernise, boosting capital productivity and long-term growth. A
strong currency also boosts investor confidence, making it easier to attract foreign direct
investment (FDI) in non-export sectors like real estate, education, or IT services.
However, an appreciation makes exports more expensive in global markets, reducing demand
for domestic goods abroad and potentially worsening the trade balance. This hurts exporters,
particularly in price-sensitive industries like textiles or agriculture, leading to falling revenues and
possible job losses. If firms lay off workers in response, cyclical unemployment may rise,
especially in export-dominated regions. A prolonged exchange rate rise may also discourage
tourism, as foreign visitors find the country more expensive. Over time, reduced external
demand can lead to lower aggregate demand, slowing GDP growth and harming small firms
dependent on global customers. Thus, while a strong exchange rate benefits some
stakeholders, it can disadvantage others, particularly export-oriented businesses and workers.

7. Discuss why some countries may experience lower inflation in the future
and some may not.

Some countries may experience lower inflation in the future due to effective monetary policy
and sound fiscal discipline. Central banks that maintain inflation targeting and adjust interest
rates proactively can manage demand-pull inflation, preventing the economy from
overheating. Advances in technology and improvements in labour productivity also reduce
cost-push inflation by lowering unit costs and increasing supply. Countries that invest in
infrastructure and efficient logistics can reduce bottlenecks and make production more
cost-effective. If a country has a strong currency, imported goods — especially oil and raw
materials — become cheaper, which helps stabilise domestic prices. In addition, if aggregate
demand grows at a sustainable pace, price pressures remain contained, supporting low and
stable inflation.

In contrast, some countries may continue to experience high or rising inflation due to structural
weaknesses in their economies. Excessive government borrowing to fund public spending can
lead to demand-pull inflation, especially if the economy is operating near full capacity. Weak
currencies make imports more expensive, contributing to imported inflation, particularly in
developing countries that rely on foreign energy and food. Political instability or supply-side
shocks — like droughts, war, or pandemic-related disruptions — can constrain supply, triggering
cost-push inflation. Moreover, if monetary authorities lack independence or credibility, they
may fail to control inflation expectations, causing businesses and consumers to anticipate
further price hikes and adjust their behaviour accordingly. Countries with underdeveloped
infrastructure or energy shortages may also face chronic inflationary pressures due to persistent
inefficiencies.

8. Discuss whether or not an increase in unemployment benefit payments

would reduce poverty.

Raising unemployment benefits can reduce absolute poverty by ensuring individuals who lose
their jobs can still afford basic necessities such as food, housing, and healthcare. It acts as a
safety net, especially during periods of cyclical unemployment or recessions, preventing
sudden drops in living standards. Higher benefits increase disposable income, allowing the
unemployed to continue participating in the economy, which supports demand and reduces the
risk of long-term exclusion. The funds received may also allow individuals time to seek suitable
employment or invest in training and education, enhancing labour mobility and improving
long-term employability. For families with children, enhanced benefits reduce child poverty,
which has lasting effects on health and educational outcomes.

However, if unemployment benefits are too generous or poorly targeted, they can reduce the
incentive to work, potentially increasing frictional or voluntary unemployment. This may lead
to dependency on welfare and reduce the urgency with which individuals seek jobs. From a
fiscal perspective, high benefit payments increase public spending, leading to opportunity
costs — resources that could have been spent on infrastructure, education, or reducing public
debt. If financed through higher taxes or borrowing, it can also have negative effects on
investment and business confidence. Moreover, in economies with informal labour markets,
benefits may not reach those most in need, undermining the effectiveness of such policies in
tackling relative poverty. For maximum impact, benefit increases should be paired with active
labour market policies such as job training, career counselling, and employment services.

9. Discuss whether or not an increase in government spending will reduce

unemployment.

Increased government spending, particularly on infrastructure, education, and healthcare, can

create direct and indirect employment. When the government builds roads, schools, or
hospitals, it hires construction workers, engineers, and service staff, generating immediate jobs.
This increased demand stimulates further job creation through the multiplier effect, where
wages earned are spent on goods and services, leading to higher aggregate demand and job
growth in retail, manufacturing, and services. Government spending can also boost human
capital — for instance, investing in vocational training helps reduce structural unemployment
by equipping workers with relevant skills. In times of recession or cyclical unemployment,
government expenditure is a key tool in Keynesian economics to stabilise the economy and
boost confidence.

Nevertheless, the effectiveness of increased spending depends on how it is financed and where
it is allocated. If funded through borrowing, it may lead to higher interest rates in the long run,
crowding out private investment and dampening job creation. Poorly targeted spending can also
result in inefficiencies or corruption, generating limited employment impact. Furthermore,
government jobs may be temporary or focused on low-productivity sectors, leading to
unsustainable employment gains. If increased spending occurs when the economy is already
near full capacity, it may cause demand-pull inflation without significantly reducing
unemployment. Long-term solutions require structural reforms to improve labour market
flexibility, reduce skill mismatches, and support private sector job growth, which is more
sustainable than relying solely on government intervention.

10. Discuss whether or not a current account deficit on its balance of

payments harms an economy.
A current account deficit occurs when a country imports more goods, services, and capital
than it exports. This can signal strong domestic demand and rising living standards, especially
if households and firms are importing capital goods or intermediate inputs to boost productivity.
If the deficit is funded by stable foreign direct investment (FDI) or long-term capital inflows, it
may not be harmful and can even support economic growth. In developing economies, deficits
may reflect high investment needs and a growing economy. For consumers, access to foreign
goods expands choice and keeps prices competitive. In the short run, the private sector may
benefit from access to better technology and inputs that can improve efficiency and stimulate
innovation.

However, persistent and widening current account deficits can be damaging, particularly if they
are financed by short-term or speculative capital, which may flee the country in times of
instability. Large deficits may indicate a loss of competitiveness, where domestic firms struggle
to export due to high costs or low productivity. This weakens the exchange rate, potentially
causing imported inflation as the price of foreign goods rises. If confidence in the economy
falls, the currency may depreciate sharply, triggering capital flight and economic crises.
Governments may be forced to use foreign reserves or raise interest rates, both of which carry
significant opportunity costs. In the long term, continued borrowing to fund the deficit
increases external debt, potentially leading to higher debt servicing burdens and reduced policy
flexibility.

11. Discuss whether or not a national minimum wage will reduce poverty.

A national minimum wage sets a legal floor on wages and can lift workers out of absolute
poverty, especially in low-wage sectors like retail or hospitality. It guarantees a minimum
standard of living and reduces exploitation, particularly for vulnerable groups like women, young
workers, or migrants. For the economy, higher incomes among low earners tend to increase
marginal propensity to consume, stimulating demand for basic goods and services and
possibly creating more jobs. By reducing income inequality, it can strengthen social cohesion
and reduce dependence on welfare schemes. In the long run, it may also incentivise firms to
invest in training and improve labour productivity, knowing that they are paying more for each
worker.

However, if the minimum wage is set above the market equilibrium, it can cause real wage
unemployment, especially among young or low-skilled workers whose productivity may not
match the mandated pay. Firms facing higher labour costs may cut back on hiring, substitute
labour with capital (automation), or raise prices, contributing to cost-push inflation. In export
industries, this can erode price competitiveness, potentially worsening the trade balance. For
small businesses operating on tight margins, the increased wage bill can lead to closures or
reduced working hours. In economies with large informal sectors, a legal minimum wage may
not even be enforceable, leading to labour market segmentation where informal workers
remain underpaid. Therefore, while it can reduce poverty if carefully implemented, its success
depends on being set at an economically sustainable level.
12. Discuss whether or not governments should aim for a high rate of
economic growth.

High economic growth raises national income, creating more jobs and improving living
standards. Growth increases tax revenue without raising tax rates, giving governments more
resources to invest in public services such as healthcare, education, and infrastructure.
Households benefit from higher real GDP per capita, which often translates to better housing,
nutrition, and access to consumer goods. For firms, a growing economy means higher demand
for their products, incentivising investment and innovation. With rising profits and expansion, job
creation follows, reducing cyclical unemployment and boosting aggregate demand. A high
growth rate also helps countries reduce their debt-to-GDP ratio, enhancing fiscal sustainability
over time.

Nevertheless, pursuing growth at all costs can have harmful consequences. Rapid expansion
can strain resources, leading to negative externalities such as pollution, traffic congestion, and
depletion of non-renewable resources. If growth is not inclusive, it may widen income
inequality, with the benefits accruing mainly to capital owners and the educated elite. In such
cases, relative poverty may rise even as GDP increases. Additionally, high growth driven by
overconsumption or excessive borrowing can result in demand-pull inflation, creating
instability. In the long run, unregulated growth can cause unsustainable urbanisation, housing
shortages, and rising pressure on infrastructure. Therefore, while governments should
encourage growth, it must be sustainable, inclusive, and balanced with environmental and
social goals.

13. Discuss whether or not tertiary sector workers are paid more than
primary sector workers.

Tertiary sector workers are often paid more because they typically operate in industries requiring
higher skills, education, or specialised training, such as finance, healthcare, and IT. These
roles tend to generate greater value-added per worker and are often located in urban areas
where wages are higher due to cost-of-living adjustments. Tertiary sector jobs are also more
likely to be formalised, offering social security, benefits, and structured pay scales, contributing
to overall wage stability. Moreover, many tertiary industries are capital-intensive or
knowledge-based, meaning workers contribute to innovation, customer service, and product
development, justifying higher compensation. The global shift towards service-based
economies in developed nations further strengthens demand for such workers, increasing their
bargaining power and wages.

However, not all tertiary sector workers are highly paid. Many jobs, such as those in retail,
domestic services, or hospitality, involve low-skilled, low-paid labour, often with limited job
security or benefits. On the other hand, some primary sector workers — particularly in
capital-intensive or high-demand extractive industries like mining, oil, or commercial agriculture
— can earn relatively high wages, especially if they operate in remote or hazardous
environments. Wages in any sector are determined by labour market conditions, productivity,
and union strength. In many developing countries, primary sector employment dominates but is
largely informal and subsistence-based, leading to lower wages. Therefore, while tertiary sector
jobs generally offer higher pay, the disparity depends on the nature of the occupation,
geographic region, and level of development.

14. Discuss whether or not the use of supply-side policy measures will
reduce unemployment.

Supply-side policies aim to improve the productive capacity and efficiency of an economy,
thereby reducing structural and frictional unemployment. Measures such as investing in
education and vocational training can equip workers with relevant skills, making them more
employable and responsive to changes in labour market demand. Cutting taxes on businesses,
reducing red tape, and improving infrastructure can encourage firms to expand, invest, and
create jobs. Deregulation in labour markets can increase flexibility, enabling firms to hire more
easily and adapt to economic cycles. These reforms can also increase aggregate supply,
contributing to long-term economic growth and lower natural rates of unemployment.

However, supply-side policies often take time to show results and may not be effective in
addressing cyclical unemployment, which stems from insufficient demand during economic
downturns. For example, workers may be trained for new roles, but if there are no jobs due to
low demand, unemployment persists. Deregulation or reduced welfare might increase labour
market participation, but without corresponding job creation, it can lead to underemployment or
poor working conditions. Additionally, supply-side reforms can be costly, with uncertain returns
— funding training programmes or tax cuts has significant opportunity costs. These policies
may also disproportionately benefit higher-income groups or large firms, potentially increasing
inequality. Thus, while supply-side measures are vital for long-term labour market health, they
should be balanced with demand-side interventions to address immediate unemployment
concerns.

15. Discuss whether or not a market economic system benefits an

economy.

A market economic system allocates resources through the price mechanism, allowing
supply and demand to determine what is produced, how it is produced, and for whom. This
encourages efficiency, as producers are incentivised to reduce costs, innovate, and respond
quickly to consumer preferences. Firms compete to attract customers, which drives innovation
and improves product quality and variety. Consumers enjoy freedom of choice, and producers
pursue profit, which can stimulate economic growth and attract investment. In theory, resources
flow to their most productive uses, increasing overall allocative and productive efficiency and
leading to better utilisation of scarce resources.

Nevertheless, market economies can suffer from market failure, where certain goods and
services are under- or overprovided. For instance, public goods like national defence or street
lighting may not be produced at all, while merit goods like education and healthcare may be
under-consumed due to lack of affordability. Additionally, income inequality often rises, as
those with capital and education benefit more than unskilled workers. Markets also do not
account for externalities — pollution and environmental degradation may go unchecked.
Without regulation, monopolies can form, reducing competition and harming consumer welfare.
In extreme cases, market-driven outcomes can lead to social exclusion, underprovision of
essential services, and short-termism. Hence, while market systems have clear advantages,
they function best when accompanied by government intervention to correct failures and
promote equity.

16. Discuss whether or not inflation will harm producers.

Moderate inflation can benefit producers in certain contexts. When firms can raise prices in line
with or slightly ahead of their costs, they may enjoy higher profit margins, especially if
consumers do not immediately adjust their purchasing behaviour. In times of rising demand,
mild demand-pull inflation can signal economic growth, which encourages firms to expand
production, invest in new technology, and hire more workers. Inflation may also reduce the real
value of existing debt, making it easier for producers to repay loans taken for capital
investment. This particularly helps small and medium-sized enterprises that operate with
borrowed capital. If wages do not rise as fast as prices, firms may temporarily benefit from lower
real unit labour costs, further supporting profits. Moreover, expected inflation can lead firms to
front-load spending on inputs and inventory, boosting short-term sales across the supply chain.

However, high or unpredictable inflation often harms producers by creating cost uncertainty
and disrupting business planning. In particular, cost-push inflation — caused by rising input
costs such as energy, wages, or raw materials — can squeeze profit margins, especially for
firms with little pricing power in competitive markets. Producers may face difficulties forecasting
future prices or demand, leading to suboptimal investment decisions and underproduction or
overproduction. This can deter long-term investment and innovation. Rapid inflation may also
force frequent price adjustments, increasing administrative costs and damaging customer
relationships. Additionally, inflation reduces consumer purchasing power, which can lead to
lower demand for non-essential goods, especially in the case of durable goods and luxury
items. For exporters, high domestic inflation can make their goods relatively more expensive
abroad, leading to a loss of international competitiveness and declining export revenues. In
extreme cases, high inflation can lead to stagflation, where rising prices and falling output
occur simultaneously, severely undermining business performance.

17. Discuss whether or not the public sector should be responsible for the
supply of all internet services.

If the public sector provides internet services, it can ensure universal access to a critical
modern utility, treating it as a merit good that offers external benefits like education, job
creation, and civic participation. Public provision allows governments to prioritise equity over
profit, ensuring even remote or economically disadvantaged areas are connected. This can
reduce the digital divide, empowering marginalised populations to access online education,
telemedicine, and employment opportunities. By controlling infrastructure, governments can
also ensure data privacy, regulate content, and avoid monopolistic pricing. In rural areas,
where private firms may not find it profitable to operate, public provision may be the only viable
route to inclusive digital development. Moreover, stable and reliable internet infrastructure
contributes to national productivity and resilience during crises, as seen during the COVID-19
pandemic, when online connectivity was essential for continuity in education and work.

However, making the public sector solely responsible for internet services may result in
bureaucratic inefficiency, underinvestment, and a lack of innovation. Governments may face
budget constraints or lack the technical expertise needed to maintain cutting-edge infrastructure
and deliver high-quality service. In contrast, private firms compete for customers,
encouraging cost efficiency, service quality, and rapid adoption of new technologies such as
fibre optics or 5G. If public monopolies dominate, the absence of competition could lead to
complacency, poor service delivery, and delayed upgrades. Public enterprises may also be
vulnerable to political interference, patronage, or misallocation of resources. Additionally, in a
global digital economy, relying solely on public infrastructure could isolate local providers from
global standards and networks. A mixed model, where the public sector ensures minimum
access and regulation while the private sector drives innovation, may offer a more balanced
solution to economic efficiency and equity.

18. Discuss whether or not a very low birth rate would be a cause for
concern for a government.

A very low birth rate can have serious long-term implications for a country’s labour force,
economic growth, and public finances. As fertility rates decline, the working-age population
shrinks relative to the dependent elderly population, leading to a higher dependency ratio.
This places pressure on government budgets, as fewer workers are available to contribute
through taxes while more elderly citizens require pensions, healthcare, and social care. In the
long run, a smaller workforce can result in reduced productive capacity, labour shortages, and
slower innovation. Economic growth may stagnate as domestic demand falls, especially for
housing, education, and family-related goods. Industries like childcare, education, and youth
services may decline, causing job losses. Governments may be forced to increase tax rates or
cut services to fund age-related spending, straining the younger generation. If absolute
poverty rises among pensioners due to inadequate savings, the state may need to increase
redistribution, adding further fiscal stress.

However, some economists argue that a low birth rate could have positive effects, particularly
in densely populated or resource-scarce nations. With fewer children to support, families may
invest more in each child’s education, health, and well-being, raising overall human capital
quality. Smaller populations may reduce pressure on housing, transportation, and the
environment, improving living standards and helping achieve sustainability goals. Lower
fertility can also align with women's empowerment, as more women enter the workforce, raising
labour participation and potentially offsetting population decline. Governments can adopt
policies to mitigate the economic effects of low birth rates, such as raising the retirement age,
increasing female labour force participation, and attracting skilled immigration to replenish
the workforce. In this way, countries can adapt to demographic changes without necessarily
facing economic decline. Whether a low birth rate becomes a problem depends largely on how
governments plan, invest, and structure incentives for long-term resilience.

19. Discuss whether or not a firm will benefit from an increase in its output.

An increase in output can bring significant advantages for a firm, particularly when it enables the
exploitation of economies of scale. As production expands, average costs may fall due to
better utilisation of fixed assets, bulk purchasing of raw materials, and specialisation of labour.
This improves the firm’s profit margins, competitiveness, and pricing power in both domestic
and international markets. A higher output also allows the firm to meet increasing market
demand, strengthen brand presence, and capture a larger market share. With more revenue,
firms can reinvest in research and development, expand distribution, or improve marketing
strategies, leading to long-term growth. Additionally, greater output can give firms bargaining
power over suppliers and access to more favourable financing terms due to improved business
confidence and performance metrics.

However, increased output does not automatically lead to better performance. If the firm
overproduces relative to demand, it may face excess supply, resulting in unsold inventory,
increased storage costs, and eventual losses. This is particularly risky in industries with
inelastic demand, where additional supply does not generate proportionate increases in
revenue. Furthermore, rapid expansion may lead to diseconomies of scale, such as
coordination problems, declining worker morale, or bureaucratic inefficiencies. If the firm must
borrow heavily to finance higher output, it may incur high opportunity costs and debt servicing
burdens. In highly competitive markets, increased output can also provoke aggressive price
competition, reducing profitability for all players. Ultimately, the benefit of increased output
depends on market conditions, cost structure, demand elasticity, and the firm’s ability to manage
growth efficiently.

20. Discuss whether or not a high rate of inflation is harmful to consumers.

A high rate of inflation generally reduces consumer purchasing power, as wages and
incomes may not keep pace with rising prices, especially for fixed-income earners such as
pensioners. As the real value of money falls, households must spend a greater proportion of
their income on essential goods and services, leaving less room for savings or discretionary
spending. Inflation also creates uncertainty, making it difficult for consumers to plan for the
future or invest in long-term goals such as education or housing. For poorer households, who
tend to spend a larger share of their income on necessities like food and energy, inflation is
particularly damaging. Moreover, if cost-push inflation is driven by rising global prices or
supply-side shocks, consumers have little ability to substitute cheaper alternatives, making the
impact unavoidable and deeply felt.

However, moderate inflation can benefit consumers in certain circumstances. For example,
individuals with nominal debts (like fixed-rate home loans) may find that the real burden of
debt decreases over time as inflation erodes the value of repayments. In a growing economy,
mild demand-pull inflation may be accompanied by wage increases and higher employment,
improving consumer confidence and living standards. If inflation encourages spending rather
than hoarding, it can support economic activity and prevent recessions. In some cases,
governments may use indexed benefits or wage agreements to protect vulnerable groups
from price rises. Additionally, inflation that is stable and predictable allows businesses to adjust
prices and wages accordingly, preserving purchasing power. Therefore, while high and volatile
inflation is generally harmful, the effects on consumers depend on its causes, how well incomes
adjust, and whether policy measures are in place to cushion the impact.

1. Discuss whether a rise in indirect taxes will reduce consumption of demerit goods.

A rise in indirect taxes such as excise duties on cigarettes, alcohol, or sugary drinks raises the
final price of these demerit goods, which are known to cause negative externalities like poor
health, increased healthcare costs, and reduced productivity. For individuals, especially those
with limited disposable income, higher prices create a strong disincentive to purchase these
products, particularly when alternatives exist. Households might redirect spending toward merit
goods like healthier food, schooling, or savings, indirectly improving overall welfare. For firms
producing demerit goods, reduced consumer demand may force them to lower output, invest in
alternative products, or improve their production methods to remain competitive. This shift can
contribute to reallocation of resources in the economy. The government benefits in two ways: it
discourages socially harmful consumption and simultaneously generates revenue, which can be
used to subsidize public healthcare, finance educational campaigns, or improve infrastructure.
Over time, the cumulative effect could be a healthier workforce, higher productivity, and lower
strain on the public health system, particularly if the goods taxed have elastic demand and the
tax is significant enough to alter behavior.

However, the impact of higher indirect taxes may be limited if the demand for these demerit
goods is highly inelastic, which is often the case for addictive substances such as tobacco and
alcohol. In such instances, individuals may continue to purchase them despite rising prices,
leading to little change in consumption but an increased financial burden, particularly on
low-income households. This can result in regressive effects where a larger proportion of
income is spent on these goods, reducing funds available for essentials such as education or
nutrition. Some households may go into debt or cut back on other necessary expenditures. For
firms, while profit margins may initially remain unaffected due to continued demand, they may
face reputational backlash or long-term decline if public awareness grows. Moreover, excessive
taxation can encourage the growth of black markets, where untaxed and unregulated goods are
sold illegally. These often lack safety standards and can be more harmful, undermining the
government's health objectives. Enforcing bans or tracking illegal sales can impose additional
costs on the government, sometimes exceeding the benefits gained from taxation. Thus, the
success of this policy depends heavily on consumer responsiveness, the strength of
enforcement mechanisms, and how the revenue is used.
2. Discuss whether a fall in the exchange rate will benefit a country’s economy.

A fall in the exchange rate means that the country's currency becomes weaker in relation to
others, making exports cheaper for foreign buyers. This can boost demand for domestically
produced goods in international markets, increasing sales revenue for export-oriented firms and
potentially allowing them to expand production and hire more workers. From the government’s
perspective, this rise in exports can help reduce a current account deficit and bring in more
foreign currency, strengthening the national reserves. For domestic firms competing with foreign
imports, a weaker currency makes imported goods more expensive, giving them a competitive
advantage in the local market and possibly increasing their market share. Households may
indirectly benefit through job creation in export and import-competing sectors, leading to a rise
in household income. Additionally, an increase in aggregate demand due to stronger export
performance may contribute to higher GDP growth in the short term, leading to better economic
indicators and increased investor confidence.

However, a weaker currency also has drawbacks, especially for individuals and households that
rely on imported goods. As the exchange rate falls, imported essentials like fuel, medicine, and
electronics become more expensive, increasing the cost of living. This import-led inflation can
disproportionately affect low- and middle-income households. For firms that depend on imported
raw materials or machinery, production costs rise, reducing profit margins and potentially
leading to higher prices for consumers. Inflationary pressures might force the central bank to
raise interest rates, which can reduce investment and slow economic growth. The government
may also face increased costs on foreign-denominated debt repayments, worsening the fiscal
balance. Additionally, if the country is heavily reliant on imports for consumption or production,
the benefits of increased exports might not be sufficient to outweigh the broader inflationary and
debt-related consequences of a depreciating currency.

3. Discuss whether a government should provide subsidies to producers.

Subsidies reduce the cost of production for firms, allowing them to increase output and lower
prices, which can make essential goods and services more affordable to consumers. When
producers receive financial assistance from the government, they are incentivized to expand
operations, hire more workers, and invest in better technologies, contributing to economic
growth. For households, this can lead to a greater supply of necessities—such as food,
electricity, or medicines—at lower prices, improving the standard of living, especially for
low-income families. In the case of industries that generate positive externalities, like education,
renewable energy, or public transport, subsidies help correct market failure by encouraging
greater consumption or provision than the market would otherwise support. This benefits society
by reducing pollution, increasing access to services, or improving public health. The
government, in turn, can use subsidies strategically to support priority sectors, such as
agriculture, green technology, or manufacturing, helping the country become more self-sufficient
and competitive internationally. It can also stabilise prices during times of supply shocks—such
as during a drought or fuel crisis—preventing inflation and protecting vulnerable consumers. If
designed well, subsidies can align private incentives with social welfare goals, stimulating
long-term development without relying solely on direct public provision.

Despite these advantages, subsidies come with significant risks and limitations. For
governments, they represent an opportunity cost—every dollar spent on subsidies is a dollar not
spent on other essential public services such as healthcare, education, or infrastructure. Poorly
targeted subsidies may benefit large corporations or politically connected industries rather than
the intended small producers or priority sectors, leading to inefficient allocation of resources. For
firms, reliance on subsidies can reduce the incentive to innovate, improve efficiency, or respond
to market demand. If producers expect continuous government support, they may become
complacent, knowing they will not face the full consequences of poor performance or
uncompetitive pricing. This can lead to production of surplus goods, wastage of inputs, and
even environmental degradation. From the household perspective, while subsidies may lower
short-term prices, if they are funded through higher taxes or increased public borrowing, the
long-term impact on families could be negative, especially if inflation rises or government
services are cut to balance the budget. Moreover, in international trade, heavy subsidies can
lead to disputes, as they may be seen as giving domestic producers an unfair advantage,
inviting retaliation from trading partners and damaging global competitiveness.

4. Discuss whether a government should increase the minimum wage.

Raising the minimum wage increases the legal floor on what employers can pay their workers,
which directly benefits low-income earners by increasing their disposable income. This can lead
to a rise in household consumption, especially because low-income workers typically have a
high marginal propensity to consume — meaning they are likely to spend most of their income
rather than save it. As spending increases, firms may experience a rise in demand for goods
and services, which can encourage business expansion and job creation. Additionally, higher
wages may improve worker motivation and reduce employee turnover, lowering recruitment and
training costs for firms in the long run. The government can also benefit through increased
income tax revenue and reduced welfare dependency, as fewer workers will require income
support. From a macroeconomic perspective, higher aggregate demand can stimulate economic
growth. For sectors with inelastic labour demand (where firms cannot easily replace workers
with machines or move overseas), the impact on employment levels might be minimal,
especially if the wage increase is moderate and productivity also improves.

However, the effectiveness of this policy depends heavily on how firms and markets respond to
higher labour costs. If demand for labour is elastic — as it may be in low-skilled or highly
competitive industries — then a rise in wages could lead to significant job losses. Firms may
reduce hiring, cut hours, or replace workers with automation to manage their cost structures. In
sectors where profit margins are thin, the increased labour cost may be passed on to
consumers in the form of higher prices, contributing to cost-push inflation and reducing
purchasing power. Small businesses, in particular, may struggle to absorb these costs and could
be forced to close or downsize. Households that lose jobs or face reduced work hours may
actually end up worse off. Moreover, a higher minimum wage may discourage informal
employment from transitioning into the formal sector, or even encourage some businesses to
shift towards informal, unregulated work arrangements, undermining the very protections the
policy aims to strengthen. The government may also face increased pressure from firms for
subsidies or tax relief to offset their costs, which could increase the fiscal burden and create an
opportunity cost — reducing funds available for investment in public goods like education or
infrastructure.

5. Discuss whether protectionist policies benefit domestic industries.

Protectionist measures such as tariffs, import quotas, and subsidies can shield domestic
industries from foreign competition, allowing them time to grow and become more competitive.
For domestic firms, reduced competition means they can maintain or increase market share,
leading to higher sales revenue and potentially greater profits. This revenue can be reinvested
into research and development or used to achieve economies of scale, reducing long-term
average costs. Workers in protected industries may benefit from greater job security, especially
in sectors under threat from cheaper imports. Households in the short run may gain from local
employment stability, which supports income levels and reduces dependence on welfare
schemes. From the government’s standpoint, protectionism can help maintain strategic
industries like agriculture or defense-related manufacturing, ensuring national security and
economic self-sufficiency. In developing countries, protecting infant industries gives local firms
time to grow without being immediately overwhelmed by multinational corporations that benefit
from lower production costs and higher productivity. Furthermore, if import demand is relatively
price elastic, then even small tariffs can significantly reduce import volumes, making room for
domestic firms to grow. Protectionism can also correct a persistent current account deficit by
reducing import expenditure and supporting domestic production.

However, while protectionism may provide temporary relief to domestic firms, it often leads to
long-term inefficiency and higher costs for consumers. Without the pressure of international
competition, protected industries may become complacent, lacking the incentive to innovate,
reduce costs, or improve quality. This can lead to allocative and productive inefficiency, where
resources are not directed to their most efficient use, and goods are produced at higher than
necessary costs. For households, this often results in higher prices and reduced choice, as they
are forced to buy more expensive or lower-quality domestic products instead of cheaper foreign
alternatives. In the case of inelastic import demand—such as for essential raw materials or
high-tech goods—tariffs may not significantly reduce import volumes but will raise prices across
the economy, fueling cost-push inflation. Exporting countries may retaliate with their own trade
barriers, hurting the domestic industries that rely on selling goods abroad. For firms that depend
on imported intermediate goods, protectionism increases input costs, reducing competitiveness
even in local markets. The government may collect tariff revenue in the short term, but it risks
damaging trade relationships and undermining investor confidence if policies are perceived as
unpredictable or politically motivated. Over time, the economy may suffer from misallocated
resources, slower growth, and reduced integration into the global market.

6. Discuss whether economic growth always leads to improved living standards.

Economic growth, measured by an increase in real GDP, often correlates with improved living
standards, as it reflects higher output and income levels within a country. For individuals, this
can translate into increased job opportunities, higher wages, and better access to goods and
services. Households may benefit from rising disposable incomes, allowing them to consume
more, save for the future, and access better housing, healthcare, and education. Firms gain
from stronger consumer demand, which can lead to higher sales, expanded production, and
reinvestment in capital, potentially achieving economies of scale and increasing productivity. A
growing economy also boosts government tax revenues without raising tax rates, which can be
spent on improving public services such as sanitation, infrastructure, and education — all of
which contribute to a higher quality of life. In developing countries, even modest growth can lift
millions out of absolute poverty by increasing employment in both formal and informal sectors.
Additionally, economic growth can attract foreign direct investment (FDI), bringing in new
technologies, business practices, and job creation, thereby enhancing long-term development
prospects. Improvements in living standards are especially likely when the benefits of growth
are broadly shared and the increased output includes merit goods and essential services.

However, economic growth does not automatically ensure improved living standards for
everyone, particularly when it is unevenly distributed or based on unsustainable practices. If the
additional income generated is concentrated among a small elite, income inequality may rise,
leaving large segments of the population without meaningful improvements in welfare. For
example, in economies where growth is driven by capital-intensive industries, job creation may
be limited, and the gains may not trickle down to workers or low-income households. Growth
that leads to environmental degradation — such as increased pollution, deforestation, or
resource depletion — can directly harm health outcomes and reduce quality of life, especially in
urban areas with poor infrastructure. Moreover, rising GDP may mask negative externalities if
social and environmental costs are not accounted for, creating a false picture of progress. For
individuals in rural or underdeveloped regions, growth centered in urban industrial sectors may
offer few benefits, widening regional disparities. Inflationary pressures may also arise if growth
leads to excessive demand, eroding the purchasing power of fixed-income groups and
worsening living conditions despite higher nominal incomes. Without investments in healthcare,
education, and environmental protection, growth alone cannot ensure sustained improvements
in welfare — and may, in some cases, make certain groups worse off in real terms.

7. Discuss whether inflation is always harmful to an economy.

Inflation, defined as a sustained increase in the general price level, can have both positive and
negative effects on an economy, depending on its rate and predictability. Moderate inflation can
be beneficial as it encourages consumption and investment; consumers are more likely to
purchase goods and services now rather than later when prices might be higher, stimulating
economic activity. For firms, predictable inflation allows for better planning and can lead to
increased revenues, especially if wages rise more slowly than prices, improving profit margins.
Additionally, inflation can reduce the real value of debt, benefiting borrowers, including
governments, by making repayments less burdensome in real terms. This can free up resources
for other expenditures, potentially boosting economic growth.

However, high or unpredictable inflation can be detrimental. It erodes purchasing power,

disproportionately affecting individuals on fixed incomes, such as pensioners, leading to a
decline in their real standard of living. For households, uncertainty about future prices can
discourage saving, as the real value of savings diminishes, and complicate budgeting. Firms
may face increased costs for raw materials and wages, leading to cost-push inflation, and may
struggle to set appropriate prices, potentially reducing investment due to uncertainty. Moreover,
if inflation outpaces wage growth, real incomes decline, reducing consumer spending and
potentially slowing economic growth. For the government, high inflation can lead to increased
interest rates as monetary authorities attempt to control price levels, which can raise the cost of
borrowing and impact public finances. Therefore, while moderate, predictable inflation can
support economic activity, high or volatile inflation is generally harmful to an economy.

8. Discuss whether a monopoly is always against the public interest.

Monopolies, as sole suppliers of a good or service, can sometimes act in the public interest by
exploiting economies of scale. When a firm has a large market share, it can spread its fixed
costs (such as research, infrastructure, or advertising) over a larger output, lowering average
costs and potentially passing some savings to consumers through lower prices — especially in
industries with high fixed costs like utilities or rail transport. For the government, dealing with
one large firm instead of many small ones may make regulation and tax collection more
efficient. In some cases, a monopoly may also invest heavily in research and development due
to its ability to earn supernormal profits, leading to innovation that benefits the broader economy
— such as advancements in pharmaceuticals or technology. From the firm’s perspective, the
absence of competition allows for long-term planning and financial stability, which can
encourage large-scale investment, create jobs, and improve supply reliability. In industries
where demand is relatively price inelastic, a well-regulated monopoly might even provide more
consistent service than fragmented, competitive firms that might cut corners to stay afloat.

Despite these potential advantages, monopolies often lead to outcomes that harm consumer
welfare and overall economic efficiency. Without competition, monopolists face less pressure to
keep prices low or improve quality, which can lead to allocative inefficiency — where prices
exceed marginal cost — meaning that the market is not maximizing total welfare. For
households, this can result in higher prices, fewer choices, and lower quality products,
especially in essential services where substitutes are limited. Firms that rely on monopolies as
suppliers may face high input costs, reducing their competitiveness. From a macroeconomic
perspective, monopolies may also cause productive inefficiency by operating at higher average
costs than necessary, since they lack the incentive to streamline operations. The absence of
competitive pressure can lead to managerial slack and complacency. Additionally, supernormal
profits may be used to influence political decisions or create barriers to entry for new firms,
further entrenching market power and reducing innovation over time. For the government,
monopolies may require constant regulation to prevent abuse of power, which imposes an
administrative burden and risks regulatory capture, where the firm has undue influence over its
regulator.

10. Discuss whether government intervention is necessary to correct market failure.

Government intervention is often necessary to correct market failure because markets left to
operate freely do not always allocate resources efficiently or equitably. One common form of
market failure occurs when there are externalities — costs or benefits that spill over to third
parties. For example, negative externalities like pollution from factories impose costs on society
that are not reflected in the market price, leading to overproduction. In such cases,
government-imposed taxes, like a carbon tax, can internalize the external cost and reduce the
quantity produced to a socially optimal level. Similarly, goods with positive externalities, such as
education or vaccines, are underconsumed because individuals fail to consider the wider
societal benefits. By providing subsidies or free provision of such merit goods, the government
encourages higher consumption, correcting underallocation. Public goods like street lighting or
national defense — which are non-rival and non-excludable — would not be provided at all by
private firms, due to the free-rider problem, making direct government provision essential. From
a macroeconomic standpoint, intervention also helps address income inequality through
progressive taxation and welfare payments. For households and individuals, especially in
lower-income groups, these measures ensure access to basic services and improve social
welfare. For the broader economy, correcting these failures contributes to more stable, inclusive
growth and can prevent long-term economic inefficiencies that markets are unable or unwilling
to resolve on their own.

However, while government intervention aims to improve outcomes, it is not always effective
and can sometimes worsen the situation — a phenomenon known as government failure. This
can occur if the government lacks accurate information about the magnitude of the externality or
misjudges how consumers and firms will respond to taxes, subsidies, or regulation. For
example, over-subsidizing certain industries may lead to inefficiency, where firms rely on
government support instead of becoming competitive. Firms may continue producing despite
not being economically viable, misallocating resources that could be used elsewhere. For
individuals, excessive intervention through price controls can distort incentives — for instance,
setting a price ceiling on food may make it affordable in the short term but discourage
producers, leading to shortages. Government bureaucracy can also be inefficient and costly,
with long delays in implementation or corruption diverting funds from their intended purpose.
Additionally, frequent changes in policies or poorly designed interventions may create
uncertainty for firms, discouraging investment and innovation. In some cases, politically
motivated interventions benefit a select few industries or regions while ignoring broader
economic interests. Therefore, while government intervention is often necessary to correct the
failures inherent in free markets, its effectiveness depends on how well-targeted, transparent,
and efficiently implemented the measures are.

11. Discuss whether a country should aim for a surplus on its current account.

A current account surplus occurs when a country exports more goods, services, and investment
income than it imports, and can reflect a strong, competitive economy. For firms, a surplus often
signals global demand for domestic products, leading to increased production, revenue, and
opportunities for expansion. This can encourage investment in export industries and improve
employment prospects, especially in manufacturing and services sectors. Households benefit
through more job opportunities, rising incomes, and greater economic stability. The government
gains foreign exchange reserves, which can be used to repay external debt, stabilise the
exchange rate, or invest in national development. A surplus can also act as a buffer during
global downturns by reducing reliance on volatile foreign capital or imported goods. In countries
where export demand is relatively price inelastic, maintaining a surplus can be especially
advantageous, as higher export revenues persist even if global prices fluctuate. Surpluses may
also reflect high national savings and low consumption, allowing the government to allocate
more resources to investment in infrastructure, education, or health without heavy borrowing.

However, a current account surplus is not always a sign of economic strength, and aiming for
one persistently can lead to negative outcomes. For consumers, a surplus might imply that
domestic consumption is weak or that households are saving excessively due to low confidence
or inadequate social security systems. This could result in lower living standards, as people
consume less than they could afford. For firms, while exporters may benefit, businesses that
depend on imported capital goods or raw materials could face higher costs if policies are
implemented to suppress imports, such as tariffs or quotas. Additionally, if the surplus results
from an undervalued exchange rate, it may cause tensions with trading partners who perceive it
as unfair competition, leading to retaliatory trade barriers that harm long-term export
performance. From the government's perspective, a strong focus on surplus might cause it to
overlook domestic investment or welfare needs, especially if it prioritises saving over spending
on public services. In the long run, persistent surpluses can also lead to global imbalances —
for example, if one country's surplus is another's deficit — which may contribute to financial
instability or require painful adjustments in global currency markets.