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Unit 4
Essays &
Mark
Schemes
2010-2013
1
1 *(a) Examine the causes of income and wealth inequality in the UK or any country of
your choice.
(20)
Causes could include:
Education
Skills and training
Experience/age
Type of employment
Ownership of assets
Inheritance
Pension rights
Evaluation:
Prioritisation of factors
Significance of each factor
Level and quality of education e.g. degree, subject, class
Pension rights e.g. final salary schemes
Conclusion
(Synoptic element: reference to use of Economists tool-kit in analysis and
evaluation and in approach to question)
*(b) In the 2009 budget the UK government announced that a new 50% rate of income tax
would be introduced in 2010.This creates three marginal tax rates of 20%,40% and
50%,instead of two. Evaluate the likely economic effects of this change i n the tax structure.
(30)
Effects include:
Disincentive to work: could be analysed using income and substitution effects
Tax revenues- use of Laffer curve analysis
Tax evasion (illegal)
Tax avoidance (legal) e.g. working fewer hours taking income in form of share
option (CGT only 18%)
Tax exiles move to Switzerland
Distribution of income more even: analysis of progressive taxation
Impact on AD and associated analysis
Evaluation could include:
Extent of disincentive effects of 50% tax rate
Ease of avoiding 50% tax rate
Number of people affected by new tax rate
Extent of tax evasion
Significance of impact on different sectors of the economy e.g. on financial
services
Impact on income distribution might be offset be other factors e.g. increasing
unemployment
(Synoptic elements: reference to concepts introduced in unit 2 e.g. fiscal policy;
use of Economists tool-kit in analysis and evaluation and in approach to question)
(b) Evaluate the case for cutting public expenditure rather than raising taxes as a
means of reducing fiscal deficits.
(30)
Candidates could take either side of the argument OR they could analyse and
evaluate 2 arguments for cutting public expenditure and 2 for raising taxes
Effects of tax increases include:
Disincentive to work of higher taxes: could be analysed using income and
substitution effects
Reduce danger of crowding out
Reduce possibility of government failure
Size of public sector already too large according to some economists waste and
inefficiency
Low productivity in the public sector
More efficient allocation of resources
Raising taxes could reduce tax revenues - use of Laffer curve analysis
Less likelihood of tax avoidance and tax evasion
Impact of cutting public expenditure may be more certain than raising taxes
Evaluation could include:
Job losses from cutting public expenditure might be more extensive than raising
taxes (because rise in taxes might be offset by dissaving by consumers to maintain
living standards)
Reduction in both quantity and quality of public services
Income distribution might become more uneven than if progressive taxes were
increased
(b) To what extent is reducing the number of people living in absolute poverty
sufficient to achieve economic development?
(30)
(20)
10
(b) The UK is a member of the European Union but has not adopted the euro as its
currency. To what extent do the benefits of membership of a monetary union such
as the Eurozone outweigh the costs?
(30)
Candidates could take either side of the argument OR they could analyse and
evaluate 2 benefits and 2 costs
Analysis might include:
Consideration of key features of a monetary union: single currency
Help from other members should one country get into difficulties e.g. loans from
ECB
Other benefits: e.g.
no transactions costs; might help to attract more FDI
monetary union designed to impose limits on macroeconomic management e.g. to
ensure low rate of inflation
price transparency: increase in competition; rightward shift in AS curve and lower
inflationary pressures
Increased trade
Evaluation could include:
Fiscal and political changes required as pre-requisite of monetary union
Inability of a country to allow its currency a depreciate e.g. Greece, Ireland,
Portugal, Spain whereas the pound sterling has depreciated 25% against other
currencies
Resulting in loss of competitiveness and fall in real GDP and employment
One size fits all interest rate which is determined by the ECB for all Eurozone
countries but which may be inappropriate for a particular member. Bank of
Englands MPC can set interest rates to meet UKs inflation target
Costs of economic mismanagement by individual members fall on other Eurozone
members e.g. Greece, Ireland.
Moral hazard issue
Possible loss of control of fiscal policy
Crisis in eurozone could lead to closer economic union which UK could benefit
from as a member
Transition costs allow as half a point
11
N.B. If analysis is related to just one country i.e. no reference to the global
economy then 14/20
Also for evaluation:
impact be different on commodity exporters than on commodity importers
12
Supply side policies: discussion of those which impact on the price level i.e.
measures to increase competition and productivity; transmission mechanism;
education and training
Evaluation: some policies will have implications for public finances; time lags
Fiscal policy: discussion of transmission mechanism; AD/AS analysis
Evaluation: ineffective if consumers reduce savings following a rise in taxes; very
blunt instrument adverse impact on other variables e.g. unemployment.
13
b)
Discuss debt cancellation and trade liberalisation as alternative means of
promoting economic development in developing countries
(30)
Case for debt cancellation:
literacy rates
and more resources for health, education.
etc
However:
Danger of corruption: money saved not spent e.g. to improve health and
education
Misuse of money saved e.g. for defence purposes
ion of a dependency culture
14
d
economies
Other Factors causing globalisation (These may be regarded as evaluation or
further analysis):
comparative advantage
ng up of economies to world market e.g.
countries
(30)
N.B. Candidates may take either perspective as analysis and use the reverse
arguments for evaluation.
Costs of globalisation include:
-dependence on imports or on exports
pollution- climate change
for governments
15
chnology transfer
Other evaluative approaches which may be rewarded include:
Assessment of the significance of the point(s) considered
Prioritisation of the points made supported by reasoned arguments
Consideration of costs and benefits for different countries and different
economic agents
16
17
(b) To what extent is monetary policy the most effective way of stimulating
economic growth? Refer to at least one example of a developed economy i n
your answer.
(30)
Analysis of monetary policy:
Either: Interest rate transmission mechanism: i.e.
impact on consumption;
investment;
net trade via the effect of exchange rate changes
Or: Quantitative Easing and transmission mechanism
Bank of England purchase of government bonds; causing increase in their price
and fall in yields
Or: Role of Credit Easing: in UK four banks will offer loans to
SMEs at a 1% interest rate discount
Or: Bank of England Loan Guarantee Scheme worth 40bn
18
19
(30)
20
(20)
21
22