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Demand Management — Fiscal Policy · Paper 2 — Free Economics HL Practice Questions
1MasteryLAQTools of fiscal policy (taxation, government spending)10 marksPaper 2~15 min
In 2023, Zambia's GDP growth fell to , down from in 2022. The government is considering a fiscal stimulus package comprising two tools: (i) a temporary reduction in the corporate income tax rate for manufacturing firms from to , and (ii) a direct increase in government spending on infrastructure (roads, bridges, and schools) financed by borrowing.
(a)
Using an AD/AS , explain how an increase in government spending on infrastructure could affect Zambia's real GDP and price level in the short run. [4 marks]
(b)
Explain two possible reasons why a reduction in corporate income tax for manufacturing firms might be less effective than direct government spending in stimulating aggregate demand in the short run. [4 marks]
(c)
Evaluate the potential long-term economic consequences for Zambia of financing the infrastructure spending through increased government borrowing. [2 marks]
Solutions
2MasteryLAQTools of fiscal policy (taxation, government spending)10 marksPaper 2~15 min
Country X is experiencing unemployment of of the labour force alongside a sustained decline in aggregate demand (AD). The finance minister proposes two fiscal policy options:
- Option A: A reduction in personal income tax rates
- Option B: An increase in government spending on infrastructure projects
(a)
Using a fully labelled AD/AS , explain how both Option A and Option B could each affect the level of economic activity in Country X. [4 marks]
(b)
Evaluate the effectiveness of a reduction in personal income tax compared to an increase in government spending on infrastructure as tools of fiscal policy to reduce the unemployment rate in Country X. [6 marks]
Solutions
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