Demand management - fiscal policy Paper 1- IBDP Economics SL

IBDP Economics SL – Macroeconomics- Demand management – fiscal policy Paper 1- Exam Style Practice Questions

Exam Style Questions..

IBDP Economic SL- All Topics

Question

Explain how expansionary fiscal policy could be used to close a deflationary (recessionary) gap.

▶️Answer/Explanation

Answers may include:

definitions of fiscal policy, expansionary fiscal policy, deflationary (recessionary) gap
diagram to show the potential effects of expansionary fiscal policy in terms of an outward shift of AD
explanation of how an expansionary fiscal policy will boost aggregate demand and increase output, thereby closing a deflationary gap
examples of countries that have used expansionary fiscal policy.

Question

Evaluate the view that fiscal policy is the most effective way of achieving long-term economic growth.

▶️Answer/Explanation

Answers may include:

definitions of long-term economic growth, short-term economic growth, fiscal policy
diagram to show an outward shift of the PPC or a rightward shift of LRAS
explanation of how fiscal policy leads to long-term economic growth indirectly by creating an economic environment that is favourable to private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest
examples of fiscal policy that has led to long-term economic growth
synthesis or evaluation.

Question

To what extent is expansionary fiscal policy the best policy to achieve a reduction in the rate of unemployment?

▶️Answer/Explanation

Answers may include:

definition of fiscal policy, expansionary fiscal policy, rate of unemployment
diagram to show aggregate demand (AD) being shifted to the right and/or a labour market diagram
explanation of the use of expansionary fiscal policy, higher government spending/lower taxation, which may increase GDP, increase the demand for labour and reduce demand-deficient unemployment
examples of fiscal policy being used to increase AD in relation to a particular economy
synthesis and evaluation (to what extent?).

Question

Evaluate the effectiveness of fiscal policy as a means of achieving long-term economic growth.

▶️Answer/Explanation

Answers may include:

definitions of long-term economic growth, fiscal policy
diagram to show LRAS and/or the production possibility curve shifting to the right/outwards
explanation of how fiscal policy can promote long-term economic growth through government spending on infrastructure, technology, R&D and human capital, tax reductions/incentives for firms to invest
examples of the use of fiscal policy to promote long-term economic growth
synthesis or evaluation.

Question

Using real-world examples, evaluate the use of fiscal policy to close a deflationary/recessionary gap.

▶️Answer/Explanation

Answers may include:

Terminology: fiscal policy, deflationary/recessionary gap.
Theory: explanation of how expansionary fiscal policy will increase AD moving the economy closer to its full employment level, closing a deflationary/recessionary gap.
Diagram: AD/AS diagram to illustrate expansionary fiscal policy to close a deflationary/recessionary gap.
Synthesis (evaluate): effectiveness depends on the shape of the aggregate supply curve and where the economy is operating; potential strengths of fiscal policy such as targeting of specific sectors and effectiveness in a deep recession; potential constraints on fiscal policy such as political pressures, time lags and sustainable debt; possible conflicts with other macroeconomic objectives, monetary and/or supply-side policies might be considered as alternatives, but the emphasis of the response should be on fiscal policy.
Example(s): real-world examples of where governments have attempted to close a deflationary/recessionary gap using fiscal policy.

Question

Explain two goals of fiscal policy.

▶️Answer/Explanation

Answers may include:

Terminology: fiscal policy.
Theory: explanation of any two of the following goals: low and stable inflation, low unemployment, increase short run economic growth, promote a stable economic environment for long-term growth, reduce business cycle fluctuations, equitable distribution of income and/or external balance.
Diagram: Appropriate diagram(s) to show attainment of the two goals chosen.