2021 H2 Economics Paper 2 Essay 4: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains how a reduction in income tax paid by workers and firms affects aggregate demand and aggregate supply, then asks whether an income tax cut is likely to be the best policy measure to reduce high unemployment in a country.
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Explain how a reduction in the rate of income taxes paid by workers and firms might have consequences on an economy's aggregate demand and aggregate supply.
Aggregate demand is the total spending on an economy's goods and services at a given price level, made up of consumption, investment, government spending and net exports. Aggregate supply is the total output producers are willing and able to supply at a given price level. A cut in income tax rates for workers and firms can affect both.
Disposable income and aggregate demand. A cut in the income tax paid by workers raises their disposable income, which raises consumption, a component of aggregate demand. Aggregate demand therefore shifts rightward from AD0 to AD1, raising real national income.
Incentive to work and long run aggregate supply. Lower income tax rates can also strengthen the incentive to work, encouraging people to work more hours and drawing some who are outside the labour force into employment. This raises labour participation and productivity, expanding productive capacity, which shifts the long run aggregate supply rightward from AS0 to AS1, so the economy can produce more without generating inflationary pressure.
Investment and aggregate supply. Lower income tax on firms makes investment more profitable. With smaller tax liabilities firms have more funds to invest in new projects, technology and expansion. This raises investment, which adds to aggregate demand from AD0 to AD1, and also builds the capital stock, expanding the economy's capacity and shifting long run aggregate supply rightward from AS0 to AS1.
A reduction in both personal and corporate income tax is therefore likely to raise both aggregate demand and aggregate supply.
Trace the worker tax cut to consumption and AD, the incentive effect to LRAS, and the firm tax cut to both investment in AD and capital stock in LRAS.
Discuss whether a reduction in the rate of income taxes is likely to be the best policy measure to reduce high unemployment in a country.
- Set up the link between an income tax cut, aggregate demand and cyclical unemployment.
- Identify the fiscal constraint that limits a tax cut in a high debt economy.
- Distinguish the types of unemployment a demand side tax cut cannot address.
- Introduce alternative policies matched to those other types and their own limitations.
- Weigh the tax cut against the alternatives across the different types of unemployment.
- Conclude with a judgment that depends on the cause of the unemployment, arguing for a policy mix.
This part is gated. The full model answer with the worked ad and as analysis and the policy evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Fiscal policy, Monetary policy
Questions students ask
Where can I get the full worked answers to the 2021 H2 Economics paper 2 essay 4?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2021 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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