ASAL Econ CB Chapter 41 Answers

CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.
Coursebook answers
Chapter 41
Economics in context
Learners’ discussion might include:
• Government spending and exports.
• Improvements in infrastructure might encourage firms to invest more as their costs may decline and their
profits may rise. For example, more reliable sources of electricity will prevent production being disrupted
and workers and capital equipment lying idle. Improvements in transport can directly reduce the cost of
getting products to market and may increase sales as products may arrive in a better condition.
• A rise in spending will come to an end when leakages rise to match the initial injection.
Activities
Activity 41.1
1
a The multiplier is 2 ( 0.5 ).
b The increase in GDP would be $132bn (2 × $66bn).
c The injection of extra government spending is insufficient. There would still be a deflationary
gap of $68bn.
Activity 41.2
Learners’ own answers.
Activity 41.3
1 Learners’ possible suggested reasons might include: government expected to cut income tax, rise in
employment increasing income, more even distribution of income, population growth, price of housing
expected to rise and so households will have more wealth, the central bank is expected to cut the rate
of interest and a greater willingness of banks to lend.
2 Learners’ own answers.
Activity 41.4
Learners’ own answers.
Activity 41.5
Learners’ answers might include estimates of:
•• private sector expenditure
•• the full employment level of GDP
•• tax revenue
•• size of the multiplier
•• number of state school pupils
•• life expectancy.
1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
Activity 41.6
Learners’ possible suggested reasons for why mps, mrt and mpm may vary between countries may
include e.g.:
•• people may save more or may have extra income in some countries because they are worried about
the future
•• the tax systems in some countries may be more progressive than in other countries
•• people may spend more of extra income on imports if the price of domestically produced products
is higher.
Learners should recognise that the higher the size of the multiplier, the more effective fiscal policy will be.
Think like an economist

Learners’ answers might include: An inflationary gap has the disadvantages that can arise from inflation
including a random redistribution of income and menu costs. It can also increase a deficit or reduce a
surplus on the current account of the balance of payments due to rising prices. However, an inflationary
gap is associated with high output and low unemployment. In contrast, a deflationary gap means
that output is lower than possible and unemployment will occur. There is also a risk that a downward
deflationary spiral may occur.
Exam-style questions: Multiple choice
1 C The multiplier is 1 . In this case, disposable income is 0.8, mpc is 0.6, so mps is 0.2. So the
mrt + mps
1 1
multiplier is
0.2 + 0.2 = 0.4 = 2.5.
1 $75 bn
2 C The gap in national income is $75bn. The multiplier is 0.4 = 2.5. So 2.5 = $30bn would have
to be injected. A is the amount which would have to be injected if the only leakage with mps
(giving a multiplier of 10). B would be the amount if the multiplier was 5 and D is the initial gap.
3 D GDP will rise by the size of the injection multiplied by the multiplier i.e. $45bn × 1.8. A is the
figure given by the injection divided by the multiplier ($25bn) added to the original GDP. B is the
1
injection added to the original GDP. C is 1.8 × 100 = 55 with $55bn added to the original GDP.
4 C
Income ($) Consumption APC MPC
100 115 1.15
200 206 1.03 0.91
300 290 0.97 0.84
400 340 0.85 0.5
500 360 0.72 0.2
5 D The mpc is the proportion of extra income which is spent. In this case, as a result of GDP rising
by XY (which is equivalent to VW) consumption rises by ZY amount.
6 B The equilibrium level of national income will be where total expenditure equals income. In this
case, C = $640bn ($100bn + 0.6 x $900bn) + $160bn (I) + $120bn (G) - $20bn ($100bn - $120bn)
(X – M) = $900bn.
7 D If the mpc of taxpayers is less than the mpc of recipients of government spending, consumption
will rise. If the economy is operating with spare capacity, this will cause GDP to increase. This is
also the case if the mpc of taxpayers and recipients of government spending are equal. This is the
balanced budget multiplier theory. For instance, if mpc is 0.8, mps would be 0.2 and the multiplier
would be 5. If the government increased its spending by $10bn, government spending obviously
rises by $10bn. If taxation is increased by $10bn, private sector spending would fall by $8bn.
The net injection of extra spending would be $2bn which would cause real GDP to rise by
$2bn × 5 = $10bn.
8 B The accelerator theory suggests that a change in the growth of income (and so demand) will
cause a greater percentage change in demand. The accelerator theory is concerned with induced
investment. It assumes technology is unchanged and is not based on the return from investment
declining as the capital stock increases.
9 C An inflationary gap occurs when total spending in the economy is greater than the maximum
output that can be produced with resources fully employed. Such a gap will put upward pressure
on the price level. It is not certain that when there is an inflationary gap, it means that the
country’s inflation rate would be higher than its main competitors. B would mean there is a
budget surplus which would tend to reduce total expenditure but it is only one component of
total expenditure. D would mean there is a current account deficit which would also reduce
total expenditure.
10 D At the full employment level of GDP, there is a shortfall of spending of UV amount.

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Exam-style questions: Multiple choice

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