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 24
Economics in context
Learners’ discussion might include:
1 Governments want to improve infrastructure to increase people’s living standards and raise
macroeconomic performance. For instance, a new sewage system may improve people’s health.
A better rail system will reduce firms’ costs of production. This can encourage firms to produce
more and so result in higher economic growth, an improvement in the current account balance,
reduce inflation and increase employment.
2 A reduction in congestion is likely to raise production and productivity. It will enable firms to use
fewer delivery vehicles and less fuel as the vehicles will spend less time on their journeys. Lower costs
of production are likely to encourage firms to increase their output.
If people travelling to work experience less congestion, they are likely to arrive at work less stressed.
This may result in them being more productive.
3 The form of infrastructure will vary from country to country. For instance, people in the Maldives
may think that priority should be given to the building of coastal flood defences as the islands which
make up the nation are very low-lying.

Activities
Activity 24.1
Fiscal policy tools: a, b.
Monetary policy tools: c. d, f
Supply-side policy tools: e

Activity 24.2
Learners’ answers might include:
1 An increase in government spending on education is considered to be a supply-side policy as it will
improve the quality of the labour force in the long run. It could raise labour productivity by increasing
literacy, numeracy and ICT skills. However, there is also an implication for fiscal policy as it involves
an increase in government spending.
2 If teachers’ retirement age is extended, it will mean that they are in the labour force for a longer period
of time than would otherwise have been the case. This will shift the long-run aggregate supply curve to
the right, leading to lower inflation and higher output. However, this does depend on the number of
teachers who do continue working and by how many years the retirement age is raised.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

1 Learners’ answers might include: Benefits: reduction in accidents, reduced transport time, reduced
need for car parking spaces, less need for fuel, reduced transport congestion, accessibility for those
who cannot drive. Costs: initial high cost, unemployment of taxi drivers and delivery drivers, may be
accidents during transition phase when a mixture of driverless cars and driven cars.
2 Learners’ own answers.

Exam-style questions: Multiple choice

1 A  upply-side policy seeks to increase the maximum output an economy can produce. Such a policy
S
may reduce upward pressure on the price level. It does not try to reduce aggregate demand. If it
does succeed in increasing aggregate supply, it may enable higher aggregate demand to be matched
by higher aggregate supply. Supply-side policy does not seek to reduce unemployment.
2 C I f some workers gain jobs abroad, the size of the labour force will fall and aggregate supply will be
reduced. A, B and D would cause aggregate supply to increase.
3 B I f there is considerable spare capacity, an increase in aggregate supply may raise potential output
but not actual output. A budget surplus would give a government more opportunity to spend
money and cut taxes in support of trying to increase aggregate supply. Flexibility of resources
would increase the speed of response to supply-side policy. In a mixed economy, there is an
opportunity for a range of supply-side policy measures including privatisation, deregulation and
government spending on education.
4 D  government may spend on investment to increase aggregate demand (fiscal policy) and/or to
A
increase aggregate supply (supply-side policy). A cut in bank lending and the interest rate are
monetary policy tools. A cut in the rate of interest may also be considered a supply-side policy
measure as it is likely to encourage an increase in investment which would result in an increase in
aggregate supply. C is a fiscal policy tool that is likely to reduce aggregate supply.
5 B I nfrastructure development improves the quality of capital resources whereas training increases
the quality of labour. Both tools seek to increase aggregate supply. They both involve government
spending, and both will increase tax revenue if successful. Neither infrastructure development nor
training have an increase in competition as their main focus.
6 C  successful supply-side policy tool should reduce cost-push pressures. For instance, a successful
A
training scheme would reduce labour costs by raising productivity. It may also reduce structural
unemployment by increasing occupational labour mobility.
7 B  irms are more likely to run their own training schemes if the workers they train stay with them
F
for longer. A, C and D are all likely to increase the need for training and all are likely to result in
more pressure being put on the government to subsidise training schemes.
8 D I ncreased competition may put pressure on firms to raise productivity so as to keep their costs
lower and the quality of their products higher than their competitors. A may reduce productivity
as it is likely to reduce the motivation of workers. B may also reduce productivity as workers
may get tired. C may mean that firms do not undertake much investment which, again, may
reduce productivity.
9 A  upply-side policy has the potential to reduce unemployment, reduce inflation and promote
S
economic growth. It is not, however, designed to reduce a budget surplus.
10 C  ontractionary fiscal policy is designed to reduce aggregate demand. If aggregate demand
C
decreases, the increase in productive capacity, resulting from supply-side policy, may not be
used. A would increase the chance of factors of production responding efficiently to the changes
caused by supply-side policy tools. C would make it more likely that an increase in potential
output would turn into an increase in actual output. D could reduce costs of production and
increase competition.

2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021