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 29
Economics in context
Learners’ discussion might include:
• demand for the currency would exceed the supply of the currency.
• higher productivity due to, for example, more investment and improvements in education.
• less reliance on the performance of other economies and enabling households to enjoy more goods
and services.
Activities
Activity 29.1
Learners’ answers might include:
1 Rising inflation in Zimbabwe would make its exports relatively more expensive and imports relatively
cheaper leading to a rise in demand for imports, a fall in demand for exports and a deterioration in the
country’s current account.
2 A decrease in the money supply would be likely to reduce spending. This may reduce a current account
deficit as demand for imports may fall and more effort may be put into exporting.
3 Spending more on education may make Zimbabwean workers more skilful and more productive,
improving the country’s international competitiveness and reducing imports. However, there is no
guarantee that increased spending on education will raise the quality of education. Privatisation may
increase competition and put more pressure on domestic firms to become more efficient and so may
increase the country’s international price competitiveness. However, there is a risk that a state-owned
firm may be replaced by just one private-sector firm which may lack domestic competitive pressure to
be efficient.
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
Learners’ answers might include:
Policy tool Objective Policy tool Objective
Cut in corporate tax Increase economic Imposition of import Reduce current account
growth tariffs deficit
Cut in general sales tax Reduce unemployment Increase in the money Reduce unemployment
supply
Cut in government Reduce current account Limit on bank lending Reduce inflation
spending on public deficit
sector pay
Cut in income tax Reduce current account Privatisation Increase economic
deficit growth
Deregulation Reduce inflation Rise in government Increase economic
spending on education growth
Fall in the exchange rate Reduce unemployment Rise in government Reduce current account
spending on infrastructure deficit
Government subsidies to Reduce unemployment Rise in the interest rate Reduce inflation
declining industries
Imposition of export Reduce inflation Rise in the school leaving Increase economic
tariffs age growth
Activity 29.2
Learners’ own answers.
Activity 29.3
Learners’ own answers.
Exam-style questions: Multiple choice
1 B I f productivity rises, the price and quality competitiveness of domestic products could increase. This
will increase export revenue and reduce import expenditure. A could result in a rise in spending on
imports and could reduce export revenue as more products could be diverted to the export market.
C would be expected to make domestic products less price competitive and so decrease exports and
increase imports. D would be likely to increase imports, at least in the short run.
2 C n increase in income tax will reduce disposable income. This is likely to reduce consumer
A
expenditure. This lower spending is likely to reduce both imports and demand-pull inflation.
B and D would be likely to reduce a current account deficit but would likely to increase inflation.
A depreciation would make domestic products more price competitive which should help reduce
a current account deficit. However, as it would make imports more expensive and would raise
aggregate demand, it is likely to result in inflation. Tariffs on imports may increase costs of
production and reduce pressure on domestic firms to keep prices low. A would be likely to increase
a current account deficit as exports are likely to fall.
3 B xchange control could limit spending on imports which would increase a current account surplus.
E
A, C and D would all tend to reduce a current account surplus. A would be likely to reduce
spending in importing countries which could reduce the value of imports they buy. C would permit
more imports to come into the country and D would reduce the price of imports.
4 C I ncreasing a budget surplus would involve reducing government spending and raising tax revenue.
These changes would reduce aggregate demand. This would lower demand-pull inflation. Lower
spending is also likely to reduce imports and may cause some firms to switch their focus from
the home to the export market. A would be likely to reduce a current account deficit but increase
demand-pull inflation. B may reduce demand-pull inflation in the short run but increase it in the
long run as well as increasing a current account deficit as lower investment may reduce innovation
2 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS
and the quality of domestic products. In the case of D, an increase in the money supply is likely to
increase both demand-pull inflation and a current account deficit.
5 D I f the economy has spare capacity, higher aggregate demand is likely to have more of an impact on
real GDP and employment than on the price level. As a result, the risk of inflation would be low.
Whichever part of the current account balance has caused the surplus, AD would increase, and
more money would flow into the economy. A growing budget deficit would tend to be inflationary.
6 D upply-side policy may increase the international price and quality competitiveness of the
S
country’s firms in the long run. A and B are more likely to have more of a short-term impact
on the current balance. Whether protectionist policy will lead to a long-term improvement will
depend on which industries are protected, how they respond and whether other countries retaliate.
7 C n increase in government spending on training could raise labour skills and productivity.
A
This could reduce unemployment as the returns from employing workers would increase. More
spending on training could also reduce a current account deficit as the costs of production could
fall and the quality of output could rise, increasing international competitiveness.
8 B n increase in investment may have involved spending on imported capital goods. It will also
A
increase aggregate demand and more workers may be employed to work with the capital goods. A
would reduce AD which would be expected to increase the number of workers unemployed. C is
likely to result in a rise in frictional and structural unemployment. D would probably increase both
the number of workers employed and the number of workers unemployed.
9 C n increase in the money supply is likely to increase a current account deficit as it will raise
A
consumer expenditure and may cause inflation. A and D may reduce a current account deficit by
reducing spending on imports. B may reduce a current account deficit by increasing exports.
10 C S
upply-side policy seeks to raise aggregate supply by raising the quantity and quality of resources.
Higher aggregate supply can reduce costs of production, raising price competitiveness, and can
improve the products produced, raising quality competitiveness. Supply-side policy does not seek
to reduce domestic demand.
3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
