25 Mark Essays
8) Japan’s Budget deficit for 2017/18 is expected to be 4.6% of GDP. Its national debt is
forecast to increase to above 25-% of GDP by 2019.
Evaluate the impact of a large fiscal deficit and national debt on a country’s economy.
Fiscal Deficit : GDP (8% alarming) → reset every year (short run)
National Dent : GDP (60% alarming but Japan has 260%) → accumulation of fiscal deficit
etc (long run)
Japan
● 1990 Asset bubble collapse ⇒ start of national/fiscal debt situation
● Try to revive GDP growth by reducing IR close to 0 and increase govt spending
(fiscal stimulus leading to increase fiscal deficit)
● Start fiscal deficit
● Another way to revive GDP growth as part of IR policy ⇒ print money to buy bonds
(QE) also adds to the national debt (because printed money is owed by the govt to
the central bank)
Introduction ⇒ summarise the Japanese economic situation
● What has led to large fiscal debt and national debt in Japan (history)
● Statement ⇒ fiscal deficit by itself is not a bad thing and can have a positive impact
on the economy in the context of the stage of the economic cycle (e.g. recession
stage a fiscal deficit is what you need to dampen effects), national debt also
sustainable WITHIN limits (60%) but Japan has gone way over limits
Paragraph 1 ⇒ define a fiscal deficit (is when Government spending if greater than tax
revenue and is measured annually and safe limit is generally no more than 8%)
● One good impact of the fiscal deficit is that it is part of the AUTOMATIC STABILISER
(consists of a progressive tax system and welfare payments)
● Welfare payments aspect means that during a recession when unemployment is
rising, we make welfare payments based off unemployment to maintain consumption
and thus AD reducing the worse impact of recession → depth of recession by
keeping people spending, also reduces impact of the negative multiplier therefore
POSITIVE IMPACT (draw diagram of economic cycle with deep recessions without
stabiliser and more flat cycle with stabiliser)
● EVALUATION: what if the fiscal deficit is not part of the automatic stabiliser?
○ G can be much larger than T due to government policy, even without a
recession - spending for political reasons to increase popularity?
○ Worse case scenario is that it is CURRENT SPENDING (ie. not investment
and just overpaying people's salaries just to gain votes with public sector
workers, increasing size of public sector and paying them too much as pay is
not linked to productivity, can slow down GDP as paying more without more
efficiency) or that it involves the printing of money to cover the fiscal deficit
(provoking money supply inflation depreciating the currency)
● Thus DEPENDS on the context of the deficit
Paragraph 2 ⇒ National debt - show link to the first para (annual fiscal deficit always lead to
an accumulation and increase of national debt)
● National deficits are financed by the issue of bonds (Interest payments on bonds
have to be financed by tax revenue so more bonds you issue the more toal interests
you have to pay which is an opp cost and slow down productive govt spending such
as infrastructure or healthcare {increases productive capacity shown on PPF}
because paying IR not productive)
○ BAD aspect of excessive national debt as it prevents you from expanding
the productive capacity of the economy
● Excessive national debt ⇒ if debt:GDP ratio rises above 60//100% raising alarm
signals shows a lack of fiscal discipline signalling an increase in bond yields (IR on
bonds) as loss of confidence with investors → increases probability of default
○ May then start printing money to push away the chance of default (pay
interest on debt)
● EVALUATION: However G can have powerful multiplier effects but it DEPENDS on
whether you spend wisely
○ A rise in tax revenue as economic growth occurs and you can then reduce
national debt and it will not become permanent
Conclusion ⇒ state DEPENDS (fiscal deficit // National debt) on the context
● Discuss state of development of the economy
● If speaking of a large developed economy (have proper tax revenue as large GDP
and confidence from financial sector like banks so IR rise less quickly thus lower risk)
may not be that bad to have a large fiscal deficit as things like bond yields will not
rise to unsustainable levels
● If developing country, above conditions will not apply and have low confidence, also
have to issue bonds to fund national debt IN A FOREIGN CURRENCY (the dollar)
thus massive exchange rate risk if your currency depreciated against the dollar
Some occupations in the UK are facing large labour shortages. Hard-to-fill vacancies include
qualified chefs, software engineers, construction workers and qualified nurses.
Evaluate the factors that might influence the supply of labour in an occupation of your
choice.
(25 marks)
1) Monetary factors → wages are not high enough to have more marginal utility than
just welfare payments and sitting at home
2) Policy decisions → immigration and spending on education and minimum wages
(show on the natural rate of unemployment diagram how the govt could shift with
better policies)
Need to choose 2 points specifically like for other factors JUST look at immigration (can put
third into the conclusion) ⇒ look at Fakir handout for the analysis that he wants
1) Monetary factors → wages//rewards
2) Non monetary factors → other conditions of work (E.g. satisfaction with work role)
3) Other factors → policy decisions (immigration decisions affecting level of
competitiveness in a particular labour market, fiscal decisions in terms of spending
on education, minimum wage, trade unions), personal preference//personal aptitude
https://www.nurses.co.uk/blog/impact-on-nhs-of-the-nursing-workforce-shortage-in-2025/#:~:
text=The%20NHS%20is%20facing%20a,of%20more%20than%2010%2C000%20nurses.
https://mmarecruitment.com/nursing-shortages-uk-examining-the-crisis-in-the-nhs/
