91224- Sample exam answers One Expected Coverage (a) The total market value of all final goods and services produced in an economy, with prices held constant from a base year. (b) AD curve shifted to the right, showing an increase in real GDP. (c) Disposable incomes of consumers would increase, increasing consumption and hence increasing AD. Real GDP increases because more would be produced to meet the extra demand. (d) A reduction in interest rates would increase consumption as mortgage payments would decrease and the return on savings would decrease. Investment would increase due to the lower cost of borrowing. Exports would increase due to the depreciation of the New Zealand dollar as there would be a drop in foreign investment. AD will increase as C, I and X will increase. So real GDP and growth increase as more is produced to meet the extra demand. AD would probably increase by more with an interest rate cut compared to an income tax cut as more components of AD are increasing. Because of the greater increase in AD there would be a greater increase in real GDP and hence a greater impact on growth.

Two Expected Coverage (a) The maximum possible combination of output that can be produced with a given level of resources and technology. (b) The economy will move to a point on the curve, to the left of point A (Graph Three). (c) More investment means the economy is producing more capital goods. For this to happen there must be a reduction in the output of consumer goods (opportunity cost) due to scarce resources. (d) Foregoing consumption will reduce short-term growth as less consumption will reduce AD, so less will be produced due to the lower demand OR Foregoing consumption will have no effect on short-term growth as the increase in capital goods has been offset by the drop in consumer goods, so the economy is still on the same PPF. In contrast, foregoing consumption will increase long-term growth as more resources will be become available for investment (more capital goods), so productive capacity of the economy will increase, enabling greater future output and growth (PPF in Graph Four shifts outwards).

Three Expected Coverage (a) For example: Government direct tax revenue will increase due to incomes increasing. Government indirect tax revenue (GST) will increase due to increases in spending. (b) Higher standard of living due to more goods and services being produced and incomes increasing more jobs available as more workers needed to produce greater output. (c) Examples of Benefits: Firms will benefit from greater revenue and profits due to increased incomes and hence increased spending by households. Employees may have increases in income due to firms making greater profits and more work required. More employment opportunities as firms need more workers to produce more. Growth may encourage the development of more environmentally friendly production techniques and more consumers will be able to afford environmentally friendly products. Examples of costs: Firms may have increased costs as resources becoming more scarce due to growth. Increased growth may increase inflation, which will also increase costs for firms. Employees may have to work longer hours which will increase their stress levels and reduce leisure time. Increased growth may result in more pollution, the destruction/damage of forests, animal habitats, and global warming etc.

Four Expected Coverage (a) Direct tax Indirect tax Export receipts Import payments (b) There would be less consumption as consumers would be expecting their jobs and income prospects to be getting worse so they would spend less. (c) There will be fewer resources for firms due to more workers leaving New Zealand. Eg, a decrese in good and services due to less consumers. (d) A reduction in consumer confidence would reduce growth as the consumption flow would decrease. Hence fewer goods and services would be produced due to the drop in demand. An increase in emigration levels would reduce the resources flow. Firms production costs may increase due to labour being more scarce. The consumption flow would also decrease due to fewer consumers in NZ. Hence firms would produce less due to the lower demand. So less growth. The savings flow would decrease as there are fewer consumers in NZ saving. Hence the investment flow would decline as banks have fewer funds to lend to firms. With less investment there would be less produced so less growth. Increased emigration would have a greater impact on growth as more of the flows from the circular model are affected compared with reduced consumer confidence.