How to Answer Examination Questions Economics

DESCRIBE/LIST  Give details or steps  Do not need to explain Describe what an a contractionary fiscal policy is.  A contractionary fiscal policy is used by the government to boost aggregate demand.  It can be done through cutting income tax or corporate tax.

OUTLINE  Give brief but important details about the factor  Do not need to explain  Similar to listing Outline the main macroeconomic goals of a government.  There are four main macroeconomic goals.  The government hopes to achieve high and sustained economic growth in the long run, low and stable inflation rate, encourage trade and secure a stable balance of payments and have high employment and low unemployment rates in the country.

DISTINGUISH  Compare the given factors  Use linking words such as “while”, “on the other hand”, “however”.  Write the difference ONLY  Write one difference in the same sentence, if possible Distinguish between a progressive tax and a regressive tax.  A progressive tax takes a larger proportion of income from high income earners while a regressive tax takes a smaller proportion of income from high income earners.  A progressive tax causes the proportion of a person’s income to increase if his income rises while a regressive tax causes the proportion of a person’s income to decrease if his income rises.

EXPLAIN  Give reasons when you are asked to explain  Use words such as “because”, “as” to show that you are trying to explain Explain why high inflation is undesirable in an economy.  It is undesirable because a high inflation will erode the real income of fixed income earners in the economy. Therefore, with a fall in real income, consumers are now not able to consume as many goods and services as they want. Thus, living standards fall.  It is also undesirable as a high inflation causes the value of money to fall. Hence, savings in real terms will decline as a result of high inflation. People will want to spend their money now than save it in the banks, causing the aggregate demand to increase again, worsening inflation rates.  In addition, a high inflation rate is undesirable because will cost sellers of goods and services to constantly review, change and update their prices and this would cause the firms to incur menu costs. The money could have been used to invest other beneficial things such as better training for the workers to increase productivity.

DISCUSS  Give both sides of the coin  Come up with your own conclusion on which side is better or give a balanced view (depends on question) Discuss whether taxation should be implemented in an economy. Yes – should implement when:  There is excessive private spending from firms. When firms overspending, it may lead to inflation. Hence to curb excessive private spending, the government increases taxes so that firms have lesser funds to invest, reducing the tendency of overspending.  The government wants to reduce the consumers’ consumption of demerit goods. Demerit goods usually produce negative externalities, therefore by increasing taxes on such goods, it increases the price of the demerit goods and deter consumers from consuming them.  The government wants to raise revenue to fund public goods or merit goods. They can obtain the funds from increasing taxes from individuals and firms. No – should not implement when:  There is a recession. During a recession, workers are laid-off or receive pay cuts. Firms have negative business optimism and are unlikely to make big investments. Hence the government should consider reducing or lifting tax rates to encourage consumers to increase spending and for firms to increase investments. Balance view: Hence, to decide whether the government should implement tax or not, the government has to consider its macroeconomic goals and look at the current state of the economy.

EVALUATE  Give your own opinion of the policy/measure/factor etc.  Weigh the pros and cons of that particular policy/measure/factor Evaluate the effectiveness of supply-side policies in an economy experiencing inflation. Pros: – effective because:  Causes a decrease in cost of production for firms, which essentially leads to a reduction in general price levels.  Also helps to boost economic growth as lower prices would mean that consumers are more willing and able to consume the good, without experiencing an increase in general price levels  It can help to curb cost-push and demand-pull inflation. (Draw graph to see if it true) Cons: – not effective because:  It does not reduce income inequality. Supply-side policies involve tax cuts during an inflation. This will benefit the higher income earners more than the lower income earners. Conclusion: In short, supply-side policies are beneficial for reducing inflation in an economy as it not only reduce general price levels, but also encourage economic growth. While it does not reduce income equality, the main problem of inflation is resolved. The government can use other measures or policies to reduce income inequality.