3.4B

Question 1

How does government debt arise?

Answer 1

–> Budget Deficit
–> Government-spending needs to be financed from borrowed funds
–> There are is enough collection from tax revenue to other sources

Question 2

What is sustainable debt?

Answer 2

–> Pay back timely and w/ interest
Debt sustainable:
- Use the borrowed funds efficiently
- Economy grows
- consumption –> production grows, employment increases, GDP grows
- Indirect + direct tax
–> Pay back debt

Question 3

What are some costs of high-level government debt?

Answer 3

1. Debt servicing costs
   –> high interest rates
2. Opportunity costs
   –> providing merit goods // paying off debt
3. Foreign exchange
   –> not enough funds for importing
4. Poor credit ratings
   –> inability to borrow funds by selling government funds

Question 4

What are some policies to decrease “cyclical unemployment”?

Answer 4

1. Monetary policies
   –> cut interest rates
2. Fiscal policies
   –> increase in G spending
3. Supply-side policies
   –> mainly affects potential output

Question 5

What are some policies to decrease “natural unemployment”?

Answer 5

1. Interventionist supply-side policies
   –> Reduces structural unemployment by setting up retraining programmes’support for re-training through grants and low interest loans, subsidies to firms hiring structurally unemployed workers…
   –> Reduces seasonal unemployment by providing information to workers on jobs available during off-peak seasons in other industries
   Advantage:
   + Direct positive impact on reducing unemployment without contributing to increased income inequalities
   Disadvantage:
   - Negative impacts on government budget and opportunity costs of government spending
2. Market-based supply-side policies
   –> Includes labour market reforms that increase labour market flexibility.
   –> Reducing the minimum wage could potentially reduce unemployment by lowering wages of unskilled workers
   –> Weaker labour unions reduce the upward pressure on wages making it easier for firms to hire because of lower costs
   –> Reducing job security makes it easier for firms to hire because they can more easily fire
   –> Reduction of unemployment benefits increase workers incentives to find work
   Advantage:
   + They can reduce the natural rate of unemployment without negative effects on government budget
   Disadvantage:
   - Contributes to income inequality and loss of protection for low-income workers

Question 6

What is the definition of “wealth”?

Answer 6

available assets that a person owns which may include property, stocks and
shares, personal savings or easily tradable valuable items such as gold or Jewellery.

Question 7

What is the definition of “income”?

Answer 7

the amount that an individual receives from income (if they have a job) from rent on land or property, interest on their savings in the bank or profit on stocks and shares that they may earn. These monies when added together collectively make up the individual’s income or gross income.

Question 8

What does the poverty cycle look like?

Answer 8

x

Question 9

What are some causes of economic inequality?

Answer 9

• inequality of opportunity
• different levels of resource ownership
• different levels of human capital
• discrimination
• unequal status and power
• government tax and benefit policies
• globalization and technological change
• market based supply side policies

Question 10

What are some possible solutions to economic inequality?

Answer 10

• policies to reduce inequalities of opportunities
• transfer payments
• targeted spending on g+s
• universal basic income
• policies to reduce discrimination
• minimum wages

Question 11

What is “PPP”?

Answer 11

Purchasing Power Parity (PPP):
It allows us to compare economic activity + living standards across many countries, by looking at the price differentials across countries - which help in comparing living standard

Question 12

How to measure “PPP”?

Answer 12

Take a basket of goods and services, and look at how much this would cost in different countries (countries that you want to compare)

–> The same basket of G+S costs 3k usd in the US, and 60,000 Baht in Thailand
–> so therefore 3000 usd = 60,000 baht
–> 1 Baht = 0.05 USD

Question 13

How to calculate the GDP at PPP:

Answer 13

Take the country (eg. Thailand)’s Nominal GDP and multiply this by the PPP exchange rate:

EG: 16.2 Trillion x 0.05 = $810 Billion