Economics Sample Questions

- Question on European economies and recovery.
- How interest rates help to control aggregate demand.

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  • Created on: 02-06-09 14:41
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Explain two ways in which a world recovery might help start a recovery in
European economies.
Imports and exports are vital industries all over the world, when other economies are doing
well ­ growing ­ foreign consumers can afford to buy our domestic products, as their
economy is growing they are more likely to do so. So by stimulating a world recovery, the
import trade will be improved in many European economies.
Secondly, the main effect of a world economy in recovery is the increase in consumer
confidence. When the world economy is growing, GDP is increasing, unemployment rates are
improving, and inflation is stabilising, consumers have positive expectations of the economy
and are encouraged to spend increasing consumption within the economy. If consumption is
increased, it means that saving is not opted for, with an increase in consumption, aggregate
demand would shift to the right encouraging firms to increase their output in order to cope
with demand, heightening the potential for more jobs being available reducing rates of
unemployment thus stimulating gross domestic product within European economies.
Explain two ways in which interest rate rises might help to control
aggregate demand.
Interest rates are defined as the cost of borrowing (for example taking out a loan) or the
reward for investment. By raising interest rates, the cost of borrowing money has increased
and this is a big move for banks as it is a determining factor of consumption. If interest rates
raise consumers tend to reduce their consumption and as a component of aggregate
demand, it will inevitably shift aggregate demand to the left. This puts pressure on
unemployment, as less output is required, so are less jobs rising unemployment. Again this
will mean consumption will reduce ensuring prices will not be raised by producers and may
possibly even deflate. Secondly, it would encourage households to save as the reward for
doing so will have increased. Again, it means consumers will have opted out of consumption.


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