WAEC SSCE - Economics - 2020 (Essay)
Ajụjụ 1 Ripọtì
a. What is money?
b. Explain the following concepts:
i. value of money:
ii. demand for money,
(c) ldentify any four determinants of transaction demand for money
(a) Money. Money is anything that is generally acceptable as a means of payment for goods and services and in the settlement of debts. Its main functions are to serve as a medium of exchange, a measure (unit) of value, a store of value, and a standard for deferred payments.
(b) Concepts.
- (i) Value of money. The value of money is its purchasing power, that is, the quantity of goods and services a unit of money can buy. It varies inversely with the general price level: when prices rise (inflation) the value of money falls, and when prices fall the value of money rises. \[ \text{Value of money} \propto \frac{1}{\text{Price level}} \]
- (ii) Demand for money. The demand for money (liquidity preference) is the desire to hold wealth in cash or liquid form rather than in other assets. Following Keynes, money is demanded for three motives: the transactions motive (day-to-day spending), the precautionary motive (unforeseen needs), and the speculative motive (to take advantage of changes in interest rates or asset prices).
(c) Four determinants of the transactions demand for money.
- Level of income. The higher a person's or nation's income, the more cash is held for spending.
- The price level. Higher prices require more money to buy the same goods.
- Frequency (interval) of income payment. People paid weekly hold less than those paid monthly, other things equal.
- The general standard of living / spending habits. Higher consumption needs raise the cash held for transactions.
- The value of transactions a person expects to carry out over the period.
Examination takeaway. Keep the two ideas distinct: the value of money is about what money can buy (inverse of prices), while the demand for money is about why people choose to hold cash; the transactions motive in particular depends mainly on income and the price level.
Akọwa Nkọwa
(a) Money. Money is anything that is generally acceptable as a means of payment for goods and services and in the settlement of debts. Its main functions are to serve as a medium of exchange, a measure (unit) of value, a store of value, and a standard for deferred payments.
(b) Concepts.
- (i) Value of money. The value of money is its purchasing power, that is, the quantity of goods and services a unit of money can buy. It varies inversely with the general price level: when prices rise (inflation) the value of money falls, and when prices fall the value of money rises. \[ \text{Value of money} \propto \frac{1}{\text{Price level}} \]
- (ii) Demand for money. The demand for money (liquidity preference) is the desire to hold wealth in cash or liquid form rather than in other assets. Following Keynes, money is demanded for three motives: the transactions motive (day-to-day spending), the precautionary motive (unforeseen needs), and the speculative motive (to take advantage of changes in interest rates or asset prices).
(c) Four determinants of the transactions demand for money.
- Level of income. The higher a person's or nation's income, the more cash is held for spending.
- The price level. Higher prices require more money to buy the same goods.
- Frequency (interval) of income payment. People paid weekly hold less than those paid monthly, other things equal.
- The general standard of living / spending habits. Higher consumption needs raise the cash held for transactions.
- The value of transactions a person expects to carry out over the period.
Examination takeaway. Keep the two ideas distinct: the value of money is about what money can buy (inverse of prices), while the demand for money is about why people choose to hold cash; the transactions motive in particular depends mainly on income and the price level.
Ajụjụ 2 Ripọtì
(a) Differentiate between subsistence farming and commercial farming.
(b) State four features of subsistence farming.
(c) Outlines two positive and two negative effects of mining on the economy of West African countries
(a) Subsistence farming vs commercial farming.
| Subsistence farming | Commercial farming |
|---|---|
| Produces mainly to feed the farmer and family | Produces mainly for sale and profit |
| Small area of land cultivated | Large area of land cultivated |
| Simple tools (hoe, cutlass); little technology | Machinery and modern inputs used |
| Low output and little or no surplus | High output with a large marketable surplus |
| Little capital and family labour | Large capital and hired labour |
(b) Four features of subsistence farming.
- Production is mainly for family consumption, not for sale.
- Small farm size and scattered plots.
- Use of simple, crude tools and traditional methods.
- Reliance on family labour with little hired labour.
- Low yield and little or no surplus for the market.
- Heavy dependence on natural rainfall and little use of modern inputs.
(c) Effects of mining on the economy of West African countries.
Two positive effects:
- Earnings and revenue. Mining (for example crude oil, gold, bauxite) earns foreign exchange and government revenue used for development.
- Employment and infrastructure. It creates jobs and often brings roads, electricity, and towns to mining areas.
Two negative effects:
- Environmental damage. Mining causes land degradation, pollution of water and air, and destruction of farmland.
- Over-dependence on one product. Heavy reliance on a single mineral makes the economy vulnerable to falls in world prices, and it can draw labour away from agriculture.
Examination takeaway. For the comparison in (a) contrast the same feature (purpose, scale, tools, output) on both sides, and in (c) give a balanced answer with clearly separated positive and negative effects as the question demands.
Akọwa Nkọwa
(a) Subsistence farming vs commercial farming.
| Subsistence farming | Commercial farming |
|---|---|
| Produces mainly to feed the farmer and family | Produces mainly for sale and profit |
| Small area of land cultivated | Large area of land cultivated |
| Simple tools (hoe, cutlass); little technology | Machinery and modern inputs used |
| Low output and little or no surplus | High output with a large marketable surplus |
| Little capital and family labour | Large capital and hired labour |
(b) Four features of subsistence farming.
- Production is mainly for family consumption, not for sale.
- Small farm size and scattered plots.
- Use of simple, crude tools and traditional methods.
- Reliance on family labour with little hired labour.
- Low yield and little or no surplus for the market.
- Heavy dependence on natural rainfall and little use of modern inputs.
(c) Effects of mining on the economy of West African countries.
Two positive effects:
- Earnings and revenue. Mining (for example crude oil, gold, bauxite) earns foreign exchange and government revenue used for development.
- Employment and infrastructure. It creates jobs and often brings roads, electricity, and towns to mining areas.
Two negative effects:
- Environmental damage. Mining causes land degradation, pollution of water and air, and destruction of farmland.
- Over-dependence on one product. Heavy reliance on a single mineral makes the economy vulnerable to falls in world prices, and it can draw labour away from agriculture.
Examination takeaway. For the comparison in (a) contrast the same feature (purpose, scale, tools, output) on both sides, and in (c) give a balanced answer with clearly separated positive and negative effects as the question demands.
Ajụjụ 3 Ripọtì
(a) Define tariff.
(b) State the following laws:
i. The law of absolute cost advantage:
ii. The law of comparative cost advantage.
(c) Outline any four assumptions behind the law of comparative cost advantage
(a) Tariff. A tariff is a tax or duty imposed on goods that are imported (or sometimes exported) as they cross a country's border. It raises the price of the affected goods and is used to earn revenue and to protect domestic industries.
(b) The two laws.
- (i) Law of absolute cost advantage (Adam Smith). A country should specialise in producing and exporting the commodity that it can produce more cheaply (using fewer resources) than another country, and import the commodity that the other country produces more cheaply. Trade then benefits both because each concentrates on what it makes at lower absolute cost.
- (ii) Law of comparative cost advantage (David Ricardo). Even if one country is more efficient (has an absolute advantage) in producing both goods, mutually beneficial trade is still possible if each country specialises in the good in which it has the lower opportunity cost (its comparative advantage) and trades for the other. Each gains by giving up less of the alternative good.
(c) Four assumptions behind the law of comparative cost advantage.
- There are only two countries producing two commodities (the 2 x 2 model).
- Labour is the only factor of production, and it is homogeneous (labour theory of value).
- Factors are perfectly mobile within each country but immobile between countries.
- There are constant costs / constant returns to scale in production.
- There are no transport costs and no trade barriers (free trade).
- There is full employment of resources and perfect competition.
Examination takeaway. The key difference is that absolute advantage compares actual costs, while comparative advantage compares opportunity costs; comparative advantage is the more powerful law because it shows gains from trade even when one country is better at everything.
Akọwa Nkọwa
(a) Tariff. A tariff is a tax or duty imposed on goods that are imported (or sometimes exported) as they cross a country's border. It raises the price of the affected goods and is used to earn revenue and to protect domestic industries.
(b) The two laws.
- (i) Law of absolute cost advantage (Adam Smith). A country should specialise in producing and exporting the commodity that it can produce more cheaply (using fewer resources) than another country, and import the commodity that the other country produces more cheaply. Trade then benefits both because each concentrates on what it makes at lower absolute cost.
- (ii) Law of comparative cost advantage (David Ricardo). Even if one country is more efficient (has an absolute advantage) in producing both goods, mutually beneficial trade is still possible if each country specialises in the good in which it has the lower opportunity cost (its comparative advantage) and trades for the other. Each gains by giving up less of the alternative good.
(c) Four assumptions behind the law of comparative cost advantage.
- There are only two countries producing two commodities (the 2 x 2 model).
- Labour is the only factor of production, and it is homogeneous (labour theory of value).
- Factors are perfectly mobile within each country but immobile between countries.
- There are constant costs / constant returns to scale in production.
- There are no transport costs and no trade barriers (free trade).
- There is full employment of resources and perfect competition.
Examination takeaway. The key difference is that absolute advantage compares actual costs, while comparative advantage compares opportunity costs; comparative advantage is the more powerful law because it shows gains from trade even when one country is better at everything.
Ajụjụ 4 Ripọtì
The figure represents the production possibility curve of a nation, Use it to answer the questions that follow
(a) What is the opportunity cost of:
i. producing 30 units of cocoa;
ii. increasing textile production from 30 to 40 bales?
(b) interpret the following points as found in the graph:
i. point Y
ii. point G
iii. point X
(c) List three conditions that can enable the nation to produce at point X.
(d) State two basic economic concepts illustrated in the diagram above.
(e) i. Define production possibility curve
ii. What does the slope of the production possibility curve Indicate?
(a) Opportunity cost
- The opportunity cost of producing 30 tonnes of cocoa is 60 bales of textiles forgone.
- When textile production increases from 30 bales to 40 bales, cocoa production falls from 25 tonnes to 20 tonnes. Therefore, the opportunity cost is:
\[25 - 20 = 5\text{ tonnes of cocoa}.\]
Thus, the opportunity cost is 5 tonnes of cocoa.
(b) Interpretation of the points
- Point Y: This point lies within the production possibility curve. It shows under-utilisation or unemployment of available resources. The nation can produce more of one or both goods with its existing resources.
- Point G: This point lies on the production possibility curve. It shows full and efficient utilisation of the nation’s available resources.
- Point X: This point lies outside the production possibility curve. It is presently unattainable with the nation’s available resources and technology.
(c) Conditions that can enable production at point X
- Improvement in technology.
- Discovery or acquisition of additional natural resources.
- Increase in investment and capital goods.
Other acceptable conditions include research and invention, improvement in human capital, reduction of waste, and economic growth.
(d) Basic economic concepts illustrated
- Scarcity.
- Choice.
- Opportunity cost.
(e)
- A production possibility curve is a curve showing the maximum possible combinations of two goods that a nation can produce with its available resources and given level of technology when resources are fully and efficiently employed.
- The slope of the production possibility curve shows the opportunity cost of producing more of one commodity. That is, an increase in the production of textiles requires a reduction in the quantity of cocoa produced, and vice versa.
Akọwa Nkọwa
(a) Opportunity cost
- The opportunity cost of producing 30 tonnes of cocoa is 60 bales of textiles forgone.
- When textile production increases from 30 bales to 40 bales, cocoa production falls from 25 tonnes to 20 tonnes. Therefore, the opportunity cost is:
\[25 - 20 = 5\text{ tonnes of cocoa}.\]
Thus, the opportunity cost is 5 tonnes of cocoa.
(b) Interpretation of the points
- Point Y: This point lies within the production possibility curve. It shows under-utilisation or unemployment of available resources. The nation can produce more of one or both goods with its existing resources.
- Point G: This point lies on the production possibility curve. It shows full and efficient utilisation of the nation’s available resources.
- Point X: This point lies outside the production possibility curve. It is presently unattainable with the nation’s available resources and technology.
(c) Conditions that can enable production at point X
- Improvement in technology.
- Discovery or acquisition of additional natural resources.
- Increase in investment and capital goods.
Other acceptable conditions include research and invention, improvement in human capital, reduction of waste, and economic growth.
(d) Basic economic concepts illustrated
- Scarcity.
- Choice.
- Opportunity cost.
(e)
- A production possibility curve is a curve showing the maximum possible combinations of two goods that a nation can produce with its available resources and given level of technology when resources are fully and efficiently employed.
- The slope of the production possibility curve shows the opportunity cost of producing more of one commodity. That is, an increase in the production of textiles requires a reduction in the quantity of cocoa produced, and vice versa.
Ajụjụ 5 Ripọtì
(a) Define consumer goods.
(b) Explain the following forms of capital with an example each:
i. fixed capital
ii. social capital
iii. circulating capital
(c) Outline three reasons for the low level of savings in a country
(a) Consumer goods. Consumer goods are goods produced for direct final use and satisfaction by consumers, not for producing other goods. Examples are food, clothing, and a television set used at home. They may be durable (a car) or non-durable (bread).
(b) Forms of capital.
- Fixed capital. Durable producer goods that are used again and again in production over a long period without being used up in a single act of production. Example: machinery, factory buildings, tractors.
- Social capital. Capital assets provided mainly by the government for the benefit of the whole community rather than a single firm; also called social overhead capital or infrastructure. Example: roads, schools, hospitals, water and electricity supply.
- Circulating (working) capital. Capital that is used up or transformed in a single round of production and must be replaced each time. Example: raw materials, fuel, and money for wages.
(c) Three reasons for a low level of savings in a country.
- Low income. Most people earn little and spend nearly all of it on necessities, leaving little to save.
- High propensity to consume / large family size. Heavy consumption needs and dependants reduce what can be set aside.
- Lack of adequate banking and saving facilities, especially in rural areas, so people have few safe places to keep savings.
- Inflation. Rising prices erode the value of money saved and discourage saving.
- Low interest rates offering little reward for saving.
Examination takeaway. Distinguish the three capitals by how they are used: fixed capital lasts through many rounds of production, circulating capital is used up in one round, and social capital is community infrastructure provided mainly by government.
Akọwa Nkọwa
(a) Consumer goods. Consumer goods are goods produced for direct final use and satisfaction by consumers, not for producing other goods. Examples are food, clothing, and a television set used at home. They may be durable (a car) or non-durable (bread).
(b) Forms of capital.
- Fixed capital. Durable producer goods that are used again and again in production over a long period without being used up in a single act of production. Example: machinery, factory buildings, tractors.
- Social capital. Capital assets provided mainly by the government for the benefit of the whole community rather than a single firm; also called social overhead capital or infrastructure. Example: roads, schools, hospitals, water and electricity supply.
- Circulating (working) capital. Capital that is used up or transformed in a single round of production and must be replaced each time. Example: raw materials, fuel, and money for wages.
(c) Three reasons for a low level of savings in a country.
- Low income. Most people earn little and spend nearly all of it on necessities, leaving little to save.
- High propensity to consume / large family size. Heavy consumption needs and dependants reduce what can be set aside.
- Lack of adequate banking and saving facilities, especially in rural areas, so people have few safe places to keep savings.
- Inflation. Rising prices erode the value of money saved and discourage saving.
- Low interest rates offering little reward for saving.
Examination takeaway. Distinguish the three capitals by how they are used: fixed capital lasts through many rounds of production, circulating capital is used up in one round, and social capital is community infrastructure provided mainly by government.
Ajụjụ 6 Ripọtì
(a) Distinguish between competitive demand and joint demand.
(b) Using diagrams, explain how the following factors will affect the equilibrium price and quantity of commodity R in the market
i. an increase in the price of the Complement of commodity R:
ii. an increase in the price of a substitute of commodity R
iii. imposition of an indirect tax on commodity
(a) Competitive demand and joint demand.
- Competitive demand exists when two goods are substitutes, so that they satisfy the same want and compete for the consumer's income. A rise in demand for one reduces demand for the other. Example: butter and margarine, or tea and coffee.
- Joint (complementary) demand exists when two goods are used together to satisfy a want, so that they are demanded jointly. A rise in demand for one raises demand for the other. Example: cars and petrol, or bread and butter.
(b) Effects on the equilibrium price and quantity of commodity R.
- (i) A rise in the price of a complement of R. Because the complement is now dearer, less of it is bought, and since R is used together with it, the demand for R falls. The demand curve for R shifts to the left, lowering both the equilibrium price and the equilibrium quantity of R. On the diagram, show demand shifting left from \(D_1\) to \(D_2\) along the supply curve, giving a lower price and lower quantity.
- (ii) A rise in the price of a substitute of R. The substitute is now dearer, so buyers switch to R; the demand for R rises. The demand curve for R shifts to the right from \(D_1\) to \(D_2\), raising both the equilibrium price and the equilibrium quantity of R.
- (iii) Imposition of an indirect tax on R. The tax raises producers' costs, so supply falls; the supply curve shifts to the left (up) from \(S_1\) to \(S_2\). The equilibrium price rises and the equilibrium quantity falls.
Examination takeaway. A change affecting buyers' willingness (price of a related good) shifts the demand curve, while a change affecting producers' costs (a tax) shifts the supply curve; identify which curve moves before reading off the new price and quantity.
Akọwa Nkọwa
(a) Competitive demand and joint demand.
- Competitive demand exists when two goods are substitutes, so that they satisfy the same want and compete for the consumer's income. A rise in demand for one reduces demand for the other. Example: butter and margarine, or tea and coffee.
- Joint (complementary) demand exists when two goods are used together to satisfy a want, so that they are demanded jointly. A rise in demand for one raises demand for the other. Example: cars and petrol, or bread and butter.
(b) Effects on the equilibrium price and quantity of commodity R.
- (i) A rise in the price of a complement of R. Because the complement is now dearer, less of it is bought, and since R is used together with it, the demand for R falls. The demand curve for R shifts to the left, lowering both the equilibrium price and the equilibrium quantity of R. On the diagram, show demand shifting left from \(D_1\) to \(D_2\) along the supply curve, giving a lower price and lower quantity.
- (ii) A rise in the price of a substitute of R. The substitute is now dearer, so buyers switch to R; the demand for R rises. The demand curve for R shifts to the right from \(D_1\) to \(D_2\), raising both the equilibrium price and the equilibrium quantity of R.
- (iii) Imposition of an indirect tax on R. The tax raises producers' costs, so supply falls; the supply curve shifts to the left (up) from \(S_1\) to \(S_2\). The equilibrium price rises and the equilibrium quantity falls.
Examination takeaway. A change affecting buyers' willingness (price of a related good) shifts the demand curve, while a change affecting producers' costs (a tax) shifts the supply curve; identify which curve moves before reading off the new price and quantity.
Ajụjụ 7 Ripọtì
The table below shows the workers engaged by an agricultural firm over a period of time. Study it and answer the questions that follow;
| Number of workers | Total product | Marginal product | Average product |
| 0 | 0 | 0 | 0 |
| 1 | 20 | 20 | 20 |
| 2 | 50 | 30 | z |
| 3 | 70 | 20 | 23.3 |
| 4 | 80 | y | 20 |
| 5 | 80 | 0 | 16 |
| 6 | x | -9.8 | 11.7 |
(a) Calculate the values of X, Y, and Z.
(b) At what level of employment of labour does the firm experience:
i. increasing returns
ii. decreasing returns
ii. negative returns
(c) State the law of diminishing returns
(d) i. On a graph sheet, draw the total product and marginal product curves.
ii. State any two relationships between the two curves in (d)(i) above
(a) Completed table
| Number of workers | Total product (TP) | Marginal product (MP) | Average product (AP) |
|---|---|---|---|
| 0 | 0 | 0 | 0 |
| 1 | 20 | 20 | 20 |
| 2 | 50 | 30 | 25 (Z) |
| 3 | 70 | 20 | 23.3 |
| 4 | 80 | 10 (Y) | 20 |
| 5 | 80 | 0 | 16 |
| 6 | 70.2 (X) | -9.8 | 11.7 |
Calculations
\[Z=AP_2=\frac{TP_2}{2}=\frac{50}{2}=25\]
\[Y=MP_4=TP_4-TP_3=80-70=10\]
\[X=TP_6=TP_5+MP_6=80+(-9.8)=70.2\]
Therefore: \(X=70.2\), \(Y=10\), and \(Z=25\).
(b)
- Increasing returns: from 1 to 2 units of labour, as marginal product rises from 20 to 30.
- Decreasing returns: from 3 to 4 units of labour, as marginal product falls from 20 to 10 while total product continues to rise.
- Negative returns: at 6 units of labour, where marginal product is \(-9.8\) and total product falls.
(c) Law of diminishing returns
As successive units of a variable factor are added to fixed factors of production, the marginal product of the variable factor will initially increase, but after a certain point it begins to decline.
(d)(i) Total product and marginal product curves
(d)(ii) Relationships between total product and marginal product
- When marginal product is positive, total product rises. When marginal product is zero at the fifth worker, total product remains at its maximum level of 80 units.
- When marginal product becomes negative at the sixth worker, total product falls from 80 units to 70.2 units.
Akọwa Nkọwa
(a) Completed table
| Number of workers | Total product (TP) | Marginal product (MP) | Average product (AP) |
|---|---|---|---|
| 0 | 0 | 0 | 0 |
| 1 | 20 | 20 | 20 |
| 2 | 50 | 30 | 25 (Z) |
| 3 | 70 | 20 | 23.3 |
| 4 | 80 | 10 (Y) | 20 |
| 5 | 80 | 0 | 16 |
| 6 | 70.2 (X) | -9.8 | 11.7 |
Calculations
\[Z=AP_2=\frac{TP_2}{2}=\frac{50}{2}=25\]
\[Y=MP_4=TP_4-TP_3=80-70=10\]
\[X=TP_6=TP_5+MP_6=80+(-9.8)=70.2\]
Therefore: \(X=70.2\), \(Y=10\), and \(Z=25\).
(b)
- Increasing returns: from 1 to 2 units of labour, as marginal product rises from 20 to 30.
- Decreasing returns: from 3 to 4 units of labour, as marginal product falls from 20 to 10 while total product continues to rise.
- Negative returns: at 6 units of labour, where marginal product is \(-9.8\) and total product falls.
(c) Law of diminishing returns
As successive units of a variable factor are added to fixed factors of production, the marginal product of the variable factor will initially increase, but after a certain point it begins to decline.
(d)(i) Total product and marginal product curves
(d)(ii) Relationships between total product and marginal product
- When marginal product is positive, total product rises. When marginal product is zero at the fifth worker, total product remains at its maximum level of 80 units.
- When marginal product becomes negative at the sixth worker, total product falls from 80 units to 70.2 units.
Ajụjụ 8 Ripọtì
(a) Distinguish between the following pairs of terms:
i. capital expenditure and recurrent expenditure:
ii. fiscal policy and monetary policy.
b. Explain four reasons why the government of a country imposes taxes.
(a)(i) Capital expenditure and recurrent expenditure.
- Capital expenditure is government spending on durable assets and projects that yield benefits over many years, such as building roads, bridges, schools, and dams. It is non-recurring and adds to the nation's stock of capital.
- Recurrent expenditure is government spending on the day-to-day running of government that recurs regularly, such as salaries of civil servants, maintenance, and consumables. It does not create lasting assets.
(a)(ii) Fiscal policy and monetary policy.
- Fiscal policy is the use of government taxation and public spending (the budget) to influence the level of economic activity. It is operated by the government/treasury.
- Monetary policy is the use of instruments that control the money supply, credit, and interest rates (open-market operations, bank/liquidity ratio, discount rate). It is operated by the central bank.
(b) Four reasons why a government imposes taxes.
- To raise revenue. Taxes finance government spending on public goods and services such as defence, roads, and education.
- To redistribute income. Progressive taxes take more from the rich to fund services and transfers for the poor, reducing inequality.
- To control consumption. Heavy taxes on harmful goods (tobacco, alcohol) discourage their consumption.
- To protect infant/local industries. Import duties make foreign goods dearer and shield domestic producers.
- To manage the economy (stabilisation). Taxes are raised to curb inflation (reduce demand) or lowered to fight unemployment (boost demand).
- To correct a balance of payments deficit by taxing imports.
Examination takeaway. Keep the two policy tools separate by their operator and instrument: fiscal policy is government + budget (tax and spend), monetary policy is central bank + money and credit.
Akọwa Nkọwa
(a)(i) Capital expenditure and recurrent expenditure.
- Capital expenditure is government spending on durable assets and projects that yield benefits over many years, such as building roads, bridges, schools, and dams. It is non-recurring and adds to the nation's stock of capital.
- Recurrent expenditure is government spending on the day-to-day running of government that recurs regularly, such as salaries of civil servants, maintenance, and consumables. It does not create lasting assets.
(a)(ii) Fiscal policy and monetary policy.
- Fiscal policy is the use of government taxation and public spending (the budget) to influence the level of economic activity. It is operated by the government/treasury.
- Monetary policy is the use of instruments that control the money supply, credit, and interest rates (open-market operations, bank/liquidity ratio, discount rate). It is operated by the central bank.
(b) Four reasons why a government imposes taxes.
- To raise revenue. Taxes finance government spending on public goods and services such as defence, roads, and education.
- To redistribute income. Progressive taxes take more from the rich to fund services and transfers for the poor, reducing inequality.
- To control consumption. Heavy taxes on harmful goods (tobacco, alcohol) discourage their consumption.
- To protect infant/local industries. Import duties make foreign goods dearer and shield domestic producers.
- To manage the economy (stabilisation). Taxes are raised to curb inflation (reduce demand) or lowered to fight unemployment (boost demand).
- To correct a balance of payments deficit by taxing imports.
Examination takeaway. Keep the two policy tools separate by their operator and instrument: fiscal policy is government + budget (tax and spend), monetary policy is central bank + money and credit.
