Economics · May / June 2025 · Paper 21 · Question 4

0455

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In 2023, India became the country with the largest population. This may affect the government’s macroeconomic aims. In 2018, the Indian Government cut the country’s corporation (corporate income) tax rate from 35% to 25%. Between 2019 and 2022, India’s inflation rate averaged 6%. Some economists suggested that to achieve its central inflation rate target, the government should cut its spending.

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4(a)[2]
Identify two macroeconomic aims of government that may conflict.
Full employment / low unemployment (1)
and price stability (1).
Economic growth (1)
current account balance (1).
Price stability (1)
redistribution of income / poverty reduction (1).
Economic growth (1)
economic sustainability (1). 2 If more than two macroeconomic aims given, consider the first three. Allow any macroeconomic aim.
4(b)[4]
Explain two reasons why a country may have a high population growth rate. Logical explanation which might include:
High birth rate (1)
due to e.g. low age of marriage / lack of education on birth control (1).
Low death rate / high life expectancy (1)
due to e.g. good quality healthcare (1).
Immigration /net immigration (1)
due to e.g. high incomes (1).
High fertility rates (1)
due to e.g. young female population (1).
Birth rate higher than the death rate (1)
results in higher natural growth rate (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. If more than two reasons given, consider the first three.
4(c)[6]
Analyse how a cut in the corporation (corporate income) tax rate can increase economic growth. Coherent analysis which might include:
Cut in corporation (corporate income) tax will increase the amount of profits that can be kept by firms (1)
may attract MNCs to country (1)
this will increase the funds firms have to spend (1)
on capital goods (1)
and increase incentive to invest (1)
more to spend on wages (1)
may create job opportunities / reduce unemployment (1)
raise consumer expenditure (1)
firms grow faster (1).
Higher investment (1)
will increase total demand (1). It may also increase the quality of capital goods (1)
may introduce new technology (1)
may increase productivity /productive capacity (1)
increase output / GDP (1).
Provide an incentive to enterprise (1)
as more profits can be retained / higher profits (1). 6 Do not credit answers that refer to income tax or any other tax than corporation tax.
4(d)[8]
Discuss whether or not a decrease in government spending will reduce inflation.
In assessing each answer, use the table opposite. Why it might:
may reduce total demand
lower total demand may reduce demand-pull inflation
if near full employment, lower demand may have a significant impact on inflation
may reduce need for taxes, lower indirect taxes may reduce prices.
Why it might not:
lower government subsidies may raise prices
lower government spending on education and training may reduce productivity and may increase cost of production
lower government spending on infrastructure could increase transport costs
higher costs of production may increase cost-push inflation
may be other causes of inflation e.g. rise in wages

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