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2(a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 2) - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 3
Question 2
2(a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 2). 2(b) Examine two likely effects of... show full transcript
Worked Solution & Example Answer:2(a) Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 2) - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 3
Step 1
Explain one reason why a country such as Germany wants to avoid an increase in the national debt relative to GDP (Figure 2).
Answer
One key reason Germany aims to avoid increasing its national debt relative to GDP is to maintain fiscal stability and credibility. A lower debt-to-GDP ratio is crucial for signaling to investors that a country is financially responsible, thus attracting foreign investment and keeping borrowing costs low. An increase in national debt can lead to a loss of investor confidence, prompting a rise in interest rates and potentially hampering economic growth.
Step 2
Examine two likely effects of the forecast change in the rate of economic growth, 2020 to 2021, on firms in Germany (refer to Figure 3 in your answer).
Answer
The forecast change in the economic growth rate for 2020 to 2021 indicates a possible increase in economic activity post-recession.
Firstly, firms are likely to experience a rise in demand for their products and services as consumer confidence returns. This can lead to increased sales and higher revenues for businesses.
Secondly, positive growth conditions may prompt firms to invest in capacity expansion to meet the heightened demand. This could involve hiring more staff or upgrading production facilities, further stimulating the economy.
Step 3
Discuss the likely impact of investment in new technology on the profitability of firms in Germany, as described in Extract 1c (line 20). Use a cost and revenue diagram to support your answer.
Answer
Investment in new technology can significantly impact a firm's profitability. It can reduce production costs, leading to higher margins. By introducing efficient technologies, firms can either lower prices or increase profit margins if they maintain current pricing. Moreover, improved technology can enhance product quality and customer satisfaction, potentially boosting sales.
In a cost and revenue diagram, this can be represented by a downward shift in the average cost curve (AC), leading to an increase in the profit-maximizing output level (Q*), thereby enhancing overall profitability.
Step 4
Evaluate the microeconomic and macroeconomic factors which are likely to determine the rate of economic growth in Germany relative to other developed economies.
Answer
Microeconomic factors influencing Germany's economic growth include innovation, labor market flexibility, and business investment. A strong vocational training system helps maintain a skilled workforce, essential for productivity enhancements. Additionally, German firms are known for their strong focus on research and development, which fosters innovation.
On the macroeconomic side, factors such as fiscal policy, interest rates, and global economic conditions play significant roles. Germany's commitment to fiscal discipline limits public spending, impacting aggregate demand positively but potentially hindering growth during economic downturns. Furthermore, its export-oriented economy can be sensitive to global market fluctuations, affecting growth rates corresponding to economic cycles in other nations.