Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Exemplar for Internal Assessment Resource

Economics Level 2

Resource title: Closing the gap between NZ and Australia with significant, and sustainable economic growth policies

This exemplar supports assessment against:

Achievement Standard 91227

Analyse how government policies and contemporary economic issues interact

Student and grade boundary specific exemplar

The material has been gathered from student material specific to an A or B assessment resource.

Date version published by Ministry of Education

December 2011 To support internal assessment from 2012

© Crown 2010

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

© Crown 2010

Grade Boundary: Low Excellence

1. The student has comprehensively analysed how government policy and contemporary economic issues interact, which is required for Excellence. The student has comprehensively explained the objectives of government policies relating to significant and sustainable economic growth in the introduction. The student has fully explained how the three policies will achieve significant economic growth and explained in detail the direct impacts on growth and the flow-on effects to employment and inflation, integrating the changes shown on the AS/AD model into the explanations. Refer to part A. The student also justified how the policies would minimise any negative flow-on effects of growth on inflation and employment, integrating changes on the AS/AD, PPF and circular flow models into the explanations. Refer to part B. The analysis included a justification for using these economic policies to achieve significant economic growth, which was explained in detail using economic concepts, and changes shown on the AS/AD models were integrated into the explanations. Refer to part C. A more secure Excellence would include supporting evidence in the analysis of how the three policies would have also achieved sustainable growth, as part of the justification. For example: Policy One: Encouraging immigration will not be a problem for the environment as long as resource management codes are followed (forests or national parks aren’t being destroyed to house a larger population) increases in revenue can be spent on using city planners, which protect the environment and reduce congestion so that cities are better in the future. In the long term these policies will not have negative effects on the environment, if a negative were to arise the government could use some of the increased taxation it will gain from these policies to counteract any problems. Policy Two: Because there are more companies and workers with higher wages in the economy the government will receive more tax. Increased Crown revenue will affect other areas of the economy. Currently government has a requirement to pay for education and health sectors and uses surplus funds (if any) to pay for growth boosting-policy. If Crown revenue has increased (from taxes) the government can afford to spend more on growth related policy, which will further promote growth for later generations, making them better off than people today. Policy Three: As the government gains increased revenue from tax it can further reduce company and/or MTR taxes making producers and consumers better off today and in the future.

Student included introduction, and explanations of sustainable and significant growth.

Policy 1: Immigration laws will be relaxed. Cutting ‘red-tape’ or deregulation of immigration will increase the number of workers moving to NZ. Since human workers are a resource in production the immediate consequence of this policy is that the potential output will increase. This is shown as an increase on the ‘Y full’ limit of the graph (At maximum utilisation of resources market equilibrium would be on the Y full line). Because there will be more people in the economy the total quantity of goods and services purchased in the mid-term will increase, this is because of an increase in AD (Shown by a movement of the AD curve to the right). This shows that at every price level the real output increases. Immediately in increase in AD will

push inflation up (consumer competition forces prices upwards) and inflation will occur. More output will be produced in response to higher prices. In the long run competition between workers for jobs will force wage rates down. In paying lower wages firms can afford to employ more people than before and can produce more for the same cost. This means more goods will be supplied at each price level. This is shown as an increase in AS. Conclusion: Policy one gives a double shift of the AS and AD curves and therefore significant economic growth due to more workers and the multiplier effect through consumption, firms selling more

goods/services, workers receiving more income and purchase again, the circulation of money and physical flows will increase AD and output meaning more Real GDP. Inflation rate stays constant because the two shifts offset each others inflationary effect and in the long run inflation will return to its starting rate. The labour price falls and so employment increases, due to increased DL from firms.

Policy 2: Subsidise desirable university education. The purpose of this policy is to target specific tertiary education which will further promote growth. Reducing prices of economically beneficial degrees (which lose funding) will become more expensive, and will lose demand. Funding will go toward making degrees free or relatively less expensive for training specific workers which NZ needs, like training managers and marketing directors who can start or operate companies which promote unique goods and services and add

value to NZ’s raw exports. For example exporting high value pastries instead of just milk solids or producing designer fashion labels which use high quality wool which is readily available in NZ. The innovation needed to make these products could be taught in University, and should be encouraged by Government. This policy will fill the current deficits in some industry (for example IT), up-skill workers in anticipation of future growth in already powerful sectors (Agricultural) and encourage innovation in new sectors. Conclusion: Policy two gives a double shift of the

AS and AD curves and therefore significant growth due to the investment in human capital and total output that could be produced (potential productive capacity) increases because workers are more capable of producing more in the same set time level, this means the frontier on the PPC graph will expand and Y full will shift right (student included a PPF model). The inflation rate will fall slightly as AS increases (due to improved productivity of labour) are larger than the AD increases, improving growth without the high prices (inflation). Labour prices increase and employment increases due to targeted funding which encourages students to take specific courses or receive specific training, leading to up-skilled workers who are more valuable and can demand a higher wage, this will increase consumption spending and growth.

A

B

Student 1: Low Excellence

Policy 3: Reduce corporate tax. Businesses which are mainly ‘human skill’ based will be able to apply for reduced corporate taxation to the Inland Revenue. Businesses will be granted reduced tax rates based on their size, rate of growth and their employment of NZ workers. This policy will mean that expanding and/or larger companies will come to NZ and bring money into the country, whilst existing NZ companies who are granted the reduced tax will become more profitable and as a result produce more at the same price level. At first the government will lose income (taxes) but in the longer term the increases of new businesses and/or expansion of existing businesses in NZ will increase the amount of workers who are employed and therefore increase the total amount of income tax collected, the government will also be receiving company tax from a wider base of companies. Eventually the government will be receiving more income than before the policy was introduced. The government will run a deficit until the increasing taxation passes the starting level. Conclusion: Policy three gives a double shift of the AS and AD curves and therefore significant growth, by attracting overseas firms and local firms expanding so more is being produced at each price level. Also total output and Real GDP will increase due to the multiplier effect as firms use other local resources; growth in one sector in the economy bolsters flows to others. Inflation rate will fall slightly as AS increases (excess stock will produce more competition between suppliers to sell the excess stock and will lower prices) are larger than the AD increases. Labour prices will increase and employment increases due to more DL which will put pressure on wages to rise as firms are forced to outbid others for workers, higher wages means a higher standard of living which is an important goal of government (student included

AS/AD and circular flow models).

Summary of policies: (student included AS/AD models) Labour prices: The labour price decreases that would come from policy 1 are offset by increases from policy 3. Wage rates will therefore increase in line with policy 2. Pay increases from policy 2 are a result of a skilled economy with value adding skills. These workers rates are high because of the high quality of their labour not a shortage of workers. This means that businesses will thrive; producing high quality valuable products and standards of living will increase. Because education is unlimited policy 2 can continue to offer growth to future generations. I have not needed to introduce additional policy as policy 1 and 3’s effects balance themselves. Inflation rates: Policy 1 has no inflation, as the double shift of the curves offset each other. Policy 2 and 3 will have minor disinflation as the AS shift is larger than the AD shift. Inflation rate will therefore stay in a low and controllable range. Having low inflation is important because high inflation causes costs of production to rise, limits firms’ ability to reinvest and creates difficulty in planning. Because inflation stays at a low level I have not used additional policy. Significant growth: Policy 1, 2 and 3 each have a double curve shift, this means growth will be significant. The three policies are directed towards making NZ a ‘high value’ economy where our goods fill niche markets and make larger profits. Policy 1 also bring in foreign business and workers into the country, induced spending will further boost the economy to make growth significant. Induced spending makes all people in the economy better off as funds trickle down to skilled and unskilled workers. Corporations thrive in close proximity. Porter style growth, where corporations fight for a market share would take hold and the companies would expand, the result being that future generations will benefit from the increased growth of these companies. Sustainable growth: All the policies are fair and plastic as it will suit the people of today as much as future generations. The government alters education funding in a reactionary way (to the current situation) and also allocates spending in anticipation of future industry. This technique is flexible and will continue to offer sustainable growth for future generations. As NZ becomes a high growth nation, people will want to migrate here and we can choose from the best workers. Growth will increase Crown revenue and as a result will increase the operating budget; with more money to spend on growth based policies that will further increase Real GDP.

C

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Grade Boundary: High Merit

2. The student has analysed in depth how government policy and contemporary economic issues interact, which is required for Merit. The student has explained in detail the objectives of government policies relating to significant and sustainable economic growth. The student has explained how the three policies will achieve significant but not sustainable economic growth and explained in detail the direct impacts on growth and some flow-on effects to employment and inflation, integrating the changes shown on the AS/AD model into the explanations. Refer to part D. The analysis included a description of how the policies would minimise any negative flow-on effects of inflation on growth, using the AS/AD model, but these were not fully justified, which is required for Excellence. For example; the statement that the only negative effect on inflation will be the initial government spending and this will be minimal compared to the positive effects later on was not fully explained. Refer to part E. Additionally, the explanation of there being no negative flow-on effects to employment needs to be fully justified, by using an economic model, and explaining the related changes in unemployment levels due to the growth policies. Refer to part F. The policies were tied to the objective of significant economic growth, and the changes on the AS/AD model were integrated into the explanations. Refer to part G. However, as part of justifying for Excellence the three policies links to the objective of sustainable economic growth also need to be fully explained, integrating the changes shown on an economic model into the explanations.

© Crown 2010

Sustainable Development: Sustainable development requires that actions taken at the present do not inhibit prospects of future generations to enjoy the level of consumption, wealth, utility or welfare compared to those enjoyed by the present population. Significant Economic Growth: Significant economic growth is achieved when the policy introduced has a multiplier effect on the economy. This means that growth in one section of the economy will have flow on effects which result in even more growth effects for this section of the economy. For example if firms benefited from an increase in export receipts and so increased production, they would pay more wages out to their workers (households). This increase in disposable income (HDI) of the households will lead to increased consumer spending which will lead to firm’s further increasing production. This further increase in production is the multiplier effect.

Policy 1: The government will provide free tertiary education for students studying in I.T. provided they meet the pre-requirements for courses. The initial government spending on education will increase real GDP and also cause prices to go up. This is illustrated on the AS/AD model with a shift right of the AD curve from AD to AD1 and results in PL going up from PL to PL1 and Y moving right form Y to Y1. In the long run when the educated I.T graduates come into the workforce there will be an increase in human capital therefore productive capacity will increase. This is shown with blue on the AS/AD

model with a shift right of the AS curve from AS to AS1. Also as the graduates are specialised in the I.T field they will be more efficient and so productivity will increase. This will cause real output to go up and so an increase in real GDP and a decrease in price level. Policy 2: The government will provide a tax credit for firms that engage in research and development provided they have an annual turnover of at least $1 million. The initial government spending on the tax credit will cause real GDP to increase and price levels to rise. This is shown on the AS/AD model by a shift right of the AD curve from AD to AD1 and results in PL going up from PL to PL1 and Y moving right form Y to Y1. Provided that the R&D is successful (this is likely because only firms that are already relatively successful will be eligible for the scheme), in the long run firms will have higher productive capacity due to better equipment/workers from the R&D and they will increase production. This will cause real GDP to increase further and price levels to fall. This is illustrated by the blue on the AS/AD model above and a shift right of the AS curve from AS to AS1. Policy 3: The government will lower company taxes and this will entice overseas firms to come and operate in New Zealand. The initial result of the government spending on lowering company taxes will cause an increase in real GDP and also cause prices to increase. This is shown by a shift right of the AD curve from AD to AD1 on the AS/AD model and results in PL going up from PL to PL1 and Y moving right from Y to Y1. In the long run more firms will come and start operating in New Zealand and this will result in an increase in production. This will further cause real GDP to increase and price levels to decrease. This is shown by the blue on the AS/AD model above and a shift right of the AS curve from AS to AS1.

Government Policies:

The government will provide free tertiary education for students studying in I.T provided they meet per-requirements for courses.

The government will provide a tax credit for firms that engage in research and development provided they already have an annual turnover of at least $1 million.

The government will lower company tax to entice overseas firms to come and operate in New Zealand.

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Y Y1 Y2 Real GDP

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AS/AD Analysis

D

Student 2: High Merit

Inflation Analysis: (student included AS/AD model) Originally when the government spends on the three policies it will increase inflation because the demand will increase, pushing up prices. We can see this from the AS/AD model from the price level shifting up from PL to PL1 due to the shift right of the AD curve. In the long run however we will see inflation decrease because as human capital increases due to the education policy we will see production increase. Also as firms increase their capital due to the research and development policy we will see production increase further. Furthermore we will see an increase in the number of firms operating in New Zealand due to the company tax policy and this will also increase production. This overall increase in production will lower prices and cause inflation to decrease. This is shown on the AS/AD model by the price level dropping from PL1 to PL2. Additional Policies for Inflation: The growth policies proposed will not need any additional policies to minimise negative effects on inflation. This is because the only negative effect on inflation will be the initial government spending and this will be minimal compared to the positive effects later on. The negative effects will be outweighed by the continued increase in output from the policies which is shown on the AS/AD model by the AS curve shifting right from AS to AS1 and resulting in PL moving down from PL1 to PL2. Employment Analysis: (student included AS/AD model) The initial injection of government spending will cause an increase in employment and in the long run will lead to a further increase. As the price is pushed up firms will increase production and so will need more labour to cover the higher output. This is shown on the AS/AD model with a shift in Y form Y to Y1 caused by the AD curve shifting right. In the long run because of the education policy employment will increase. This is because people can now acquire free tertiary education in I.T and so will be employed in jobs they couldn’t be without the education. The research and development policy will increase employment because when firms do the R&D they will need to employ other firms to do this which will increase jobs and so increase employment. The company tax policy will increase employment because as firms move to operate in New Zealand they will need workers which will increase employment. The increase in firms will also require more infrastructure which will need to be built and this will cause employment to increase further. This overall increase of employment in the long run is illustrated on the AS/AD model by a shift right in Y from Y1 to Y2. Additional Policies for Employment: The growth policies proposed will not need any additional policies to minimise negative effects of employment because there will only be positive effects on employment from these policies. The first positive effect will be from the initial government spending. We can see this on the AS/AD model from the AD curve shifting right form AD to AD1 resulting in Y moving right from Y to Y1. The second positive effect will occur when firms increase production and is shown on the AS/AD model by a shift right of the AS curve from AS to AS1 which results in Y moving further right from Y1 to Y2. Significant Economic and Sustainable Growth: (student included AS/AD model). These government policies will achieve significant economic growth because firstly the government spending towards the policies will cause a shift right of the AD curve from AD to AD1 resulting in an increase in real GDP from Y to Y1. In the long run the policies will cause productive capacity to increase and also firms to increase production. This is shown on the AS/AD model by a shift right of the AS curve from AS to AS1 and will result in a further increase in real GDP from Y1 to Y2. This will lead to an increase in employment and therefore cause an increase in household disposable income (HDI) which will increase consumer spending from households to firms and will cause firms to expand production further which will lead to a further boost in employment and increase in (HDI). This multiplier effect will cause significant economic growth and will help close the gap between Australia and New Zealand. These policies will achieve sustainable economic growth because in the long run it will not inhibit prospects for future generations to have the same level of wealth, consumption, utility or welfare as we have today. In fact the economic policies proposed will allow future generations to have greater prospects for these things than we do today because it will create a more economically thriving society. The policies are perfectly viable and bearable and will not have huge effects such as resource depletion does on the environment. Also the policies are economically equitable because the returns in the long run will far outweigh the costs in the beginning.

G

F

E

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Grade Boundary: Low Merit

3. The student has analysed in depth how government policy and contemporary economic issues interact, which is required for Merit. The student has explained the objectives of government policies relating to significant and sustainable economic growth, but not in detail. The student has explained how the three policies will achieve significant but not sustainable economic growth and explained in detail the direct impacts on growth using the AS/AD model to support the explanations. Refer to part H. The flow-on effects to inflation and employment have been explained in detail using the AS/AD model to support the explanations. Refer to part I. The summary ties the policies to the objectives of significant and sustainable economic growth, but the explanations have not been supported with an economic model. Refer to part J. A more secure Merit would be attained if policy one was better explained using the AS/AD model. For example; the increase in AD is due to an increase in (G), but an increase in skills would also lead to an increase in AS due to improved productivity of labour. Policy three needs clearer explanation of what has caused AS and AD to shift. For example; Increased (I) shifts AD curve right, but if (I) in R&D leads to improved productivity through better technology, this also shifts the AS curve right, and for exporting firms means more price competitiveness overseas and higher export receipts, more (Y) domestically leads to more (C) so AD curve shifts right.

Additionally, the flow-on effects to inflation would be explained in more detail as to how the overall effect of two polices counteracts the negative impact of inflation with policy one, or considering the example above for policy one another explanation could be; due to improved productivity of labour there is now a double shift of the AS and AD curves for policy one, so all three policies have double shifts which means price level returns to the same level or decreases, so minimising the impact of growth policies on inflation and easing inflationary pressure.

© Crown 2010

Significant and Sustainable economic growth: Sustainable development requires that actions being taken by the present decision-makers do not diminish the prospects of future persons to enjoy levels of consumption, wealth, utility or welfare comparable to those enjoyed by the present population. Significant growth relates to closing the gap between NZ and Australia.

Policy One: Subsidisation of tertiary education; I think the NZ government should invest in certain areas of tertiary education. This will create a more skilled workforce, as students who go to university and see that their course is cheaper are more likely to stick to it until they graduate. The areas I would like to look at

subsidising would be science, information technology (IT), and farming. This is because science and IT are changing the world that we live in, and farming as it is, is one of NZs biggest industry. As these industries can reward you with a sizable income return (e.g. science=cancer research; technology experts=facebook/twitter, and farming=dairy products). The workers demand for goods and services, as seen as an increase on the graph will overall increase. The AD curve has shifted to the right. For example, if there is an increase in dairy farmer’s products, his income will increase. This may result in an increase in firms supplying spa pools demand

(this is called induced spending). An indirect expenditure flowing on from a farmers increase in dairy production could be a purchase of more fertiliser products for the farmer’s pastures. A way for the government to get maximum benefits out of this is to lay down some guidelines for the subsidised courses. One thing I would do is make students who benefit from the cheaper course would be, that they have to stay and work in NZ for seven years after graduating. This will mean their income that they earn will be spent around the NZ economy. Another thing would be, if they try and leave or quit the course they have to pay the government back. Also from the graph you can see that because demand for products has increased, prices have risen. This will increase our inflation rate (PL-PL1). Also, real output has increased (RO-RO1), so more jobs will be created/needed to cater for the needs of the economy.

Policy Two: Lower company tax; A low company tax policy in NZ could attract overseas investors to start new firms, and our higher skilled workforce would make the decision to invest here easier. But we wouldn’t allow just any new companies to start; they would need to be labour intensive (employ a certain amount of

New Zealanders). If the overseas investors use our higher skilled scientists or IT experts, to help create a new product, or faster ways to produce already invented products it would lead to a double shift in the AS/AD graph. The AD curve will shift to the right as the employees will demand more goods and services with their incomes. This will increase induced spending (e.g. workers will increase luxury goods, like going out for tea at fancy restaurants or buying new cars). The AS curve will shift right, as they have found a way to increase productivity. As there is a double shift, inflation has been counter

balanced. The increase in AD pushed up prices, but as new technology has helped supply increase

PL

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AS/AD Analysis

H

Student 3: Low Merit

(creating a surplus); firms will decrease prices to sell extra products. Employers will need more workers because of an AD/AS increase. More products are wanted and more products can be made faster, so more workers will cover the needs of the NZ economy. Policy Three: Subsidisation of research and development (R&D); the government should help firms by subsidising a certain percentage of the firms R&D. If firms are willing to invest $10,000 dollars in R&D, the government will pay an extra 10% of this. The government will give $1,000 dollars extra to the cause. If a firm is willing to invest more then the percentage will increase. As firms are now more willing to invest in R&D, this shifts the AS curve to the right. They will find better ways to use their resources and faster ways to produce. This will push down prices; on the world market our NZ exports (e.g. dairy products) will be more competitive. This will mean we will sell more and have higher incomes. This is why our AD shifts to the right. The increase in income will flow onto the rest of the economy. More luxury goods will be demanded, as a higher disposable income has occurred. This double shift on the graph (see above) again counter-balances the inflation rate. Demand pushes up prices and supply decreases prices. This means it has no effect on prices in general on the NZ market.

Additional Policies: Minimum wage increase; this policy should be introduced to help the low income earners who were not able to go to university. It means it will close the gap between the wealthy (rich) and poor. This will mean their quality of life will increase and they can then demand more goods and services. Also the new firms that are created might need employees to do ordinary tasks like cleaning the firm’s floors, windows, and toilets. This will decrease the unemployed as you don’t need to be qualified to do these jobs.

Flow-on effects-Inflation: After all my policies, two have double shifts that have counter-balanced inflation. But my subsidisation of tertiary education has shifted AD to the right; this increases prices and therefore increases inflation. However, the other two show no increase or decrease in inflation, because the policies result in double shifts, so the only real thing that has happened is real output has increased, shifted right so this means we have successfully achieved economic growth (student included AS/AD model). Flow-on effects-Employment: All three of my policies create more jobs in NZ. Either AD is causing firms to hire more workers so they can cater for consumers and for our exports, or supply is causing need for more workers due to new technology as the machines need people to operate them with the shift right of real output. This means unemployment is decreasing (student included AS/AD model).

Summary: My policies have achieved significant economic growth, because our newly higher skilled workforce and low company tax have increased our households’ disposable income. This means their net social welfare will increase, and stay that way as they keep on earning more money. The new jobs create employees with money they can now spend on goods and services. The owners/employers who benefit from this induced spending will be able to increase their spending so this cycle will continually repeat itself. Overall the government will also cover its costs from my policies, this is because they will benefit from an increase in the income PAYE tax, and more GST from consumers buying more goods and services. They achieve sustainable economic growth as well, because of the R&D policy. The firms benefit from new ways of production and their costs of production decrease, because firms found better ways to utilise resources that they use in the production line (e.g. a better way to use timber in the production of furniture making will save the firm from buying as much timber). If the government decided to adopt my policy package they would benefit from it for many years to come. It will close the gap between NZ and Australia, which has been a target they are trying to reach. It will mean the government will be more liked and they will stay in power for longer. NZ will be better off and be a much happier country.

J

I

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Grade Boundary: High Achieved

4. The student has analysed how government policy and contemporary economic issues interact, which is required for Achieved. The student has explained the objectives of government policies relating to significant and sustainable economic growth, but not in detail. Refer to part K. The student has explained how the three policies will achieve significant but not sustainable economic growth, and explained the direct impacts on growth using the AS/AD model to support the explanations. Refer to part L. The flow-on effects to inflation and employment have been explained using the AS/AD model to support the explanations. Refer to part M. The summary ties the policies to the objective of significant economic growth, but the explanations have not been supported with an economic model. And the policies have not been linked to sustainable economic growth, the other objective described in the introduction. Refer to part N. Additionally, the explanations provided for policies two and three were not detailed enough for Merit. Policy two needed more explanation as to what tax on imported materials could be reduced, maybe GST and if so how this targeted approach would work as a growth policy. Policy three required more explanation of how this government policy to increase subsidies would affect production, and for which markets, and the effect on AS.

© Crown 2010

Significant and Sustainable Economic growth: Sustainable economic growth is when actions take place in the present that will cause economic growth but does not diminish the prospects of future generation’s level of consumption, wealth, and utility or welfare compared to the people in the present. Sustainable economics takes greater account of the social and environmental consequences of growth strategies. For example, sustainable economic growth will consider if the strategy for growth causes any environment damage or resource depletion. Significant growth relates to closing the gap between NZ and Australia. Policy 1: Increasing the saving interest rate will encourage people to save money as it is profitable for them.

People are saving instead of spending so there will be a decrease in consumer spending. This will cause a decrease in aggregate demand which will shift the aggregate demand curve to left. This will cause a fall in price level (PL-PL1) and real output (Y-Y1). This will decrease economic growth. However, increase in saving will make an increase in investment in firms. When there is an increase investment, there will be an increase in productivity. This will increase aggregate supply which will shift aggregate supply to right. The price level will fall (PL1-PL2) and the

real output will increase (Y1-Y2). As the real output increase caused by shifting aggregate supply is greater than the decrease in real output caused by shifting aggregate, there will be an increase in real output overall. As the price level decreased and the real output has increased, there is an increase in economic growth. Policy 2: Decrease the tax on imported raw materials. This will cause an increase in aggregate supply, which means aggregate supply will shift to the right. This happens because firms are able to produce more as the cost of production decreased. Cost of production decreased as the tax on imported raw materials decreased and therefore firms are able to buy same amount of material at lower costs. This makes an increase in aggregate supply and will cause the price level to decrease and real output to increase. As there is an increase in real output which means productivity has increased so there is an increase in economic growth (student included AS/AD model). Policy 3: Increase subsidy on firms. This means there was an increase in government spending. This will increase aggregate demand (C+G+I+X-M=AD) which means the aggregate demand curve shifts to the right. This will cause an increase in price level and real output. As there was an increase in real output there was an increase in economic growth (student included AS/AD model). Impact on inflation: Increasing the saving interest rate will make people save money. People are saving instead of spending so there will be a decrease in consumer spending. This will cause a decrease in aggregate demand which will shift aggregate demand curve to left. This will cause a fall in price level. Increase in saving will make an increase in investment. When there is increased investment, there will be an increase in productivity. This will increase aggregate supply which will shift aggregate supply to right. The price level will fall. As the price level decreased there was deflation. Decrease the tax on imported raw materials. This will cause an increase in aggregate supply which means aggregate supply will shift to right. This happens because firms are able to produce more because the costs of production have decreased. This makes an increase in productivity which will increase aggregate supply and will cause the price level to decrease. As there was decrease in price level, there was deflation. Increase subsidy on firms. This means there was an increase in government spending. This will increase aggregate demand (C+G+I+X-M=AD)

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Student 4: High Achieved

which means the aggregate demand curve shifts to the right. This will cause an increase in price level. The price level increased and therefore there was inflation. The shift of aggregate supply to the right was much greater than shift of aggregate demand to the right so overall the price level decreased which means there was deflation, (see graph below). Impact on employment: As the equilibrium has shifted closer to the Y-Full, suggests there was an increase

in employment. As increasing the saving interest rate, decreasing tax on imported raw materials and increasing subsidy for firms caused an increase in real output, which means there was an increase in productivity. As productivity has increased firms may have to employ more people to work because firms may not be able to produce at their full capacity as there are not enough people and therefore firms employ more people to produce at full capacity. As more people are employed, the unemployment rate will decrease and employment rate will increase.

Summary

Policies: Increasing saving interest rate Decrease the tax on imported raw materials Increase subsidy for firms These policies showed a significant economic growth as the graph above shows there was a significant increase in real output which means productivity has increased significantly and the increased subsidy for firms made an increase in aggregate demand as it is government spending and therefore increased price level a little bit making sure that the price level was not too low. There was significant real output and the price level decreased showing us there was deflation but not too much and this shows there was significant economic growth.

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N

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Grade Boundary: Low Achieved

5. The student has analysed how government policy and contemporary economic issues interact, which is required for Achieved. The student has explained the objectives of government policies relating to significant and sustainable economic growth, but not in detail. Refer to part O. The student has explained how the three policies will achieve significant but not sustainable economic growth, and briefly explained the direct impacts on growth using the AS/AD model to support the explanations. The flow-on effects to inflation and employment have been briefly explained using the AS/AD model sometimes to support the explanations, but more consistent use of the AS/AD model and more explanation are expected for Achieved. Refer to part P. The summary ties the policies to the objectives of significant and sustainable economic growth, but the explanation is brief and has not been supported with an economic model. Refer to part Q. A more secure Achieved would address the above points and the direct impacts on growth of the government policies would be explained more, using the AS/AD model. Policy two for example; more (I) in R&D will increase AS, shifting the curve right from AS to AS1 due to increased productivity due to better technology, so this will result in real output increasing from RO to RO1 and this means an increase in economic growth.

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Significant and Sustainable Economic Growth

Significant growth is large growth that would in this case help to close the income gap between NZ and Australia. Sustainable economic growth is when growth is being achieved, but is also not destroying a resource while doing it, so not only can the present generation enjoy the effects also future generations can use both the resources and benefit from the effects of the plan. Policy one

The first policy is to lower income tax. This will produce economic growth because this will increase the amount of deposable income for the average household leading to an increase in consumption. This increase in aggregate demand will result in a higher level of scarcity for commodities, so the price will increase, and thus supply will also increase as a higher level of output will be needed to satisfy the increase in demand and also move AD up as well as price and demand as you can see on the graph. This policy will effect inflation by increasing it, because the increase in AD causes the price to

rise because households are able and willing to buy more. As for unemployment it will decrease because firms need more resources in order to produce a higher level of output. More resources are employed and the equilibrium moves closer to Y full as shown on the graph. Policy two

My second policy is putting incentives into research and development (R&D); this will be achieved by as long as the firm research’s increases aggregate supply the government will pay for all its research costs. This means that firms will want to invest in R & D that will increase AS as shown on the graph. Its effect on inflation is that it will decrease because there is more competition on the market they will have to lower their prices that decreases inflation. The impact on employment is that it will decrease because with the new technology they can replace some of their workers.

Policy three (student included a AS/AD model) My third policy is to increase welfare spending. This will produce economic growth because the lower income earners have more income this means that they spend more on goods and services and therefore increasing AD which leads to an increase in supply which leads to an increase in economic growth. The effect on inflation is that it will increase because with increased AD comes an increase in price level; the effect of this policy on employment will decrease because firms need more resources in order to produce a higher level of output. Summary So all of these policies as a whole will increase economic growth significantly because all the policies produce economic growth and some also have other positive effects such as increasing employment. So overall I think these policies will increase economic growth as well as being sustainable, because R&D encourages more efficient and productive use of resources.

PL

RO

OO

Y full

PL

AS

AD

AD1

PL1

RO1 RO

PL

RO

Y full

PL1

AS AS 1

PL

RO RO1

O

P

Q

Student 5: Low Achieved

Exemplar for internal assessment resource Economics 2.6B for Achievement Standard 91227

Grade Boundary: High Not Achieved

6. The student has not adequately analysed how government policy and contemporary economic issues interact, which is required for Achieved. The student has explained the objectives of government policies relating to significant and sustainable economic growth, but not in detail. Refer to part R. The student has described how the three policies will achieve significant but not sustainable economic growth, and briefly explained the direct impacts on growth using the AS/AD model to support the explanations. Policy one has no clear explanation as to why the AS curve shifts right, and no discussion of Y and PL. Refer to part S. Policy two also has no reference to Y and PL and the student has not explained how the increase in (G) in R&D would affect AD. Refer to part T. Policy three does not explain how Kiwisaver increases (G), or how this leads to an increase in (I), there is no clear explanation of how Kiwisaver would increase AD or AS, and no reference to Y or PL. Refer to part U. The flow-on effects to inflation have been explained, but the AS/AD model was not directly used to support the explanations. Additionally, the flow-on effects to employment were not explained and an economic model was not used. Refer to part V. The summary ties the policies to the objective of significant economic growth, but the explanations have not been supported with the AS/AD model, and there is no explanation of sustainable economic growth. Refer to part W. The analysis is limited due to a lack of reference to the AS/AD model to support the explanations, and clearly explained government policies. The flow-on effects to employment were also not covered, so overall the student has not met the requirements of Achieved.

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Significant and sustainable economic growth is large growth that ensures that the use of resources and the environment today doesn’t damage prospects for use by future generations i.e. can be continued long into the future without negative effects further in time. Policy 1: My first policy is to remove university fees for specific courses, which NZ has a shortage of, and that have been selected by the government. The objective of this policy is to get people in NZ that have

specified qualifications for areas of work that are having shortages of staff. This policy will reduce the amount of unemployed as people will have qualifications for vacancies that are occurring at that time hence they will go straight into work. This is shown on the model by the eventual shift closer to ‘Y full’. This will cause government transfers to decrease as the numbers of unemployed has decreased so the government won’t be paying out as much money shown by the shift from AD to AD1. Therefore there will be a double shift in price levels going down as the AD

shifts to AD1 and the AS curve shifts right from AS to AS1. This will mean price levels decrease, however due to the AD shift there will be a decline in economic growth initially before the AS growth kicks in and in the long run there will be significant economic growth. Policy 2: Involves the government refunding some tax/giving tax credits to higher earning firms once they have invested money into research & development (R&D). This will increase (G), therefore shifting AD to

the right to AD1. This will increase firms productivity if the R&D is successful, thus decreasing their costs of production. This will increase the firm’s profit, therefore Real GDP and economic growth will occur. The money is only refunded to the firms once the R&D has been completed. This will create demand-side growth. This increase in productivity will cause a shift in the AS curve to the right to AS1.

PL2

PL1

Y1 Y Y2

PL

AD

AS

AD1

Real Output

Price

Level

AS1

Yf

Price Level

Y-Full

AD1

PL2

PL1

Y1 Y2

AS1

AS

Y

PL

AD

Real Output

T

R

S

Student 6: High Not Achieved

Policy 3: Keep the Kiwisaver scheme going so that as well as people saving their money, both firms and the government will invest into this scheme shown in the graph above by the shift in the AD curve to AD1 as the government is spending more money due to this scheme. This will lower current consumption and give firms more money to spend on capital goods. This is shown in the model above by the shift from AS to AS1. This will create both supply-side and demand-side growth (student included AS/AD model). Effect on Inflation: 1. As shown on the AS/AD model inflation (price levels) will decrease with more qualified workers, R&D will be more successful so productivity will increase; hence production becomes less expensive so prices can go down. 2. There is some demand-side growth that occurs due to this policy hence there is some inflation, but this is inflation only in the short term. In the long term the inflation will be countered due to the AS growth making this a sustainable policy to use. 3. There would have been a short period of inflation when this policy was first started. But now there will be disinflation as we are well into this policy. However, this inflation will only occur in the short term as the supply-side growth in the same policy will lower the inflation (disinflation) over a longer term effectively ‘undoing’ the small amount of inflation created by the demand-side growth when the policy was first introduced. Overall, disinflation will occur in the long run as there is supply-side growth. However, there will be a small amount of inflation in the short term at first when the policy package is introduced. This is due to their being some demand-side inflation (student included AS/AD model). Effect on Employment: In all three of the policies the levels of unemployment decrease as in each case we move closer to Y-Full, thus increasing levels of employment. Summary: Therefore these policies would be suitable as it has significant and sustainable growth shown by the large amount of supply-side growth. This is the best option as it doesn’t increase inflation unlike demand-side growth. These policies will achieve significant economic growth as there will be a multiplier effect such as when R&D is successful and other firms will have to set up to produce this new good/service/technology. This will cause an increase in employment to fill the new jobs created but these firms will also need raw materials which could be purchased locally thus creating an increase in local demand. Hence some induced spending will occur as local firms would be receiving more income and there will also be an increase in local employment. Also there would be both supply-side and demand-side growth so the growth will be a lot faster than if there was only one type of growth. Therefore my policies don’t need any extra policies as there is already a multiplier effect for growth which will achieve significant growth. The policies don’t need any additional policies to combat the effects of inflation as despite there being a small increase in inflation in the short term, the supply-side growth will counter that and in the long term there will be deflation (negative inflation).

W

V

R

U