Economics
Exam Technique Advice
German Economy - A Level Economics Data Response Plan
- Level:
- A Level
- Board:
- Edexcel
Last updated 25 Jun 2020
Here is a suggested data response plan for a question on the recently announced German fiscal stimulus.
Using the data provided and with the aid of an aggregate demand and supply diagram, consider the likely macroeconomic effects of a cut in VAT on the German economy (10 marks)
KAA Point 1
One impact could be to increase consumer demand as a 3% fall in VAT might lead to lower prices. If prices fall, this leads to a rise in real incomes which therefore raises household’s purchasing power. Consumption is the biggest component of AD and likely that the cut would raise consumer confidence, adding to demand. Table 2 shows a forecast fall in consumption of 10% in 2020 but a rebound of 7% in 2021 – perhaps helped by the decision to cut VAT.
Evaluation Point 1
The impact of a fall in VAT on consumers depends in part on whether German businesses choose to pass on some or all the tax reduction in lower prices. They might seek to keep prices constant to help restore profits. Table 2 shows a forecast 9.3% fall in capital investment suggesting low profitability. VAT exemption for 6 months (i.e. cutting VAT to zero) might make a bigger difference.
KAA Point 2
A cut in VAT could stimulate business investment. VAT is charged to suppliers, so a fall in VAT will increase their operating profits and lift business “animal spirits” leading to an increase in demand for capital goods. Investment likely to drop by more than 20% in 2020, suggesting a VAT fall would be welcome. (AD-AS diagram)
Evaluation Point 2
Investment is driven by many factors and tends to lag changes in operating profits. A 6-month 3% reduction in VAT is unlikely to be very effective in increasing planned investment. Perhaps a policy with more impact such as the increased subsidies for buyers of electric cars will increase investment in e-vehicles and infrastructure.
You might also like
Fiscal Policy - Explaining Automatic Stabilisers
Student Videos
Biden's huge fiscal stimulus bill is approved
11th March 2021
Economics of Fiscal Drag
Student Videos
Sunak's Plan for Jobs
8th July 2020
Evaluating Fiscal Policy (Online Lesson)
Online Lessons
The Fiscal Multiplier
Student Videos
Surge in borrowing takes UK national debt above 100% of GDP
19th June 2020
Test 10: A Level Economics: MCQ Revision on Fiscal Policy
Practice Exam Questions
Recommended
Exam support for 2022
Online Grade Booster Courses for A-Level Exams in May & June 2022
Exam technique, advance information support, live revision and more from the tutor2u subject specialist teams