1. Study the extract below and answer the questions that follow.

Price controls on food

(1)In 1985, the Peruvian president ordered controls on the price of rice, sugar and other goods to keep basic foods affordable for the poor. However, when shortages and a black market arose, Peruvians were forced to queue (stand in line) for hours for basic foods, and later the presidency dissolved in a spiral of hyperinflation. As Peru again faces rising food prices, the re-elected president has rejected price controls and is focusing this time on tighter monetary policy to control inflation. 

(2)From Argentina and Venezuela to Russia, China and Thailand, governments are meeting the challenge of rising food prices by imposing price controls – fixing prices below market level – hoping to ease the burden on their populations and avoid social unrest. 

(3)However, evidence shows that such measures do not reverse price trends and can end up having the opposite effect. Some economists prefer income transfers or food assistance for the poor instead and warn that price controls lead to market distortions such as reduced supplies because they discourage domestic production. By reducing the underlying causes of inflation, price controls prevent market solutions. 

(4)According to experts, price controls are only likely to work where basic foods are a small share of total household spending, or when controls are implemented for a very short time, such as in Morocco during Ramadan. If price controls remain in place for too long, large price increases are more likely to occur when price controls are removed. 

(5)While price controls may be seen as a quick solution, there is little proof that they have worked to reduce inflation. Government officials in China, and other developing nations, see their current price control measures as temporary and insist they will not cause long-term problems. The government intervention is “not a price freeze,” but rather a method of limiting “unreasonable” price increases and reducing “inflationary expectations of the public”. 

(6)The key to dealing with higher prices, the International Monetary Fund (IMF) argues, is that governments tackle the problem with targeted transfer payments, rather than economy-wide subsidies. “In general we don’t like price controls,” says the IMF. “However, we do recognize that governments may want to slow down the impact on consumers.”

(a) Define the following terms indicated in bold in the text:

(i) inflation (paragraph (1))

(ii) transfer payments (paragraph (6)).

(b) Using a demand and supply diagram, explain the impact of a subsidy on the market for food.

(c) Using an appropriate diagram, explain the likely impact of imposing price controls on food items.

(d) Using information from the text/data and your knowledge of economics, evaluate the use of price controls to limit the impact of rising food prices on consumers.


2. Study the extract below and answer the questions that follow.

German economy contracts

(1)Europe’s biggest economy and a leading exporter, contracted by 0.5 % in the third quarter of 2008 after it contracted 0.4 % in the three months to the end of June, leading to increasing concerns about deflation. 

(2)Growth slowed due largely to a strong euro and rising oil prices. “A negative effect on gross domestic product (GDP) resulted from foreign trade, with a strong increase in imports and weakening exports,” the statistics office said. Many businesses have reduced production due to falling demand. GDP is now expected to contract by a record 6.2 % for 2009, the worst fall since World War II. 

(3)German unemployment could increase by around one million in 2009 and reach 4.4 million or 10.5 % by mid-2010. There will be gradual recovery starting in the second half of 2009, but economic growth will not return until the second half of 2010, according to the OECD*. 

(4)A 12 billion euro government spending package has been announced by the German Chancellor. The government says the new spending, which includes loans for medium-sized industry and a tax reduction for purchasers of new cars, will cause increased spending of 50 billion euros in Germany. 

(5)The package of measures to stimulate the economy may be a step in the right direction in terms of boosting the economy and reducing unemployment. At best, however, it will provide a small solution to the global economic downturn. This has been recognized by the German government, which recently passed a second package of emergency spending worth 50 billion euros (2 % of GDP). 

(6)Major measures planned for 2009–2010 include additional infrastructure investment of 17.5 billion euros, cuts in personal income and corporate taxes, social welfare spending of 15.8 billion euros, a reduction in health insurance contributions and subsidies for individual industries.

(7)However, some economists say the government has been too hesitant in its efforts to stimulate the economy. The impact of some measures may be limited by the rising savings ratio. Many of the measures in the government’s fiscal stimulus will not come into effect until the end of 2009 and the effects will not be felt until 2010, a time when the economy is already expected to start growing.

(a) Define the following terms indicated in bold in the text:

(i) deflation (paragraph (1))

(ii) savings (paragraph (7)).

(b) Using a business cycle diagram, explain Germany’s economic position in 2008 in relation to the business cycle.

(c) Using an AD/AS diagram, explain one type of unemployment experienced in Germany in 2009.

(d) Using information from the text/data and your knowledge of economics, evaluate the likely effectiveness of the German government’s fiscal policies designed to boost the economy and reduce unemployment.




您的电子邮箱地址不会被公开。 必填项已用*标注