Economics, 3rd Edition

8 

What is the Laffer curve?

9 

Why do flexible labour markets improve the efficiency 

and capacity of the economy?

10 

Why is it necessary for governments to invest in 

education, training and research and development?

PROBLEMS AND APPLICATIONS

1 

Using the new Keynesian AS curve, explain why when 

the output gap is very large the AS curve has an almost 

horizontal slope.

2 

Why might governments find it difficult to accurately 

measure the size of the output gap?

3 

Assume that a government is successful in shifting the 

AS curve to the right. Show what happens to the Phillips 

curve in such a situation.

4 

What sort of trade-offs do governments face if a 

decision was being considered to reduce the level of 

welfare benefits as part of a market-orientated supply-

side policy?

5 

Governments who have implemented major cuts in 

higher rates of income tax have been accused of giving 

more money to the rich at the expense of the poor. 

Construct an argument to counter such an accusation.

6 

What sort of assumptions underlie the policy that cuts in 

income taxes would increase the supply of labour hours 

offered in an economy?

7 

What are the potential costs and benefits of policies 

designed to improve the flexibility of labour markets?

8 

Why do governments find it difficult to reduce 

spending?

9 

A government announces a decision to increase 

investment in spending on higher education with 

the intention of increasing the participation rate 

in higher education by young people to 45 per cent 

(i.e.  that  45  per cent of school leavers choose to go 

to university).

a.  Does it matter what sort of degrees these young 

people do at university?

b.  To what extent is the proportion of young people 

going on to university an important factor in 

improving the quality of human capital?

c.  What else might the government need to put in place 

to ensure that the policy was a longer-term success 

(hint: will there be appropriate jobs for young people 

when they graduate)?

10 

How would a government be able to tell whether a 

policy of increasing private sector involvement in 

public sector services provision actually lead to a more 

efficient outcome compared to having those same 

services provided by the public sector?

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