Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
9.19
Between 2011 and 2014 the Bolivian economy grew 
at its fastest rate for 30 years. Th
is coincided with a 
marked reduction in its poverty rate and a change 
in its budget position from a defi cit to a balance. Th
e 
Bolivian government was praised by both the IMF 
and the World Bank for its sound fi scal policy.
1
Analyse why rapid economic growth may be 
associated with:
■ 
a fall in poverty
■ 
a change in the budget position from a defi cit 
to a balance.
2
Explain what type of fi scal policy the IMF and 
World Bank may describe as ‘sound’.
The impact of corruption 
and legal framework in 
an economy
An inadequately developed legal framework can encourage 
corruption. If fi rms and governments are corrupt, funds 
that could have been used for development may be diverted 
to the owners of the fi rms and to government offi
cials. 
For example, a lack of property rights may result in fi rms 
polluting local rivers without any penalties. Corrupt 
government offi
cials may steal money given as aid or raised 
in tax revenue. Th
ey may also be bribed to give contracts to 
certain fi rms.
261
Chapter 9: The macroeconomy 

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In this chapter it has been shown that:
■ 
Economic development involves more than 
economic growth.
■ 
Actual growth involves a movement within a PPC 
towards the curve, whereas potential growth is shown 
by a shift of the PPC to the right.
■ 
Economic growth is caused by increases in the 
quantity and quality of resources.
■ 
Economic growth may increase material living 
standards but may also create pollution and deplete 
resources.
■ 
GDP is the income of a country, whereas GNI is the 
income of a country’s population wherever they earn it.
■ 
There are a number of measures of living standards 
including GNI per head, the HDI and MPI.
■ 
The size of a country’s labour force is influenced by 
the number of people of working age, the school 
leaving age, the retirement age and the proportion of 
women who work.
■ 
Full employment may be achieved by increases in 
aggregate demand, while supply side policy measures 
may reduce the natural rate of unemployment.
■ 
The main types of unemployment are frictional, 
structural and cyclical.
■ 
Unemployment results in lost output, lost tax 
revenue and increased government spending on 
unemployment benefits.
■ 
Patterns of (un)employment change as countries 
develop, and as demand and technology change.
■ 
There are two main measures of unemployment: the 
claimant count and the labour force survey. Both 
measures have their shortcomings.
■ 
Reflationary fiscal and monetary policy measures and 
supply side policy measures are used to try to reduce 
unemployment.
■ 
A closed economy is one that does not engage in 
international trade, whereas an open econ omy is one with 
an international trade sector.
■ 
Initial changes in aggregate demand result in greater 
final changes in aggregate demand because of the 
multiplier eff ect.
■ 
Aggregate expenditure consists of consumption, 
investment, government expenditure and net exports.
■ 
An increase in aggregate expenditure will increase 
money GDP.
■ 
An inflationary gap will occur if aggregate expendi ture 
exceeds the full employment level of output.
■ 
An increase in investment may be caused by changes in 
income or by changes in other influences such as changes 
in technology and changes in business optimism.
■ 
The accelerator theory states that the level of 
investment depends on the rate of change in GDP.
■ 
The Quantity Theory of Money states that changes in 
the price level are directly related to changes in the 
money supply.
■ 
The narrow money supply is used largely to make 
payments whereas the broad money supply is money 
used both to make payments and to save.
■ 
Commercial banks create money by lending to their 
customers.
■ 
Keynesians favour government intervention to 
achieve full employment, while monetarists argue 
that control of the money supply is necessary to 
avoid inflation.
■ 
The liquidity preference theory states that there are three 
motives for demand in money which are the transactions, 
precautionary and speculative motives.
■ 
Aid may be given from one country to another country 
or through an international organisation.
■ 
The development of a developing economy may 
be hindered by its relationship with developed 
economies.
■ 
Trade and investment may promote development if 
trade is on fair terms and if investment, including FDI, 
raises GDP and employment and does not generate 
pollution and deplete resources.
■ 
The IMF and World Bank are international organ-
isations that help economies with balance of pay ments 
diff iculties that are in need of loans and grants.
■ 
Corruption and a lack of a developed legal framework 
can hinder development.