Paper 1 · National Income and Economic Growth
Faced with unemployment, government decides to increase expenditure on goods and services. What situation yields the greatest increase in output in the economy?
Ahigh unemployment, bank loans
Bhigh unemployment, raising tax rates
Clow unemployment, raising tax rates
Dlow unemployment, issue bonds to non-bank sector
Explanation: High unemployment means spare capacity so output can increase most; financing via bank loans (credit creation) has no crowding-out effect and thus gives the greatest multiplier effect on output. The marking scheme confirms answer A.
ZIMSEC Economics Paper 1, November 2009, Q33
