25 mark question

Question 1

microeconomic and macroeconomic effects of policies to stimulate growth and development

Answer 1

macroeconomic:
- cutting interest rate -> hot money flows -> increase value of currency
- shifting out AD

microeconomic:
- increase in wages
- increase in productivity for firms
- cutting interest rates -> reduced unit costs for firms

Question 2

microeconomic and macroeconomic impact on an economy of changes in the level of investment

Answer 2

microeconomic:
- increased incomes + reduced unemployment
- increased productivity
- increased demand due to increased consumer confidence
- improved quality of life due to technological improvements

macroeconomic:
- shifts in AD - multiplier effect
- shifts in AS - increased spare capacity
- inflation
- balance of payments - effect of inward FDI

Question 3

microeconomic and macroeconomic influences on international competitiveness

Answer 3

microeconomic:
- productivity
- unit cost
- market structures
- labour market factors -> trade unions/NMW/regulation

macroeconomic:
- trade liberalisation
- inflation
- fiscal policy
- supply side

Question 4

microeconomic and macroeconomic effects of reduced government expenditure instead of cutting taxes

Answer 4

microeconomic:
- unit cost doesn’t increase
- fall in productivity

macroeconomic:
- deterioration in terms of trade
- fall in inflation
- reduced crowding out

Question 5

microeconomic and macroeconomic causes of a current account deficit

Answer 5

microeconomic:
- low productivity
- high NMW
- strong trade union

• resource depletion ( dutch disease )

macroeconomic:
- high economic growth -> high income -> high imports
- strong exchange rate
- high relative inflation

• poor investment - outdated tech - high export costs
• loss of competitive advantage ( deindustrialisation )

Question 6

microeconomic and macroeconomic reasons for protectionism

Answer 6

microeconomic:
- increased revenue
- protect workers
- protect against dumping
- protect standards

macroeconomic:
- protect infant industries - diversification
- protect against unemployment
- tariff revenue
- solve trade deficit

Question 7

microeconomic and macroeconomic effects of protectionism

Answer 7

microeconomic:
- higher prices -> reduced consumer surplus
- increased domestic producer revenue

• reduced allocative efficiency - production moves from a country with comparative advantage

macroeconomic:
- increased government revenue
- protection of infant industries
- long run reduction in unemployment

• inflation - increased import prices -> increased unit costs -> increased price level
• current account ( ceteris paribus )
• increased growth
• reduced unemployment

Question 8

microeconomic and macroeconomic effects of depreciation in the exchange rate

Answer 8

microeconomic:
- higher prices
- increased cost of production
- increased debt service costs - debts held in foreign currencies become far more expensive

macroeconomic:
- improved current account
- increase in growth - AD shifts out
- reduced unemployment
- inflation
- increased FDI

Question 9

microeconomic and macroeconomic barriers to development

Answer 9

microeconomic:
- low productivity
- poor education/health/infrastructure
- volatile commodity prices

macroeconomic:
- corrupt government
- low savings and investment - harrod-domar

Question 10

microeconomic and macroeconomic influences on international competitiveness

Answer 10

microeconomic:
- productivity
- unit costs - wages
- regulations
- competition
- dynamic efficiency/investment/R&D

macroeconomic:
- protectionism
- exchange rate
- tax rates
- relative inflation
- infrastructure

Question 11

microeconomic and macroeconomic effects of a minimum wage

Answer 11

microeconomic:
- increased unit cost
- reduce income inequality

macroeconomic:
- real wage unemployment / workers being replaced by capital
- inflation - cost push
- decrease in competitiveness of exports
- government may see increase in costs if employed many workers on NMW but if not then increased tax revenue from private sector

Question 12

microeconomic and macroeconomic effects of unemployment

Answer 12

microeconomic:
- social costs - depression/anxiety/crime - increased pressure on services
- increased pool of workers for firms
- worsening of market failures - increased consumption of alcohol

macroeconomic:
- fall in output
- government finances
- hysteresis - long term impact on LRAS
- lower inflation - philips curve
- current account benefits

Question 13

microeconomic and macroeconomic effects of nationalisation

Answer 13

microeconomic:
- allocative efficiency - solve market failure in the form of monopoly power -> lower prices and higher quantity/choice
- greater economies of scale
- skills/training/productivity

macroeconomic:
- government finances - cost of running - fiscal budget deficit
- employment
- inefficiency and inflation
- lack of dynamic efficiency - LRAS

Question 14

microeconomic and macroeconomic effects of market based development policies (trade liberalisation/promoting FDI/tax cuts/privatisation/deregulation)

Answer 14

microeconomic:
- increased competition - increased allocative efficiency - increased choice/quality and lower price
- increased dynamic efficiency
- market failure - environmental

macroeconomic:
- growth/incomes/living standards/poverty
- job creation - labour as derived demand
- increased tax revenue
- increased income inequality

Question 15

microeconomic and macroeconomic effects of market structures

Answer 15

microeconomic:
- allocative efficiency
- productive efficiency
- x-inefficiency
- anti-competitive strategies
- price discrimination

macroeconomic:
- dynamic efficiency - LRAS
- jobs - competitive market - jobs created
- productive efficiency - LRAS
- competitive markets and poverty alleviation

Question 16

microeconomic and macroeconomic effects of a trade union

Answer 16

microeconomics:
- increased wages and employment
- improved workers rights and protection
- monopsony labour market outcomes
- costs to firms
- wage discrimination

macroeconomic:
- could lead to unemployment
- inflation
- decrease international competitiveness
- reduce FDI

Question 17

microeconomic and macroeconomic effects of a subsidy

Answer 17

microeconomic:
- reduced price -> increased consumer surplus
- increased quantity and reduced market failure
- producer revenue and inefficiency
- cost to government

macroeconomic:
- protect domestic producers + workers
- inflation
- international competitiveness
- government finances
- FDI

Question 18

microeconomic and macroeconomic effects of privatisation/deregulation

Answer 18

microeconomic:
- allocative efficiency
- productive efficiency
- x-inefficiency
- dynamic efficiency
- stakeholder impacts
- market failures

macroeconomic:
- productive and dynamic efficiency - LRAS
- unemployment
- infrastructure building - competitiveness and FDI
- government revenue

Question 19

microeconomic and macroeconomic effects of free trade

Answer 19

microeconomic:
- lower prices -> increased consumer surplus
- quantity and choice
- competition -> static efficiencies
- technology -> lower costs of production
- economies of scale

macroeconomic:
- comparative advantage exploitation
- impacts on current account
- AD/Growth/Unemployment
- inflation
- living standards and poverty
- dynamic efficiency - LRAS

Question 20

microeconomic and macroeconomic effects of supply side policies

Answer 20

microeconomic:
- increase productivity
- competition benefits (deregulation)
- risk of monopoly power (deregulation)
- market failures -> government spending on the services

macroeconomic:
- increased growth
- lower unemployment
- lower inflation
- improvements in current account
- hit to government finances -> increase budget deficit

Question 21

microeconomic and macroeconomic effects of economic growth

Answer 21

microeconomic:
- market failures -> environmental (pollution)
- increased profits and dynamic efficiency

macroeconomic:
- income/living standards/poverty
- reduced unemployment
- inflation - demand pull
- worse current account due to increased imports and less competitive exports
- increased government tax revenue

Question 22

microeconomic and macroeconomic effects of FDI

Answer 22

microeconomic:
- market failures -> environmental (pollution)
- welfare of workers and pay
- dynamic efficiency -> costs/productivity/green production
- competition distortion/addition - foreign firms destroy home firms

macroeconomic:
- higher growth/ lower unemployment/increased living standards
- inflation
- balance of payments - FDI in financial account
- technology diffusion from new firms -> LRAS
- increased government tax revenue

Question 23

microeconomic and macroeconomic effects of expansionary monetary policy

Answer 23

microeconomic:
- impact on savers - lower interest rates
- higher house prices as interest rates are cut -> cheaper mortgages -> increased demand
- interest rate cuts -> lower firms costs -> increased profitability
- impact on indebted households

macroeconomic:
- increased growth
- reduced unemployment
- inflation - demand pull
- current account - cutting interest -> weaken exchange rate -> improved current account - or increased income -> increased imports -> worsened current account

Question 24

microeconomic and macroeconomic effects of contractionary monetary policy

Answer 24

microeconomic:
- impact on savers - higher interest rates
- house prices - fall in demand for houses due to increased interest rates
- firms costs and profitability - reduced profitability due to increased costs as increased interest rates
- impact on indebted households

macroeconomic:
- growth
- unemployment
- inflation
- current account
- reducing systemic risk
- reducing chance of bubbles

Question 25

microeconomic and macroeconomic effects of expansionary fiscal policy

Answer 25

microeconomic:
- crowding out - increased costs of productions for firms
- solve market failures
- public service impact
- x-inefficiency - wasteful government spending
- profits for firms - indirect tax cuts and corporation tax cuts

macroeconomic:
- growth
- unemployment
- inflation
- current account
- government finances - increased fiscal deficit

Question 26

microeconomic and macroeconomic effects of contractionary fiscal policy

Answer 26

microeconomic:
- crowding out
- x-inefficiency
- public services impact
- inequality

macroeconomic:
- government finances - fiscal headroom and confidence
- inflation
- trade
- growth
- unemployment
- productive capacity constraints

Question 27

microeconomic and macroeconomic effects of strong exchange rate

Answer 27

microeconomic:
- reduced costs -> increased profitability but less competitive exports
- domestic producer efficiency as imports are now cheaper for domestic consumers so domestic producers will need to improve efficiency to compete
- lower prices for consumers -> increased consumer surplus
- increased choice for consumer

macroeconomic:
- current account
- growth - AD/LRAS
- unemployment - AD/LRAS
- inflation - AD/LRAs
- reduced FDI

Question 28

microeconomic and macroeconomic effects of strong exchange rate

Answer 28

microeconomic:
- reduced costs -> increased profitability but less competitive exports
- domestic producer efficiency as imports are now cheaper for domestic consumers so domestic producers will need to improve efficiency to compete
- lower prices for consumers -> increased consumer surplus
- increased choice for consumers

macroeconomic:
- current account
- growth - AD/LRAS
- unemployment - AD/LRAS
- inflation - AD/LRAs
- reduced FDI

Question 29

microeconomic and macroeconomic causes of income inequality

Answer 29

microeconomic:
- education
- age - older higher wage with more experience
- capital intensive production
- technology - automation
- flexible labour contracts - 0 hour contract - lower income
- inheritance

macroeconomic:
- dominant sector for economic growth
- recession - lower skilled and incomes lose jobs the fastest
- globalisation - FDI/immigration/trade liberalisation e.g. losing comparative advantage or cutting costs to keep up with foreign competition
- government policies - lack of or corrupt governments

Question 30

microeconomic and macroeconomic consequences of income inequality

Answer 30

microeconomic:
- social costs - increased negative externalities
- incentive to be educated increased - increased productivity - reduced unit cost for firms
- incentive for entrepreneur
- incentive to work

macroeconomic:
- greater government spending to correct
- fall in living standards for those on lower incomes
- those on high incomes will seek to invest their yield - could lead to bubbles or for those on low incomes - indebtedness
- constraint on growth - those on high incomes have high propensity to save

Question 31

microeconomic and macroeconomic policies to reduce income inequality

Answer 31

microeconomic:
- NMW
- maximum wage

macroeconomic:
- progressive income tax
- government spending on benefits/welfare
- government spending on education/healthcare