Essay Plans Theme 2

Question 1

Economic growth

Answer 1

Benefits:
- higher disposable income / standards of living
- higher employment (labour derived demand)
- higher profits (accelerator effect)
- higher gov tax rev

Costs:
- demand pull inflation
- income inequality
- environmental costs
- current account defitict (increased import spending)

Question 2

Inflation

Answer 2

Costs of high:
- poverty
- erosion of savings
- low export competitiveness
- wage price spiral (higher wage higher inflation)

Benefits of low stable inflation:
- workers with higher wages
- natural consumption
- unemployment low
- reduced real value of debt

Question 3

Expansionary fiscal policy (g t) increase ad

Answer 3

Pros:
- boosts economic growth
- reduce unemployment
- redistribute income
- multiplier

Cons:
- demand pull inflation
- current account deficit
- worse gov finances
- x-inefficiency

Question 4

Expansionary monetary policy (i.r) increase AD

Answer 4

Pros:
- increase growth
- reduce unemployment

Cons:
- demand pull inflation
- current account deficit
- negative impact on savers

Question 5

Contractionary monetary policy

Answer 5

Pros:
- reduce demand pull inflation
- discourage household/corporate debt
- encourage saving (higher living standards)

Cons:
- lower growth
- higher unemployment
- reduces investment

Question 6

Supply side policies (increase productive capacity of economy)

Answer 6

Interventionist:
- gov spending on education/training
- gov spending on infrastructure
- subsidies to firms to promote investment

Market based:
- tax reform
- labour market reform
- competition policy

EVAL:
- no guarantee of success
- costly
- time lags

Question 7

Causes of current account deficit

Answer 7

Demand side:
- strong domestic growth (increase spending on M)
- recession overseas (decrease X)
- strong exchange rate (SPICED)

supply side:
- low investment
- low productivity
- high relative inflation
- depletion of resources

Question 8

Quantitative easing

Answer 8

How it works:
- Central Bank creates money electronically
- used to buy gov bonds (increase demand for bonds, Increase price of gov bonds yields lower i.r
- loan money out or invest
- high asset price causes wealth effect
- low cost of borrowing
- overall increases AD

HOWEVER,
- risky and cause high inflation
- increase demand for second hand goods which doesn’t increase AD
- no guarantee increase AD, confidence may still be low