Macro Essay Plans

Question 1

Explain How Govt. Policies can reduce the NRU (15)

Answer 1

P1 - Interventionist Policies - reduce Struc Un.
- Education Spending - Occ. Mobility
- Infrastructure Spending - Geog Mobility
LRAS outward shift diagram (keynes)

P2 - Market Base Policies
- Reduce Power of TU - reduce real-wage un.
Backwards TU perf. comp diagram.

Question 2

Discuss the view that falling unemployment will inevitably lead to trade-offs with other macroeconomic objectives (25)

Answer 2

ARG - Trade offs are likely but not inevitable

P1 - SRPC - Inf / Un = Tradeoff

P2 - LRPC - Successful SS policy = No tradeoff
- also link to LR growth

P3 - SR Growth resolves Cyc. Unemployment
- Keynesian AD shift towards YFE

Depends upon - Spare Capacity / Type of Unemployment

Question 3

Assess the view that maintaining low interest rates for a sustained period of time may be damaging to the UK macroeconomic performance (25m)

Answer 3

ARG - While it can stimulate economic growth and investment in the short term, it may also lead to potential risks and negative consequences in the long term.

P1- Low interest rates encourage borrowing and investment
- Investment - Cheaper credit - business expansion
- increased economic activity - job creation
- Increased employment / output - Increased AD
- Housing becomes more affordable
- Causing economic growth.

E1 - Low interest rates lead to debt bubbles
- Excessive borrowing = increased cumulative debt
- Low rates = greater risk / financial instability - systemic risk
- Potential bank failure (moral hazard)
Depends on financial regulation

P2 - Reduced reward on savings
- Those reliant on interest incomes see a fall in this.
- This discourages saving
- Funds unavaliable for future projects

E2 - Low interest rates can cause DP Inflation
- MPC>MPS causes increased consumption
- AD increases = Potential positive output gap.
- Inflation can worsen wealth inequality - those on lower incomes are less willing and able to continue consumption.
Depends on Spare capacity.

Question 4

Discuss the potential consequences of sustained economic growth on an economy. (25 marks)

Answer 4

Intro - Define Economic Growth, Discuss TIGER, Conclude economic growth is not always beneficial

P1 - Increased Consumption
- Assuming equal benefit of growth, an increase in GDP will signal an increase in GDP per capita.
- Increased disposable income = Higher consumption
- Improved personal utility
- Multiplier Effect
- Reduced absolute poverty = greater impact in LIC.
- Increased derived demand for labour = reduction in cyclical unemployment.
AD KEYNSIAN DIAGRAM

E2 - Inflation
- Keynsian view = if low spare capacity, increased inflation will lead to DP inflation.
- Current account deficit may increase - increased demand for imports.
Depends on spare capacity + increased demand for imports.

P2 - Increased Investment
- Higher incomes lead to higher tax rev (VAT + Income)
- Increased public sector investment
- (If crowding in), increased private sector investment
- Increased productive capacity
- Potential Accelerator = an increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment.
LRAS Outward shift diagram (classical)

E2 - Increased Inequality
- Growth will typically benefit the rich
- They own more assests and are able to reinvest.
- Wealth tends to grow faster than the economy
Depends on policies to redistribute wealth (ie. prog. tax) / propensity to invest.

Question 5

Explain the main causes of Deflation (15m)

Answer 5

Deflation refers to the general reduction of price levels throughout an economy, ie. a negative rate of inflation.

P1 - Demand-Side Deflation
Inward Shift of AD Diagram
- Deflation occurs due to a lack of sufficient demand
- Price levels reduce
- For example, if interest rates are high, then the MPC will reduce, reducing AD in the economy.
- Also, if Govt. increases corp tax, then there will be a fall in investment (AD=C+I+G+(X-M)).
- As a result, rGDP falls
- DS Deflation is damaging as it is anticipated and can be sustained = Deflationary Spiral

P2 - Supply-side Deflation
Outward shift of SRAS
- Caused by a fall in the cost of production
- Price levels fall
- For example, discovery of new raw materials can cause a fall in the costs of production.