Macro Essays

Question 1

Evaluate effectiveness of demand side policies to stimulate growth

Answer 1

• Increase in gov expenditure on education (expansionary fiscal)

-Loose Monetary policy (decreasing base interest rates) -> less costs of borrowing

However:

• > Spending –> >fiscal deficit –> >National debt –> credit rating deteriorated –> <demand for bond –> less price for bonds –> >IR bonds –> harder to service debt

-Time

Question 2

Economic effects of continued objective to reduce budget deficit

Answer 2

• Try Oppositing the bonds argument
• Contractionary fiscal policy; less AD ( < G) therefore…

However:

• Reduced Crowding out
• SR concept, in LR, > spending

Question 3

Decreasing skill shortages; the conflicts with other objectives

Answer 3

• > G –> >AD –> more inflation
• <Unemployment –> environmental conflict

Question 4

X)Evaluate the use of demand side policies to reduce unemployment

Answer 4

1) Fiscal policy (reduce corporation tax) –> more profits ( less unemployment) but also more FDI (because less tax) –> AD shift right (with multiplier). >GDP –> <negative output gap –> < underemployment

2) Reduce Bank Rate –> more look to buy house –> > demand –> > house price –> postive wealth effect –> > consumption –> labour is derived demand.

However:

Question 5

Benefits of Globalisation

Answer 5

• Can engage in international trade (trade diagram + comparative advantage)
• > competition –> less costs –> productive efficient –> right shift LRAS –> econ growth

However:

-PPD

• Better firms able to exploit better –> infant industries get pushed out

Question 6

Evaluate the likely effectiveness of foreign aid in promoting growth and development in developing countries

Answer 6

-Financing government spending within the dvping country –> >G –> >AD ( w multipler) ( big AD increase because high MPC). If spent on capital expenditure–> LRAS –> AD AND LRAS –> non inflationary (Diagram) –> Econ growth–> >HDI - S.O.L

• Debt Relief ( reducing their debt ) - can you use the bonds argument in the LR ? - otherwise- the tax revenue + foreign aid can be used to actually develop the country instead of worrying abt their debt, is an injection + pay for imports –> feed population or captial goods

However:

• Corruption

-Moral Hazard

Question 7

(X)Evaluate the likely benefits of remittance flows to less developed countries. Refer to a developing country or countries in your response.

Answer 7

• Overcome savings gap, they got high MPC, banks are short of deposits… > ‘I” –> >AD + link to HDI.
  + Harrod Domar Model

-Increase disposable incomes –> >C –> >AD

-

Question 8

Evaluate the likely effectiveness of market-based and interventionist supply side policies to decrease unemployment in developed countries. Refer to a developed country or countries of your choice in your answer.

Answer 8

• Interventionist- Education + training (schemes targeted specifically at certain groups to reduce structural unemployment) –> right shift AD
• Market based: Abolishing NMW (+ diagram) –> less real wage unemployment.

However:

• Bonds argument
• Less incomes –> cyclical unemployment (because less spending) + AD diagram w multiplier

Question 9

Increase in protectionism

Answer 9

• (Tariff diagram) –> more tax rev (gov)
• Less FDI

However:

-Retaliation

• Domestic firms are more confident as less competition –> more ‘I’ –> AD. HOWEVER, macro objectives clash (inflation)

Question 10

Effects of growth of trading blocs

Answer 10

-Trade creation ( + diagram)

• Movement of labour ( + diagram )

However:

• Trade diversion ( + Trade diversion diagram )
• Domestic employment may fall, replaced by foreigners

Question 11

(X) Causes of wealth + income inequality

Question 12

Increasing Competitivness

Answer 12

• > Spending on Education
• Infrastructure

However:

• Bonds argument
• Time lag

Question 13

Costs and Benefits of a monetary union (25)

Answer 13

-Trade Creation

• Results in FDI

However:

• Only one central bank
• Overdependancy

Question 14

(X)Why is it good to develop manufacturing sector

Answer 14

• Likely to promote development ( Lewis Model) - Diversifies the economy and FDI

-

However:

• TNC’s are footloose

-

Question 15

Possible effects of a fall in external value of the … (basically depreciation)

Answer 15

• Helps improve the current account deficit ( > competitive) (> demand for exports because other currency can buy more ) and rupee can’t buy as much
• (X-M) is a component of AD, improves therefore…

However:

-For there to be an increase in the CA following depreciation –> Marshall Lerner must be satisfied + J Curve

-

Question 16

(X)Why depreciation bad (8)

Answer 16

• Increase in real value of debt, >difficult to service debt (need to convert > Lira)
• Raise inflation (cost - push) import raw materials

However:

• More price competitive

-

Question 17

How to intervene to prevent depreciation (5)

Answer 17

Are you buying or selling Lira, buy Lira ( > D) in the foreign exchange market and sell foreign reserves => demand out => re value

Question 18

(X)Discuss whether providing substantial Government financial support to banks is the best policy during a financial crisis (15)

Answer 18

• If bankrupt => savers lose money => consumption heavily affected => negative wealth effect ( because) => consumer confidence super low => depression
• Many business put money in bank, If go => shut down => unemployment + unemployment from bank => spillover effect => can’t borrow, even if you can, IR will be massive

However:

• Moral Hazard
• Costs for government => higher fiscal deficit => national debt… bonds argument

Question 19

(X)To what extent is a high national debt (public sector debt) to GDP ratio a cause For concern.

Answer 19

-Higher debt => downgrade credit rating…

• Increases real value of debt ( if deflation) => withhold spending => negative wealth effect => < consumer confidence => C… spiral but also…
• < Debt from less public sector spending => < Crowding out ( public sector grows at expense of private) => private sector flourishes => invest in technology => Lras shift => econ growth

-

• Cut in wrong sections => stagflation?

Question 20

(X)Discuss the role of the financial sector in growth And development of developing countries.

Answer 20

1) Saving rate low because bla bla bla… + financial sector underdeveloped. But if financial sector => > ‘I’ => > AD…

2) However doesn’t fix underlying problem of gdp / c low

3)

Question 21

(X) Is a large trade deficit a cause For concern ? (12)

Answer 21

• (X-M) is a component of AD, <X>M => AD shifts inwards, imports are leakage => negative multiplier...</X>

However:

• Depends where economy is
• If deficit is caused my importation of captial then no