Macroeconomic Objectives

Question 1

Pros and cons consumption led growth

Answer 1

A:
Largest component of AD (60%+)
Firms have more profit so multiplier effect
People have more RDY so less gov spending on benefits

D:
Not good if debt fuelled - unsustainable- may default on loan - hurts future demand - if IR increases, less borrowing
Consumption is volatile - depends on economic cycle - if spend lots on imports, high MPW
Wealth impacts C
Not all consumption beneficial if bad for environment

Question 2

Pros and cons investment led growth

Answer 2

A:
Supply side effects
Non inflationary economic growth

D:
If I on poor Q capital, useless
Not beneficial in isolation, workers need training to use capital
Can replace low skilled jobs - high unemployment
May be debt fuelled #zombiefirms

Question 3

Pros and cons export led growth

Answer 3

A:
More injections into circular flow of income
More profit, more investment- increase productive capacity
Development of facilitating industries like logistics and transportation

D:
Or one to exogenous shocks e.g. fall in RDY abroad
Demand pull inflation as AD increases
Protectionist measures reduce exports - may cause a trade war
Primary commodities have volatile prices and aren’t sustainable long term for developing countries
If export most of FoPs, won’t have enough to maintain living standard and products domestically

Question 4

Causes of long run economic growth

Answer 4

Change in q&q of FoPs
E.g. subsidies, competition policy, education, healthcare, infrastructure, changing immigration laws etc

Increase in labour productivity
Increase in workforce size
Investment
Infrastructure improvements
Increase in competition
New resource discoveries

Question 5

Pros of economic growth

Answer 5

Less unemployment
Increased tax rev
Reduced poverty
Use in standard of living
Increase power on international stage - higher GDP attracts more FDI - developed countries can export their products for cheaper

Question 6

Cons of economic growth

Answer 6

Lifestyle - may have to work longer hrs - poor work life balance
Environmental cost - air pollution, extracting raw materials etc
Inequality - regional inequality between rural and urban where some receive investment - increased I in tech means higher unemployment but rich entrepreneurs own capital
Inflation - those with fixed or low incomes will have lower standard of living
Worsen net exports - SPICED

Question 7

Causes of short run economic growth

Answer 7

Lower IR
weaker ER
Lower income/corp tax
Higher consumer/bus8ness confidence
Higher gov spending

Question 8

Pros and cons of GPI

Answer 8

A:
Has many more factors weighted in than GNI that are a mix of short and long term
Looks at environmental degradation - counts pollution negatively e.g. if gov gives subsidy to reduce pollution, this increases GPI

D:
Very expensive and time consuming to calculate
Some indicators are subjective - e.g. Cost of crime
May be driven by 1 indicators that is very high rather than equal development in them all

Question 9

Unemployment rate formula

Answer 9

(No. unemployed) / labour force(economically active) x 100

Question 10

Labour force survey

Answer 10

Questionnaire of 60,000 households carried out by ONS - those out of work seeking work in last 4 weeks and available to start work in next 2 weeks OR has job and will start in next 2 weeks

A:
Can be used by all countries so policy makers can compare them and make informed economic decision making
Includes those who aren’t eligible for benefits but are unemployed e.g. frictional unemployment

D:
60,000 households not representative enough of 60mn people in UK

Question 11

Claimant count

Answer 11

No. of people claiming JSA (job seekers allowance) each month - benefits

A:
Can be done cheaply as gov already have this info

D:
Some people may not apply as embarrassed - underestimated
Doesn’t count frictional unemployment as they can’t claim benefits
Doesn’t work in developing countries as they don’t have benefits

Question 12

Causes of unemployment (add evils when u figure it out)

Answer 12

Frictional
Seasonal
Voluntary
Cyclical
Structural

Question 13

Pros of full employment

Answer 13

Productive efficiency - max output
Living standard increased - more goods/services available and people have more income. More variety
Improved fiscal position - less spending on benefits, fiscal drag, increase tax rev etc…
Non inflationary growth - if gov use extra cash to spend on supply side policies
Improvements in development - increased gov spend into education, healthcare etc - improved HDI and GPI

Question 14

Cons of full employment

Answer 14

Inflation - little/no spare capacity
Less international competitiveness - as inflation 8ncreases, more expensive for abroad consumers - less net exports
Higher CoP - FoPs more scarce so have to pay more to obtain the
Productivity decrease - when everyone employed, workers don’t have to worry abt being replaced so slack off

Question 15

Whether full employment beneficial or not depends on

Answer 15

Quality of employment - low skilled zero hr
50% uk gig economy is underplayed

Control over inflation - if gov provide subsidies, firms can lower their prices
May spend on healthcare etc to increase health and productivity - increased quality of FoPs - AS increase

Question 16

Negative consequences of unemployment

Answer 16

Benefits - expensive for gov - wage replacement ratio too high

Less tax revenue

Loss of potential output - not operating on PPF

Lower standard of living - less RDY so less consumption and more poverty

Increased gov spending elsewhere - if unemployed, commit more crimes, gov spend on police sector or mental health etc

Social cost - divorce rates high cuz of financial stress - crime rates high - inequality

Hysteresis

Cost to other economies - people may migrate to where there are jobs - burden on host country as strain services like housing, schooling

Question 17

Positive consequences of unemployment

Answer 17

Find higher paying work - frictional
Lower CoP - high spare capacity
Reduced inflation pressure - cyclical - exports cheaper so more internationally competitive

Question 18

Whether unemployment is harmful depends on

Answer 18

Level of unemployment

Duration - 7% for 10 yrs worse then 10% for 2 yrs

Cause(type) of unemployment

Distribution of unemployment - deindustrialisation affects mainly north so bad

Benefits - developed nations have them but developing don’t

Question 19

Analysis Causes of inflation

Answer 19

Demand pull inflation:
IR - lower IR causes higher C
Increase in money supply - lowers IR so more borrowing
Rising house prices

Cost push:
Taxation
Cost of raw materials
Inflation expectations - if believe inflation will increase, will increase prices as workers will demand higher wages etc

Both:
Higher wages
Devaluation - increased CoP as importing raw materials more expensive

Question 20

Eval causes of inflation

Answer 20

Demand pull inflation:
IR - even if cut IR, some will still save for future, during recession low confidence and may expect IR to fall more so delay C
Increase in money supply - depends on level of spare capacity - if Keynesian section, won’t cause inflation
Rising house prices - illiquid so long process to sell - house prices volatile so not enough confidence to C

Cost push:
Taxation - if elastic product may not pass on increased prices
Cost of raw materials - prices of primary commodities like oil volatile - may just I in solar or wind
Inflation expectations - if people trust BoE, won’t negotiate higher wages or start buying lots

Both:
Higher wages - may be temp increase, no demand pull - companies control no. of zero hr contract so don’t need to increase prices
Devaluation - if against a country UK barely trade with, won’t cause demand pull inflation

Question 21

Whether a policy causes inflation depends on

Answer 21

Gov policy - can spend on supply side policies

Developed vs developing - developing hit YFE faster cuz less q&q of FoPs

Size of multiplier effect - bigger the multiplier, bigger the inflation

Question 22

Cons of inflation

Answer 22

A:
Shoe leather cost - real IR = nominal IR - inflation rate
If inflation keeps increasing real IR will be negative so people take their money out of the bank - have to do this multiple times as there are limits for money taken out in a day

Menu cost - firms have to adjust their prices more frequently

Unequal distribution of income - Fixed or low income people more affected - have to spend higher proportion of unstable income
But for rich people house prices increase - wealth affect so more confidence
Can hire financial advisors to help them deal with inflation and are less likely to lose their jobs as they are more skilled

Loss of international competitiveness - Export prices increased due to inflation so exports for whereas imports increase - so exports fall

Wage price spiral - workers demand higher wages so firms increase prices to cover extra CoP - cost push inflation so demand higher wages again

Question 23

Pros of inflation

Answer 23

Real wage flexibility (money illusion)

Gain to borrowers - gov will increase IR to combat inflation

Encourages economic growth (demand pull) - more I - non inflationary econ growth

Fiscal drag

Question 24

Whether inflation harmful depends on

Answer 24

What is increasing in price - if not needs, not that deep
Type of inflation - cost push not good cuz output decreases and PL increases - BUT demand pull is econ growth so not that bad
Volatility - high volatile, can’t plan expenditure or consumption or investment
Inflation compared to international competition
Group being considered - bad for fixed incomes, good for wealthy

Question 25

Cons of deflation

Answer 25

Delayed consumption - deflationary spiral

Real cost of borrowing increases - cuz real IR = nominalIR - inflation - when inflation negative, real IR higher than nominal - have to pay more than cost of living if they borrow

Debt increases - value of debt for those with fixed IR increases- assets at risk

Confidence -low confidence, so less profit, less I - assets value falls so can’t obtain as much loans from bank

Low profit

Question 26

Pros of deflation

Answer 26

Improved standard of living - for low income households

Increased international competitiveness - cuz of lower prices

Question 27

Whether deflation harmful depends on

Answer 27

Causes - If output increases, less harmful but if it doesn’t (left AD shift, bad)

Duration

Price level compared to international competitors