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AS and A Level: Macroeconomics

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The macroeconomic objectives

  1. 1 Growth is measured usually by the GDP per capita. Be aware that just looking at GDP as a measure of growth is flawed to some extent and know the criticisms of it e.g. ignores the distribution of income, exchange rate problems.
  2. 2 Full employment – This usually tracks GDP growth to a large extent. Some unemployment in an economy is normal as people change jobs (frictional unemployment) and some would say a little unemployment is useful for preventing big wage rises.
  3. 3 Low inflation – Inflation is a persistent rise in the level of prices. If a country has inflation its prices are likely to rise compared with foreign competitors so the country will become uncompetitive.
  4. 4 The balance of payments needs to be in equilibrium, where the value of imports equals the value of exports.
  5. 5 The most important objective varies – For many years it was the balance of payments and unemployment. Until very recently it was inflation and much more recently, growth has become the most important. Remember that all objectives need to be achieved at the same time.

Macroeconomic Policies

  1. 1 The government tries to regulate the economy, mainly by affecting the level of Aggregate Demand (AD) and Aggregate Supply (AS). There are three main types of policy listed below.
  2. 2 Fiscal policy is using taxation and government spending to regulate AD by, for instance, increasing tax to reduce AD or borrowing more to spend on infrastructure projects to increase AD. Fiscal policy is used less to affect AD recently.
  3. 3 Monetary policy is essentially affecting the amount of money in the economy by changing the money supply, changing the exchange rate or altering the interest rate. In recent years, monetary policy has mainly come to mean just changing the interest rate with the main aim of affecting AD however quantitative easing is also monetary policy.
  4. 4 Supply side policies are designed to increase AS by improving the production potential of the economy. Examples include improving education and training, increasing competition for businesses and tax breaks for research and development.
  5. 5 In practice, governments use all three policies to regulate the economy. Supply side policies are seen as most effective as they also lead to lower inflation but their effects are in the long term.

Keynes versus Friedman

  1. 1 This is regarded as being a key ideological stand off regarding government regulation of the economy.
  2. 2 Keynes believed that the government had a big role to play in the economy by regulating aggregate demand. When AD was too low so there was low growth and unemployment, the government should borrow money and embark on public sector expenditure to stimulate AD and the economy. When AD was too high, the government should increase tax or reduce government spending to reduce AD.
  3. 3 Friedman was a monetarist. He believed that the free market should be left to itself to regulate the economy. He believed that left alone, the economy would provide full employment and growth. The government would only create inflation by injecting money into the economy. The government should regulate the money supply only.
  4. 4 The dominant ideology changes. From 1945 to 1979, Keynes was dominant. During the 1980s monetarism came back. Now there is arguably a more balanced view.
  5. 5 Avoid simplistic analysis. The debate concerning the role of the government in macroeconomics is complex.

  • Marked by Teachers essays 5
  • Peer Reviewed essays 35
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  1. Peer reviewed

    Discuss the effectiveness of a fiscal policy in reducing unemployment

    5 star(s)

    Fiscal policy would only be used as a short term solution to unemployment and is not sustainable. There are other factors external to the fiscal policy that can limit its effectiveness such as interest rates. Interest rates have substantial impact on the levels of spending by consumers.

    • Word count: 558
  2. Peer reviewed

    Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore.

    4 star(s)

    Being a small and open economy, Singapore have place a strong emphasis on export orientated growth due to our small domestic market, thus resulting in a strong dependence on export revenue to sustain our economic growth. Moreover, with limited domestic investment and the openness to international capital flow, we are more dependent on foreign direct investment (FDI). Therefore, this two components account for a large proportion of the total injections in our economy. As for withdrawals, due to the lack of natural resources and the policy of free trade, we have high import expenditure.

    • Word count: 904
  3. Peer reviewed

    Discuss the extent to which a reduction in the rate of interest can be effective in increasing consumer expenditure and investment.

    4 star(s)

    Increases in consumer expenditure will most likely increase aggregate demand as consumer expenditure is a component of aggregate demand. Increases in aggregate demand will promote further rounds of spending in the future as unemployment levels will be lower and economic growth will be higher hence giving consumers more confidence to spend more, therefore interest rates are effective in increasing consumer expenditure. Lower interest rates will also increase investment levels within the economy due to the same reasons mentioned above that will increase consumer expenditure.

    • Word count: 699
  4. Peer reviewed

    Discuss the extent to which an increase in exports will improve an economy's macroeconomic performance.

    4 star(s)

    An increase in aggregate demand would mean an increase in economic growth, which shows good economic performance. Diagram below shows the increase n aggregate demand. Exports will also improve the county's balance of payments. Balance of payments is the net trade in goods, services, investment and transfers. An increase in exports will mean that overall balance of payments will not be in a deficit but in a surplus. An improving balance of payments will also mean that the county's industries and firms are competitive and therefore show that the firms are economically healthy and performing well.

    • Word count: 523
  5. Peer reviewed

    Export Essay

    4 star(s)

    Over the past few years given the 25% devaluation in sterling our export performance is not that impressive. Firstly, the demand from other countries to buy UK exports has not been too good due to the recent recession. Therefore aggregate demand (AD) decreased leading to a fall in UK exports. The UK has been running a persistent current account deficit for several years, but as the economy emerges from recession and domestic spending will return thus helping growth, import growth has still been stronger than exports. The rest of the world may also have a slow recovery in demand, especially in the European Union where household spending has not been up to scratch.

    • Word count: 530
  6. Peer reviewed

    Discuss the effectiveness of fiscal policy measures in reducing aggregate demand?

    4 star(s)

    At the very beginning, resources are not being fully used, spare capacity enable an expansion in the production. This process would generate more income without raising too much inflation. In the second stage, part of resources are used up, any increase in demand won't bring any increase in the level of output, but on the other hand, inflation could occur because any increase in prices would discourage potential buyers which cut off the excess demand. Next, almost all the resources are being used up, increase in demand bring no change in the level of output but high inflation in the economy.

    • Word count: 734
  7. Peer reviewed

    Using an appropriate diagram explain how a government may attempt to close a deflationary gap.

    4 star(s)

    AD represents aggregate demand, which is the sum total of all demands in the economy at any given price. Real Y represents the real (adjusted for inflation) income of consumers. Keynesian 45? Diagram In this diagram, we can see that the level of aggregate demand is lower than the level of output at full employment, therefore the economy is overproducing and a decline in growth will occur. For example, say the level of current aggregate demand is $500, and aggregate demand at full employment is $600. This means that the value of the deflation is $100, that is, people are spending $100 dollars less than they can technically afford to.

    • Word count: 856
  8. Free essay

    Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment?

    3 star(s)

    The multiplying effect comes into play, when the long term effects of the investment are considered - a more efficient transport network will allow businesses to transport their products more efficiently. The increased efficiency means that the businesses are able to use the saved time/money elsewhere. This again, leads to more opportunity for employment. These newly employed workers now have a greater disposable income - they will be spending more money on goods and services, which increases the profits of businesses.

    • Word count: 834
  9. Peer reviewed

    Discuss the effectiveness of expansionary monetary policy in achieving an increase in Aggregate Demand in an economy

    3 star(s)

    Furthermore, if interest rates fall, homeowners who have variable rate mortgages, will have a much higher amount of expendable cash to spend (as shown in the graph below). Although, in the short run, homeowners using fixed rate mortgages may not be affected to severely, although, with lower interest rates, there will be an increase in mortgage approvals, and may cause an expansion in the housing market.

    • Word count: 456
  10. Peer reviewed

    Explain how supply side measures can be used to promote economic growth (15)

    3 star(s)

    Some argue that cutting taxes on activities such as saving and working would increase the productive potential of the economy. The level of taxes has an impact on investment and therefore LRAS. An increase in taxes on businesses will reduce the profitability of investment. With a lower rate of return, fewer investment projects will be carried out, limiting the productive potential and therefore growth in the economy. Higher tax rates will also affect investment coming from abroad as well as domestic investment.

    • Word count: 829
  11. Peer reviewed

    Defining Aggregate Demand and Aggregate Supply

    3 star(s)

    Now the arrangement of the formula is important too. Firstly we can see that C, I, G and X are positive while the M component is negative. This is because the consumption level will have a positive effect since consumer buying goods raises the money flow in the economy. Investment will also have a positive effect since more companies investing will raise the level of money available as more companies buying factories will have a positive effect since they will be able to buy bricks to build the factory raising demand for bricks.

    • Word count: 805
  12. Peer reviewed

    Discuss whether deflation or inflation is a more serious problem for the economy

    3 star(s)

    This ultimately leads to the real level of debts falling therefore debts become more manageable. A disadvantage of inflation for an economy is a possible loss of competitiveness. For example, if the UK has a higher inflation rate than the rest of the world, its price competitiveness in international markets will fall. A rise in a country's relative inflation rates may lead to a fall in its world share of exports and a consequent rise in import penetration. This ultimately leads to a fall in the rate of economic growth and the level of employment.

    • Word count: 642
  13. Peer reviewed

    DISCUSS THE ALTERNATIVE POLICIES A GOVERNMENT MAY USE TO IMPROVE ADEFICIT IN THE BALANCE OF PAYMENT

    3 star(s)

    Doing research in previously experiences, solve self-problem, in order to enhance the quality of the products to make the products more competitive. And reduce the cost of production to influence the price goes down. However, the supply side policy is a long run policy, which may take long time to achieve the result, and amount of money will be cost. Therefore there will not be effectiveness in the short run. Secondly, the exchange rate position is directly affect the export and import.

    • Word count: 726
  14. Peer reviewed

    Discuss the economic consequences of unemployment

    3 star(s)

    However, unemployment improves labour mobility as there is a greater pool of workers who are keen to gain the necessary skills needed for employment. This benefits the economy as firms have a greater variety of workers to choose from. This increases efficiency as the best skilled workers selected use the capital to produce the maximum possible output. Unemployment causes work skills to be lost as people learn best by experience and by training in work. Therefore the long term unemployed lose basic work skills.

    • Word count: 835
  15. Peer reviewed

    How does level of aggregate demand affect level of unemployment

    3 star(s)

    Here workers are unemployed simply because there is insufficient demand to provide them jobs. Clearly attempts by government to boost demand by either policy will lower this type of unemployment. However, supply side unemployment needs careful consideration. Supply side has several different causes such as frictional, structural and technological or real wage unemployment. Frictional is basically workers moving between jobs and is sometimes referred to as 'the oil that lubricates the labour market'. Although some economists may argue the fact generally frictional unemployment is unavoidable in a market economy. Structural is mismatch between the skills demanded by employers and the skills, if any, possessed by the unemployed.

    • Word count: 682
  16. Peer reviewed

    Compare the effectiveness of the fiscal and monetary policy with some reference to supply side policy in running the UK economy. Fiscal policy is used to change taxation and government spending in order to control the level

    3 star(s)

    Monetary policy isn't very effective when there is a recession, because even though it can create jobs but it still can't attack investments and it can cause inflation to increase if we are too close to Nairu. It's never ideal to just rely on just 1 policy, you have to use both together in order for the economy to run smoothly. If the fiscal policy is just used on its own then it may be overdone thus causing inflation to increase, these effects depend on whether or not we are close to Nairu.

    • Word count: 767
  17. Peer reviewed

    Examine two reasons why a government might wish to control increases in its expenditure

    3 star(s)

    The two reasons that I will examine are to keep the tax levels down and to control inflation. Taxes are placed in two categories. First there is direct tax, which is tax levied directly to a person or organization, for example income tax. The second category is indirect taxes, which are taxes placed on goods and services. In Australia, the main indirect tax is the Goods and Services Tax (GST). This is relevant to the governments expenditure plan because of the affect increases or decreases in expenditure will have on the budget, which is a summary estimate of planned spending over a period of time.

    • Word count: 879
  18. The costs of unemployment.

    people their sense of identity, especially their social identity, it provides a sense of purpose and the income provides a means of freedom and control outside the workplace. Unemployment therefore hits individuals the hardest,the jobless lose their self respect, purpose, sense of achievement and ofcourse income. It is not just the individuals themselves that are affected by this but their families too. Homes and cars are lost, arguments at home, even divorce rates have been shown to rise due to the fact that people cannot solve their finacial problems.

    • Word count: 739
  19. The Consumer price index

    To calculate the C.P.I for multiple items are calculated by adding up the prices of all of the items in the month from the number of stores, rental units are added together and averaged. This figure is weighted into the categories in the CPI e.g Housing 40%, Food and Non-Alcoholic Beverages 20%, Taxes are at 43% but not calculated. The C.P.I is split into 12 categories including food and non alcoholic drinks, clothing and footwear and housing. A typical household spends around 30% of their income on transport (15%)

    • Word count: 894
  20. Notes on markets and supply and demand

    Markets A market is a place where buyers and sellers meet to exchange goods and services. Choosing a price: 1) Quality of the product 2) Cost of production 3) Competitors price 4) What consumers are prepared to pay. Consumer Surplus it is the difference between the price a consumer is prepared to pay and the price they actually pay. Supply Supply is a quantity of goods and services that a supplier is willing to supply at a given price over a period of time. Factors affecting supply: 1) If the price changes it will be a movement along the curve 2)

    • Word count: 538
  21. Quantitative and qualitative economic data

    The most important data to be measured would be that which measured the standard of living in a country. Here it is beneficial to use a range of quantitative as well as qualitative data. This is because even though GDP or GNP may measure an economies output or income levels it does not measure the standard of living within the economy or the disparities between rich and poor. Economic growth does not necessarily mean improvements in the standard of living for many households in the economy. In many instances the HDI (Human Development Index) would provide a better measure as it's a composite of life expectancy, education and per capita GNI or gross national income as a measure of a standard of living.

    • Word count: 949
  22. The rise in youth unemployment is a significant problem for the UK. Discuss

    Many graduates are realising that today, a degree isn't going to guarantee success in the job market, especially those who are looking to take a place in a competitive industry, such as journalism. Also, the decline in the manufacturing industry has had an impact on youth unemployment, more those without degrees (or low skills) . because jobs are difficult to get for most young people, many have to resort to having low-paid, low skilled jobs.

    • Word count: 537
  23. Free essay

    Which policy is better - monetary, fiscal or supply side?

    If the UK is in a recession, the government (through monetary policy) can intervene in the foreign exchange market to influence the value of other currencies. By increasing the competitiveness of UK goods/services, AD will increase (as X in X-M increases) which will therefore increase economic growth. In addition, the Bank of England is now independent, and their target percentage of inflation is 2% per year. The CPI has been an important factor in keeping inflation low over the past 15 years, however over the last 2 years alone, inflation has been rising rapidly, which suggests that monetary policy is useless in steadying inflation as it is out of the governments control.

    • Word count: 772
  24. Market for alcoholic drinks

    From the table we can see on average buying alcohol from an off-licence would cost you only a few pence more than in a supermarket. The most expensive place therefore to buy your alcohol from would be the public houses, costing around �2.50 a drink. It is more expensive to go to a pub in London than somewhere further up North. The reason it's very expensive to drink in a pub because you, as a consumer, are paying for the overheads.

    • Word count: 944

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