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AS and A Level: Macroeconomics
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The macroeconomic objectives
- 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 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 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 The balance of payments needs to be in equilibrium, where the value of imports equals the value of exports.
- 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.
- 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 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 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 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 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 This is regarded as being a key ideological stand off regarding government regulation of the economy.
- 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 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 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 Avoid simplistic analysis. The debate concerning the role of the government in macroeconomics is complex.
Discuss the view that governments of countries with large budget deficits should take measures to reduce them as quickly as possible
One of the methods in which a country can reduce its budget deficit is by simply reducing government spending, so in relation the money it receives through taxes, the proportion which is being spent becomes smaller and the deficit decreases and works towards becoming a surplus. For example cuts in certain areas such as healthcare and education would help to save money and reduce the government?s expenditure. This may mean that if the country is in a deficit it can reduce the likelihood of it having to borrow money from another country or from a bank, helping it stay out of serious debt.
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Explain the causes of cyclical unemployment and how it can be solved? Cyclical unemployment is involuntary unemployment due to a lack of aggregate demand for goods and services. This is also known as Keynesian unemployment. When there is a recession or a slowdown in growth, we see a rising unemployment because of businesses closing factories. It can be solved by the government by boosting ad ? eg through expansionary fiscal policies that reduce tax and increase G spending. 1.
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Discuss whether it is desirable for a country to specialise in the production and export of a single good.
Workers may be more productive if they were to focus on producing one product. This would also allow workers to adopt specialist skills more quickly and save time as they do not need to move about or constantly change tasks. An expansion in trade would allow countries to produce what they are best at hence would lead to a massive expansion in the world living standards. zl However, if a country does chooses to produce a single good, there are certain disadvantages. For example, the country may be dependent on the export revenue of that good alone which may be insufficient, or risky as it is vulnerable to changes in price.
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Discuss whether planning has any role to play in the allocation of resources in a modern mixed economic system
Factors that may influence demand of a product to increase includes income, interest rates, price of substitutes. If consumer?s income increases, the demand will increase. However, if interest rates increases, consumers would save more, hence the demand would decrease, producers may then switch to produce other products with higher demand and prices. Public Sector would also be influenced by the change in supply. When cost of production increases, firms tend to spend less on producing that product.
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Once achieved, industry will be strong enough to cope with foreign competition. This inward looking policy had real success with annual growth reaching around 6%. It would seem that this was extremely effective for the measures that the Thai government introduced it for (protecting grassroots companies), however, there are some downsides to inward looking policies such as comparative advantage being distorted. This means that within Thailand resources would not have been allocated efficiently. Also, the distinct lack of competition from foreign companies in an protectionist country could lead to inefficiency.
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This paper will begin by detailing the creation of money and then end with a description of the monetary policy combinations required to best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.
A consumer or business, for example, may request to borrow funds from a bank in the amount of $10,000. A review of credit history and the current financial portfolio allows the bank to accept the borrower?s promise to pay plus interest in exchange for the money. The borrower offered no money to the bank yet walked out with an additional $10,000 ? money has been created. This may sound absurd or sketchy, but is possible due to the reserve ratio (explained in more detail later). This ratio simply states the amount of money a bank must keep in reserve in relation to the amount of money it may lend out.
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Many countries have experienced a substantial rise in their fiscal deficits since 2008. Assess the factors which might explain this trend in the public finances of a country of your choice
As a result, they may have to reduce staff in order to survive or maintain profitability. If many businesses throughout the country do this, such as Morrison's cutting 700 jobs, then the amount of people claiming social benefits may increase. This has a dual effect on the government. First, the government has lost out on those 700 people's income tax revenue and secondly, has to pay out benefits to help them. On a macroeconomic level, this loss of revenue coupled with increased expenditure on social benefits caused by rising unemployment can be a factor in the substantial rise in the fiscal deficits.
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through education and training, there is time lag in carrying out these policies. Also, imperfect information may mislead the government to carry out effective policies i.e. cutting taxes and reducing benefits. This may lead to greater budget deficit. Due to the uncertainties and risks when carrying out supply-side policies, it?s better for the government to increase AD. AD can be increased if the economy is below full employment level and there is spare capacity within the economy. In order to increase AD, the government can increase consumption expenditure (C), investment (I), government expenditure (G)
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Since resources are scarce to produce unlimited wants we need to consider how resources can be used to produce best outcome. We need to consider how we can get the maximum use out of the resources available to us. But other issues beside purely economic concerns should be considered when deciding how to produce. For example, through slavery or forced labor we could produce more goods and services in an economy but there is a moral
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Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 ? ?The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War?. This statement was made in reference to the fact that Germany is now imposing the idea of tough budget cuts in Greece in exchange for emergency loans. Darling compares this action to the forced pay of reparations by Germany, imposed by the Allies after WWI in the Treaty of Versailles.
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However, because this additional investing is not the result of additional money, it must come from savings. As such, consumption improves and saving reduces. A drop in customer assurance works in the other way. Wealth 1. Prosperity affects consumption in one of two ways. A rise in financial wealth (including stocks, bonds, and especially money) encourages the family industry to improve consumption and reduce saving. Consumption improves and saving reduces. Alternatively, an improve in physical wealth (including cars, furnishings, and appliances) reduces the need to buy these goods and thus encourages the family industry to reduce consumption and improve saving. Taxes 1. Government collects taxation to pay for presidency activities.
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Economies of Scale. Some firms become large by enjoying the EOS, however many prefer to remain small. Explain this statement.
buying such as when the firms purchase raw materials in large quantity, they may enjoy the following benefits such as disquantity discounts. This enables the firm to enjoy continuous production. Next, the firms could also do bulk selling where the popular products may enjoy bulk clearance, low distribution cost and less warehousing. For financial economies, large firms has an advantage as they have finance choices and therefore the it would be cheaper than the small firms as small firms are charged relatively high.
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Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand
It can be seen from the formula that C, I, G and X are positive while the component M is negative. This is because the consumption level has positive effect since when consumers spend on goods or services it will raises the money flow in the economy. Investment also has positive effect because the more a company invests the more available money there is for the company which is invested and therefore that company will have more demand and spend more on goods or services. Similarly, government expenditure and exports have positive effects to the money flow in the economy.
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Supply side policies. Education and Training. This can be used as a supply side policy. This is because if the unemployed and untrained workers are trained up under the policy it would mean the structurally unemployed would become trained in another sector that has demand for them, making them employable again. This therefore increases the labour available making it possible to increase aggregate supply. The potential drawbacks of this kind of policy is that in short run it would be very expensive for the government to provide the training of the unemployed, but this could be seen as a long term investment as they would receive taxation from them when they become employed.
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Another sign of the changing times has been the increase of females in full time employment by 43.4 per cent and the number of marriages falling, while the number of divorces have risen. So to what extent have living standards risen. The answer to this primarily depends on the meaning "living standards". While some would argue that GDP is a good indicator of a country's standard of living does a larger GDP really mean that living standards have improved? The government of Bhutan would certainly disagree with this and the "Happiness Index" is the preferred measurement of their living standards.
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This in turn further increases employment, as more factors of production are needed to meet demand. High employment means high income tax for the government and increases sales for UK businesses, which may also lead to more equality in the balance of payment deficit. High unemployment causes social problems such as crime and more specific problems such as heightened cases of alcohol consumption leading to greater stain on the NHS, who would have little funding anyway due to the lowered government income.
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Evaluate using the multiplier, the likely effect on the UK price level an equilibrium real output of the changes referred to in the information provided.
The UK economy during this period appears to be experiencing strong growth; a boom hence moving towards the inelastic part of the Keynesian LRAS curve. Therefore a large right-ward shift in AD curve will result in a larger increase in the price level and a smaller increase in GDP. This problem is intensified when considering the multiplier effect. Successive shifts in AD to the right will mean the price level will increase significantly compared to GDP. Inflation will be high, thus higher wages will be demanded, and the cost of production will increase.
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Discuss TWO key issues facing the labour market in Australia in 2012. Explain TWO government policies that may be implemented to address these issues
The skills shortage in Australia began to rise in 2006. This was mainly because of a mismatch between the skills possessed by job seekers and the skills demanded by employers. A report by the Australian Human Resource Institute (AHRI) found that seven out of ten Australian employers are experiencing a skills shortage. There is also currently a geographic imbalance between job availability and the supply of labour and it is most evident in the mining boom states of Western Australia and Queensland. The Australian government and businesses are grappling with the growing demand for skilled labour through two main policies.
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2. Menus costs: Firms will also suffer from menu costs. These are the costs involved in changing prices. For examples, firms have to incur costs by changing price labels or prices in catalogues (new price lists) or on menus or to adjust slot machines. 3. Redistribution: Inflation leads to an arbitrary redistribution of real income. Different income groups will be affected in different ways. In other words, there will be some ?gainers? and some ?losers?. A fall in the value of money will remove purchasing power from those living on fixed incomes, such as pensioners, and redistribute it towards those who draw their living from prices.
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When the marginal cost ofproduction is not equal to price, it means that the output of products is controlled so that theprices can be kept at its level. Thus, this is clearly not putting resources to its best uses. There are two methods of resource allocation. They are a. the price mechanism, and b. the state or central authority or the government. The price mechanism is a system that co-ordinates individual, decentralised decisions whereby both consumers and producers decide what goods and services to produce, how they are to be produced and how much of it and for whom.
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As an example I?ll use two recent events, the ?Credit Crunch? and Hurricane Katrina, these two events affected economic growth negatively in different ways. First, the recent economic boom was based on the back of mortgages, however this boom was pushed more with subprime mortgages, however these sub prime mortgages defaulted in large numbers damaging the Collaterised Debt Obligation market as more and more mortgages defaulted. This demonstrates how in the short term these risky investments may be beneficial with high yields, however they quickly defaulted and became toxic.
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