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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.

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  1. 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
  2. You are to produce a report on the subject the balance of payments and exchange rates. In it you need to define what the various terms mean and examine critically their importance to the UK economy. You should concentrate on their role in how the economy

    and consumer spending for short term aid and fiscal policy will also use to reduce the aggregate demand later on in this essay I am going to descried the policies in detail and how they are use in the balance of payment. The BOP tells the total amount of financial transaction in the whole economy that has entered from other counties and leaves the UK economy. The BOP also tells us how much money UK has spent on the import good and how much is sold on the export good, if there is more import then export it will be a deficit and export more than import will be a surplus.

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  3. 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%)

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  4. 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)

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  5. 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.

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  6. 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.

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  7. 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.

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  8. Outline any two main/priority issue that concern the Australian economy & discuss the effectiveness of the governments macro and/or microeconomic policies toward the issue in the Australian economy.

    Australia's Current Account is made up of a number of components. It included the balance of merchandise trade, which is export credits, minus import receipts. Net services consist of tourism, education, insurance, transport, shipping, and finance. Net income is also included, which refers to income received from Australian owned assets overseas, minus the payment of income for foreign owned assets in Australia. Finally there is Net Current Transfers, which includes foreign aid, migrant funds, and pensions. A CAD occurs when Australia's expenditure on goods, services, income and transfers overseas exceeds the receipt of such items from overseas.

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  9. Why does smoking lead to an external cost?

    Tax on cigarettes is known as an ad valorem tax which is based on percentage of the market price, so the larger the quantity that is bought, the higher the rate of tax. When the price of cigarettes is higher, there is a shift in quantity supplied from Q1 to Q2. This is shown by a shift in the supply curve from S to S post tax. Higher tax rates would restrict the amount of cigarettes that are bought and so will reduce the amount of negative externalities and external costs of smoking.

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  10. Pakistan is in the grip of a serious energy crisis that is affecting all sectors of the economy and the various segments of the society. As the situation stands to-day, there are hardly any immediate solutions to resolve the issue.

    The production of crude oil is not sufficient as consumption. There is no prospect of Pakistan reaching self-sufficiency in oil. Natural Gas Natural gas has been gaining immense substance around the world due to its quality of being a cleaner fuel compared to coal and oil. Pakistan depends heavily on its natural gas reserves for different sectors of the economy. The Energy Commission estimated that Pakistan will be facing a shortfall in gas supplies rising from 1.4 Billion Cubic Feet (BCF)

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  11. 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.

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  12. Evaluate the polices the government should adopt if it wishes to achieve a low level of unemployment.

    This will bring the aggregate demand curve downwards and to the left. (See diagram 1) If the aggregate demand curve falls, GDP will fall significantly. This is also the same with investment, if income is low; people are less likely to invest. However, if the aggregate demand curve fluctuates to the right quite quickly, it can lead to inflation. There will be fewer jobs available because people are spending less, which in the long run, can cause unemployment. Another possible cause of unemployment is having a large majority of the population, being unskilled workers.

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  13. Explain what is meant by transaction, precautionary and speculative demand for money

    It is usual to distinguish three reasons why people want to hold their assets in the form of money, which are transaction, precautionary and speculative motives. The transaction motive refer to the desire to hold money in order to make purchases of goods and services. The transactions demand for money is positively related to real income and inflation. As an individual's income rises or as prices in the shops increase, he/she will have to hold more cash to carry out his everyday transactions.

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  14. Using the data and your economic knowledge, evaluate the contribution that the growth of government expenditure may make to the U.K. economic performance.

    Economic growth can be affected both in the short and long run by aggregate demand, which includes government expenditure. Short-run economic growth is determined by aggregate demand, therefore if one of the components of AD was to increase, e.g. government expenditure, it is expected that this would stimulate short term economic growth, as shown in 'figure 1' - as AD rises from AD1 to AD2, real national output should rise from Y1 to Y2. Long term economic growth can also be affected by an increased amount of government spending. Changes in aggregate supply can lead to increases in the potential output of the economy.

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  15. Capitalism and Socialism

    When a socialist system is in place, man is not free. He is regulate, he is taxed and his money is spent by the government. Under the most extreme version of socialism - communism - the is one choice, there is one supplier and there is one price. There is no desire to make excellent products to attract more customers, there is only a need to fulfil monthly targets set by the government, and the cost of this need is often faulty products being sent out for fear of punishment by the authorities for failing to meet the targets.

  16. Free trade and protectionism

    There are several types of tariffs, * An ad valorem tariff is a set percentage of the value of the good that is being imported. It could cause problems as fall in the international price of a good will lead to a decrease in the tariff. This makes the domestic industries more vulnerable to competition. * A specific tariff is a tariff of a specific amount of money that does not vary with the price of the good. However, it is difficult to decide the amount at which to set a tariff, and it may need to be updated frequently due to changes in the market or inflation.

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  17. Free essay

    the trend growth rate and measurements of economic welfare

    Variations in sunspots affect the power of the sun's rays, which consequently has a significant influence on the quality of the crop harvest and therefore the price of the commodities sold, which in turn promotes greater economic confidence and leads to the achievement of larger profits earned, these profits can then be reinvested into the circular flow of income - leading to further growth. Another factor is the role of speculative bubbles; rapid economic development and growth usually leads to hasty asset price increases.

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  18. Taxation

    That is to say, direct taxes which were previously more dominant would give way to a larger quantity of indirect taxes that are regressive in nature - therefore hitting the poor the hardest as the proportion paid in tax falls as income rises. As a result, the effect of these changes can be illustrated on a Lorenz Curve in the diagram below: As the diagram reveals, the Lorenz Curve deviates by a considerable extent from the line of perfect inequality.

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  19. Define, Describe and Determine the UK's Monetary Policy

    Most economists think that changes in the level of M0 have little effect on total output and inflation. Although it can be thought to be a coincident indicator of consumer spending and retail sales. Thusly, M0 reflects changes in the economic cycle, but does not cause them. M4 (Broad Money) - This consists of all notes and coins and deposits held at UK financial institutions by the private sector. It includes deposits held by the private sector (households and firms) for transactions and savings at banks and building societies. It also includes new money created by lending in the form of loans and overdrafts.

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  20. Is world essentially a centrally planned economy

    This is caused by abandonment of project is which returns are believed to be too risky or diffuse, e.g. fusion reactor technology and public education respectively. Moreover, economic decisions are based on long-range goals, with no concern for consumer demand, which can be restrained in order to achieve a greater capital investment for economic development in a desired pattern. Same fact can also be a reason for a downside, as planners cannot detect consumer preferences, shortages and surpluses with sufficient accuracy, so the production cannot be managed efficiently.

    • Word count: 823
  21. the limitations of Fiscal Policy

    long run This report will explain why fiscal policy should be focused in medium to long-term economic objectives rather than in the short run macroeconomic stabilizations. Firstly, one of the limitations of fiscal policy explained why it should not be focused on the short-term macroeconomic stabilization which is the relatively inflexible of fiscal policy as government spending and taxes are not able to be changed quickly (Bernanke et al., 2008). Secondly, the current government goal in the short run is to fight recession that is experienced by other developed country in the world.

    • Word count: 1884
  22. selective logging on impact of market economy

    (Anderton 2006, p 286) This is how the market economy is defined. There are many characteristics of a market economy. For example, economic agencies i.e. government institutions or individuals with the sale being the transfer of property rights. The price mechanism is an important factor in a market economy because the economic agents: buyers and sellers determine the prices within the economy. Adam smith was a political economist. He coined the metaphor, "the invisible hand". Smith argued that the agents pursue their own self-interest with the result being the allocation of resources in which society would benefit as a whole.

    • Word count: 949
  23. A Study of Economic Development across the world

    Firstly Latin America and the Caribbean, this region has shown good economic development in recent years but this has only been in some areas; mainly education and some health aspects. They have achieved the Millennium Development Goal of universal primary education and have attained better gender equality in education with more girls enrolling in Secondary education. With health they have also achieved a great deal. In the last 15 years mortality rates of children under 5 have more than halved and are now at 26 per 1000 live births compare this to the 171 per 1000 live births in Sub-Saharan Africa and it is quite an achievement.

    • Word count: 1124

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