Notesale: Turn your study into money

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General evals for shift in AD/LRAS:
AD shift right eval: depends on economic cycle/ output gap- if in a boom and a positive
output gap- increase in AD won't increase growth that much and only result in high
inflationary pressure due to little to no spare capacity- too close to Yfe
...

Expansionary eval: no expansionary policy needed as in a recession (more AD needed),
gov may not have to shift AD right as increase in AD will happen naturally due to increase
gov spending on welfare (as more people unemployed) and decrease income tax (as ppl
earning less)- less tax= more consumption
...
Ricardian equivalence: Higher G/lower tax = higher expectation of
future tax rises = more saving = less consumption = less AD (so expansionary fiscal policy does
not work)
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ONLY BAD IF shift
left in recession/ large negative output gap- as no decrease in PL and big decrease in
growth
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Natural decrease in G and increase in tax
would auto lead to decrease in AD
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Macro-Economics
Macro-Economics Essays start here
Consequences of budget deficit (25 marks)
Point 1: economic growth- deficit is good- growth will repay gov eventually- increased tax
and less welfare spending in a boom
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g
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good if in a
recession- stimulate economy (reduce negative output gap)
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If budget deficit is due to borrowing = crowding out effect: increase borrowing =
increase demand for loanable funds= increase IR = decreased I and C in private
sector (as increased cost of borrowing)
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B can just lower
IR
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have to increase taxes and cut G
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g
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e
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: ‘ageing population’- not
paying tax but need G (pensions)- budget deficit would keep increasing over time- as
tax revenue cannot cover G
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If spending leads to deadweight debt instead of reproductive- its bad as no long term
econ benefits
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g
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Conclusion: whether it’s a concern depends on type of deficit and type of gov spending,
also depends on whether debt is internal (recirculated into domestic economy) or external
(foreign current debt)
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g
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Consequences of budget surplus: (25 marks):
Point 1: Loss in Aggregate Demand & Economic Growth (Surplus Bad)
• When a budget surplus is present within an economy, it is implied that taxes are
greater than government spending
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o Aggregate demand shifts left, receding economic growth and the economy
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• Debt is bad, since it will harm investor, firm and consumer confidence
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Worse if
foreign currency debt
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o If building a highway, and government borrows to fund the project, the debt is
reproductive
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▪ The highway will effectively pay for itself
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o These will bring gains to the economy, improving productive capacity
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o Workers will refuse to work, and the supply of labour will decrease within the
economy
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Stands to harm aggregate demand
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• If income tax increases, aggregate demand will also decrease as higher proportions
of consumer income is taken away from taxation
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• CONSIDER USING LAFFER CURVE IF YOUR FIRST POINT DOES NOT
ALREADY HAVE A DIAGRAM
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Will have to
relate entirely to another point
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• Not a strong point to make, but if you’re desperate, you can talk about potential
losses in tax revenue if the government over-increase the tax rate for a budget
surplus
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Growth and living standards (25 marks)
Point 1: increase AD, higher income/employment= increase in material living standards
Eval: inequality- benefits of growth not distributed- living standards not inclusive e
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: oil
industry- Nigeria, financial industry- UK
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Easterlin paradox- relative income decreases- decreased non-material
living standards (happiness) OR Keynesian eval- growth close- less growth and heavy
demand pull inflationary pressure as no more spare capacity (close to positive output gap)
Point 2: environmental degradation: air pollution, climate change (fossil fuels lead to
greenhouse gases- rising sea levels etc), depletion of natural resources, loss of biodiversity
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g
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air pollution= bad health
Eval: Kuznets curve- firms can reinvest for more sustainable production, also as incomes
rise ppl can afford the luxury of worrying about the environment
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Conclusion: growth good if inclusive, sustainable and not from one dominant component
e
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: exports, as that sector could crash
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Countries exposed to foreign currency debt e
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: UK earns 2 billion dollars (exports)
however spends (imports) 5 million dollars
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- Problem 1: exchange rate risk, if our currency
depreciates - the debt will increase
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Problem 2: when
foreign debt is repaid it doesn’t stay within the domestic economy
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Long term consequences: expenditure> income- higher tax= decreased FDI

Against Eval:

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Depends on size of deficit relative to GDP (if high GDP, deficit doesn't matter as
much) forecasted 6
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- UK can afford it

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Keysnian eval- AD1- AD2 at YFE isn’t that bad
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If you have a deficit on your current account, you can make a surplus in the financial
account
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g
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deficit from capital goods/ productive goods=
GOOD
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Deficit countries = better stuff but less money/ econ development
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Depends if cyclical (ok as will alleviate once recession occurs) vs structural (bad- sue
to supply side reasons- happens at every stage if cycle- even recession)

Consequences of CA Surplus: (25 marks)
If u have a 5 mil surplus, someone else has a 5 mil deficit
For :

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•
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trade wars- if u beat another country bad in trade, u will lose them as a partner
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Deficit countries = better stuff but less money/ econ development
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E
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: reduce
government spending
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Reduce vat/ subsidies firms: reduce cost push inflation

Eval (against):

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Conflict of macro objectives- lower econ growth, higher unemployment
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Consequences of currency depreciation: (25 marks)
Point:

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Reduces CA deficit and better trade balance

Eval:

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Marshall Lerner condition and J curve : depreciation only improve CA deficit if MCL is
true

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MLC: only true: elastic demand for X and M- makes CA better

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MLC : not true: inelastic demand for X and M - makes CA worse

Point:

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Growth (x-m)- employment and living standards rise- rise in AD

Eval:
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Keynesian eval- depends on where on curve

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Exports don’t count much for AD- C I G could still be low- also living standards
doesn’t have to increase- inequality etc
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Demand pull inflation- impedes econ growth as confidence decreases- AD shifts left

Change from indirect to direct tax: (25 marks)

Point 1: for direct taxes

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Direct taxes = progressive (reduces inequality)
AD decreases as deceased consumptions exports more competitive

Point 2: for indirect taxes : BAD

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should switch to indirect : Laffer curve : less incentive to work Indirect taxes =
regressive (increases inequality) less noticeable Indirect taxes = regressive
(increases inequality) less noticeable
SRAS shift left, increased cost of production- exports less competitive , cost push
inflation

Privatisation vs Nationalisation: NHS (25 marks)
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Point 1: national: Positive externalities in production as state welfare maximisesallocatively efficient at social optimal level, doesn’t have shareholders to appease can invest for welfare maximisation
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Natural monopoly EOS- MES is further down- greater EOS potential

Eval 1: inefficiencies : X and productive inefficiency as no profit motive and no competition
and may voluntarily forgo EOS or could suffer from DEOS if too big
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BUT- (if natural state run monopoly- with regulation can be most efficient)

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Point 2 : private: profit max- closer to perfect comp- static efficiencies, less waiting
time etc
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Potential dynamic efficiency as
need to innovate to compete with rivals and need to invest profit, less drain on gov
finances and increased revenue from selling to private sector
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Price mechanism- no shortage/ surplus
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Static inefficiency- healthcare has inelastic demanddisproportionately affects the poor if high prices
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BUT- dynamic efficiency due to SNP
and can be regulated and due to bring more desirable outcomes
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g
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Intervention in this process should be minimal, as compared to consumers and
producers, the gov can never possess the information on what is demanded and what can be easily
supplied
EV2: Assumes rationality of consumers and producers, which behavioural economics shows to be a
flawed assumption in a myriad of ways, Andrew Tate
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g
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Consumers will overconsume unhealthy
foods for example, requiring government intervention to maximise welfare
EV2: This assumes intervention will be successful and not cause government failure
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g
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no correction between family income and productivity
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Inequality is not
inherently bad
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Lower AD
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Financial crowding in

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Point 2: austerity in the future, people who didn't create debt have to pay for it
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(UNRELATED EVAL ONLY DO IF
HAVE TIME)
Point 2: Currency Devaluation
Eval: Cost push inflation if industries rely on imports- increased COP- make exports
less competitive in long run and increase price
Point 3: Supply side policies improving LRAS, making exports more competitive
Eval: Time lags, it won't immediately improve trade balance, and by the time it does,
economic context will be different

Evaluate the possible impact on the cost of living and the standard of
living in the UK of a sustained rise in the value of the pound sterling
against other currencies, such as the euro and the US dollar: (25
marks)
Point 1: Imports become cheaper, exports decrease, BOP worsens, leakage in
circular flow, domestic industries may shut down unemployment, lower Consumption,
lower investment, lower AD
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Eval: Demand for exports may be inelastic, BOP wouldn't worsen, at least in the
short run
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In Fact it may be good for an economy in the
short run
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Point 2: Disinflation/Deflation: If industries are dependent on imports of raw materials,
their cost of production goes down, left shift of SRAS, therefore price level goes
down, lower cost of living, and higher living standards
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Only few Industries may depend on imports,
especially considering the UK isn't a country manufacturing goods, but more of
services e
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banking, which are not affected by higher value of pound
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PL: To what extent do you agree that a fall in savings is beneficial
for the UK economy? Justify your answer
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This may lead to higher employment, possibly even the multiplier affect, further
increasing AD, causing rapid economic growth
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Moreover, money may be sent
as remittance to family, especially since the UK has a large immigrant workforce,
presenting a leakage from the circular flow
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Animal spirits would be high, and conditions to invest would be ideal
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Eval: Investment may not occur, as the economy would be suffering from inflationary
pressures due to the fall in savings, making products less internationally competitive
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Point 3: CA deficit - MPI increases as incomes rise- foreign currency debt etc…
Eval: CA deficit not that bad- UK- debt is 100% of GDP, deficit made up as surplus in
financial/capital account- BOP balanced
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MPI might not increase- ‘fall in saving’ spent on domestic goods
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- eval for points 1,2,3 - can relate

D Assess policies which can be used to reduce cyclical instability
in the UK
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This would prevent malpractice in an economy, and
closely monitor firms, allowing for security against economic shocks, such as

financial crisis
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Eval: Regulatory Capture
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If regulation was flawed, it would present a systemic risk,
and confidence in the economy would diminish, causing sudden shocks, such as the
collapse of major institutions, pushing an economy into recession, creating instability
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Such improvements may make
the workforce more structurally/ geographically mobile, preventing high levels of
unemployment in times of recession, improving stability
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This combined with a recession will lead to
high rates of unemployment, and may cause higher instability, as AD would
decrease, negative multiplier, low confidence
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Point 3: Monetary policy tools, such as forward guidance when banks tell consumers
when interest rates will change, boosting confidence in an economy, preventing
instability
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D Evaluate the view that government intervention to reduce
inequality will lead to an improvement in economic welfare
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Eval: unemployment, as excess amount of workers, so unemployed workers would
have a lower wage, leading to lower economic welfare
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Point 3: Progressive Taxation
Eval: Laffer curve, after a point if taxes rise
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High income workers move out
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(25)
IMPROVE POINT 1
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Point 1: Profit max is the reward to enterprise, and may be the goal of entrepreneurs
starting the firm, it would be their principal goal
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Production processes improve, firms lower costs,
whilst making better products, allowing them to stay in the market in a dominant
manner
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D To what extent do you agree that reducing the budget deficit is more
important to the UK’s macroeconomic performance than reducing the
current account deficit on its balance of payments? Justify your answer
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This would cause recession, leading to gov having to spend more, eg on
unemployment benefits worsening the deficit, making it vital to solve a BOP deficit
first, to solve budget deficit
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Point 2: Budget deficit leads to higher interest rates, causing lower spending and
financial crowding out, leading to a fall in ad, causing negative economic growth
Eval: depends on type and where the budget deficit is on the business cycle, if its at
a time of recession, interest rates would already be v low, a deficit may stimulate the
economy, indicate high animal spirits, crowding in
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If
cyclical don’t really need to solve, it will be self correcting
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(25)
ADD MORE TO POINT 2 SUPPLY SIDE CAN HELP COUNTER ALL I
THINK
Point 1: Economic growth v inflation Economic growth can be achieved whilst keeping a low
rate of inflation, by improving supply side whilst AD, LRAS right, AD up, balancing out rise in
price level, but leading to higher GDP
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In the short run, a rise in AD would still lead to inflation, so gov macro objective of low
inflation and economic growth conflict
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As economy grows people get richer and more people are employed, causing a
rise in disposable incomes, which may lead o a rise in demand for imports, worsening the
current account deficit
Eval: A gov could increase domestic production in an economy, to counterbalance the rise in
imports, again leading to a BOP current account equilibrium
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It may also be done by depreciating the
value of a currency, making exports cheaper and imports more expensive, causing a rise in
bop current account
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Eval: Policies to reduce the NRU may allow for lower inflation, whilst higher levels of
unemployment
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Other possible conflicts:environment vs growth can be countered by stricter pollution
regulation, economic growth vs inequality can be countered by progressive taxation/ Min
wage rising

D Evaluate the costs and benefits for a country of joining a currency
union, such as the eurozone
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POSSIBLY INVALID POINT: MONETARY UNIONS DON'T NECESSARILY CREATE
TRADE, AS BARRIERS TO TRADE AREN'T NECESSARILY REMOVED
Point 2: Trade creation, as no tariffs, leading to lower prices higher quantity of goods
imported, increased consumer welfare, higher standards of living
Eval: Prices may actually increase if a country imports lots of goods from countries outside
the bloc
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Point 3: Joining a currency union may lead to a currency losing control over its own
monetary policy
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It would be decided for the good of all countries in the bloc,
however singular countries may not reap the benefits depending on their macro situation
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Moreover, the
currency would become more dominant, as compared to the currency of a single country,
which may on its own be very weak
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PL Using examples to illustrate your answer, assess the usefulness of
behavioural economic theory compared to traditional economic policies
in helping governments to correct market failures (25)
HARD ESSAY
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This in
turn may further deteriorate the market failure and cause gov failure, whereas
behavioural economic theory is based on trials and real world evidence
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Whilst
some may be rational, others won't be
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Point 2: Economic policy to correct market failure may be easier to implement, as
what the gov has to do is clear and concise
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Whereas behavioural policy
would require new and innovative ways to apply to a market
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(25)
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Point 1: Reduced inequality and higher employment in the case of a monopsony
market
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Point 2: May lead to higher productivity in an economy, as workers would be more
motivated
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Causing economic growth

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Eval: Employees may just choose to work fewer hours, as they are earning more,
reducing output
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(25)
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Point 1: Foreign ownership of assets
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This means foreigners
have an increasing claim on your assets, which they could desire to be returned at
any time
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There is a
risk that your best assets could be bought by foreigners, reducing long-term income
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Geopolitical imbalances
may be caused, i
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China holds large amounts of us currency, giving it power to
influence the US economy
Eval: foreign investment may be good for a country, since inward investment will
allow the growth of industries, allowing for economic growth, allowing the country to
pay back the money it borrowed to invest, increasing confidence in an economy
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Moreover
deficit in ca means surplus in c and f acc
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Point 2: lower ad, as x-m is a comp, negative economic growth, domestic industries
may shut down, loss of jobs unemployment, negative multiplier further worsening
growth, possibility of a recession
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Also loss of investor
confidence, as a deficit may lead to currency depreciation, investors may get lower
returns, further pushing down ad
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Also if such an imbalance occurs on a time of high ad, on inelastic part
of Keynesian lras, it may be good for an economy as it would prevent hyperinflation
reduce cost of living improving welfare
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A deficit shows that uk economy is rich, people have high
disposable incomes and therefore are spending on imports, giving consumers access
to greater variety of products, increasing welfare UNRELATED

D Assess the view that falling unemployment will inevitably lead to an
improvement in the standard of living for people in the UK
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Moreover, as consumption rises, a multiplier effect may occur, leading to
higher employment, and further improvement in living standards
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living
standards may not improve, as rise in employment causing a rise in income leads to
demand-pull inflation, so people's purchasing power decreases, wages in real terms
decrease, they can’t buy as much, welfare and living standards both decrease
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This money
could instead be used to spend on capex, e
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schools hospitals, improving welfare
of a population not only in the short run, but also in the long run
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Eval: Tax evasion and inadequate tax policies eg: flat rate of taxation may mean a
gov in unable to fully maximise tax revenue
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3% to 2% is
unlikely to have much effect
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Both high tax
and low transfer payments still may not lead to budget surplus, as gov spending on
other things may be high, so not necessary national debt reduces
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This may give rise to a Price wage spiral meaning as workers
demand a rise in pay, businesses agree, as there is a shortage of labour
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This increases cost of living for workers, and they demand further pay rises,
further fuelling inflation, leading to lower purchasing power for everyone, reducing
living standards
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Also if demand for labour is elastic, firms may replace workers with
machinery, preventing the aforementioned from occurring
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(25)
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Point 1: A budget surplus would allow a gov to reduce national debt
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Surplus would also mean demand
for money is low, possibly leading to low interest rates, reducing the value of national
debt further
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This may not be the case due to external
shocks, such as pandemic which saw huge rise in gov spending and an almost
balanced budget turn into a huge deficit
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Moreover, if loss of spending leads to cut in capex then economy may
become less productive, ie lower hospitals schools etc
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Eval: This would depend on the economy’s position on the keynesian LRAS, if it’s in
inelastic region, then low gov spending may actually increase living standards by

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causing a fall in price levels, but not a fall in real GDP, and a fall in transfer payments
may actually allow a gov to increase employment, as people can be taken out of the
benefits trap
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Eval: However, interest rates may still rise due to other factors such high inflation in
an economy
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In 2023,
consumer confidence in the economy was v low, even lower than financial crisis, and
at such a time gov should be attempting to stimulate economic growth, creating
favourable conditions for private investment , instead of aiming to have a budget
surplus
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(25)
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Point 1: MNC’s have the potential to lead to economic development
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They also lead
to a rise in employment, which could cause the positive multiplier effect to occur
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As more
people are employed, gov earns higher amount of tax revenue, allowing for higher
investment in development, whilst also leading to economic growth, and causing
industrialization, shifting LEDC’s from primary to secondary sector based
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This would mean firms would produce products in this country and sell to
another daughter company in another country with lower corporation tax, therefore
leaving no tax revenue for this country, leading to a loss of funds for development,
therefore preventing development
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This allows gov to increase spending on other things such as education,
healthcare etc, allowing for higher productivity, do workers demand higher wages,
and gov gains more revenue further causing even more development
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This may be due to corruption, as gov officials may simply choose to
keep the extra money saved, preventing development
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e
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Point 3: Moreover, another consequence of my first point about the Lewis model may
be that MNC’s may lead to industrialisation, and would reduce a country’s
dependency on primary products This would lead to higher investment, as investors
wouldn't be worried about a countries economy suffering from price volatility of
primary products, allowing a gov to gain more funds for development
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This would
lead to more firms in a country, leading to greater funds for the gov, allowing for
higher development
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(25)
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Point 1: May create inflationary pressures in an economy as firms and individuals
consume and invest more due to cheap credit, eroding peoples purchasing power
and causing a fall in living standards
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If people rely on savings, eg: retired people, they will choose to
reduce consumption as they now are getting lower returns on their money
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Moreover, low interest rates would cause value of
gov debt to fall, preventing austerity measures in the future, leading to long term rise
in living standards, and increasing confidence in an economy, increasing investment ,
consumption and causing growth
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Eval: However the wealth affect may not be caused, as in European countries,
majority of people rent houses, so a rise in house prices would instead make them
feel poorer, as they have to save more to buy houses, according to economist
Ricardo Sousa
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g
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This will lead to a rise in exports and a fall in imports, improving the CA, leading to
AD rise, economic growth
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Eval: In the UK currently the pound is quite weak but export demand is not rising
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Even if demand for exports rose, economic growth would depend on an
economy’s position on the Keynesian lras
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Using the data in the extracts and your economic knowledge, assess the
view that inequality is ‘good for us all
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The benefits of
the rich getting richer may also be felt by the poor, due to the trickledown effect, as
higher incomes may lead to higher investments, causing jobs etc, benefiting the poor
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Moreover trickle down affect may not occur is the rich have a high MPS,
Point 2: May lead to excess gov spending on transfer payments, which have an
opportunity cost, as they could be used to fund other capital expenditure such as
schools and hospitals, which would benefit an economy in the long run
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Moreover, high
transfer payments could still mean high expenditure on cap ex
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e

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