Econ 2How to write a 25 Mark Essay

Question commonalities • Using the data and your economic knowledge, discuss the difficulties that

the Government is likely to encounter when attempting to boost the rate

of growth of the UK economy. (25 marks)

• Using the data and your economic knowledge, assess the impact on the

performance of the UK economy of a significant increase in exports and a reduction in imports of goods and services. (25 marks)

• Using the data and your economic knowledge, discuss the view that a

sustained recovery in the UK economy will inevitably lead to an increase in inflation. (25 marks)

• Using the data and your economic knowledge, assess the view that a

reduction in income tax is the best way to improve the performance of the UK economy in both the short run and the long run. (25 marks)

What will you be asked about?

How do these affect or influence macroeconomic

policy and government objectives?

How do these affect or influence the Growth,

performance or recovery of an economy?

Can these be improved, impacted or sustained by the factors below and are

there any difficulties in achieving these goals

CONTENT

AD ComponentsConsumption + Investment +Government spending + (Exports – Imports)

• Consumption - Is when goods and services are purchased in an economy

• Investment - Is when goods are purchased for future use in the hope of future gains

• Government Spending - Is spending on consumption or investment by the government and is known as fiscal policy. It excludes transfer payments.

• (Exports – Imports) - Is the current account whereby the amount of non-UK goods purchased by UK consumers is taken away from the amount of UK goods purchased by buyers non-UK consumers.

Increases in these components shift AD outward or to the right

Consumption Investment Government spending Exports

When these components increase through natural means or government influence they will shift out the Aggregate Demand curve. Price level and real national output will increase ceteris paribus

Decreases in these components shifts AD inward or to the left

Consumption Investment Government spending Exports

When these components Decrease through natural means or government influence they will shift in the Aggregate Demand curve. Price level and real national output will fall ceteris paribus

• Supply-side measures or policies are aimed at boosting the amount of goods and services produced in an economy.

• Policies that boost supply include;Education and Training Productivity Investment

Supply-side measures

When these supply-side measures increase through natural means or government influence they will shift the Aggregate Supply curve. Price level will fall and real national output will increase ceteris paribus

Increase in these supply-side measures will shift AS outward or to the right

Education Investment Productivity

When these supply-side measures Decrease through natural means or government influence they will shift in the Aggregate Supply curve. Price level will rise (cost-push inflation and real national output will decrease ceteris paribus.

Decreases in these supply-side measures will shift AS inward or to the left

Education Investment Productivity

Balance Of Payments

(Exports – Imports) - Is the current account whereby the amount of non-UK goods purchased by UK consumers is taken away from the amount of UK goods purchased by buyers non-UK consumers.

Current account also includes :• Net investment incomes • Net transfers

Key terms: Trade deficit, trade surplus, exchange rate

Questions you could be asked

• Using the data and your economic knowledge, assess the impact on the performance of the UK economy of a significant increase in exports and a reduction in imports of goods

Where are we?

How do these affect or influence macroeconomic

policy and government objectives?

How do these affect or influence the Growth,

performance or recovery of an economy?

Can these be improved, impacted or sustained by the factors below and are

there any difficulties in achieving these goals

✓

Macroeconomic policy

• Fiscal Policy

• Monetary Policy

• Supply- side policy

Fiscal Policy • Fiscal policy is government policy that involves taxation,

government spending and government borrowing.

• Keynesians argue the use of government fiscal policy is key to influencing the pattern of growth within and economy whilst monetarist believe that this is only a temporary measure and so, monetary policy should be used to rebalance the economy.

Expansionary Fiscal Policy

Fiscal Policy – Government spending and taxation

1. Government Spending increases – Boosts AD as it is a direct component but it is often funded by borrowing so may cause an increase in interest rates and thus reduce investment.

2. Taxation Decreases- If taxes decrease then people will have more disposable income and be able to consume more, thus increasing AD ceteris paribus

Contractionary Fiscal Policy • Government spending decreases- If government spending

decreases AD will decrease which may cause a reduction in interest rate to encourage consumption

• Increase in taxation- If taxes increase people will be left with less disposable income and consumption is likely to fall

Monetary Policy • Monetary Policy has been set independantly by the Bank of

England since 1997.

• The Bank of England set the base interest rate and control the money supply.

• This influences inflation, output, Jobs, AD, Growth and the exchange rates.

Expansionary Monetary Policy

1. Reduce interest rates – In a downturn with low growth rate and low demand the Bank of England may reduce interest rates to encourage spending and discourage saving.

2. Increase Quantitative easing – The Bank of England can print new money or buy government bonds to increase the money supply and encourage spending and growth within the economy.

Contractionary Monetary Policy • Increase in the interest rates to slow the rate of borrowing and

discourage spending to slow the rate of growth within the economy

• Reduction in quantitative easing – Reducing the amount of money being created and injected into the economy to reduce the money supply and slow the rate of growth

Government Objectives • Low unemployment – lots of people in work

• - Low and steady inflation

• Steady and sustainable economic growth

• A positive balance of payments or a strong balance of payments position

Where are we?

How do these affect or influence macroeconomic

policy and government objectives?

How do these affect or influence the Growth,

performance or recovery of an economy?

Can these be improved, impacted or sustained by the factors below and are

there any difficulties in achieving these goals

✓

The Essay

Using the data and your economic knowledge, discuss the difficulties that the Government is likely to encounter when attempting to boost the rate of growth of the UK economy. (25 marks)

Putting it all togetherWe need to make this, into this

Essay

Skills

• Knowledge• definition

• Application• Can you use the case

study?

• Analysis• If/then• This causes/as a

consequence etc

• Evaluation• Depends upon

These are the skills the examiner wants to see

Structure

• Intro• Knowledge

• Argument for intervention• App/Analysis/Eval

• Argument against• App/Analysis/Eval

• Conclusion• Evaluation

This is the rough structure we will use to show those skills

Key: Green text = Knowledge Blue text = Application Orange text = Analysis Red text = Evaluation

Introduction

The government is likely to encounter several problems when attempting to boost the rate of growth in the UK economy. However, which problems and their extent depend upon how the government uses monetary and fiscal policy to boost growth, the scale of growth desired, and whether the growth is sustainable or a short-term goal. As Extract C states, boosting growth by raising demand often results in high inflation and a balance of payments deficit. As a result, the UK government finds it difficult to achieve their multiple objectives, due to their conflicting outcomes. Supply-side remedies may be introduced to manage such difficulties but there may also be a need for a unified approach between monetary and fiscal policy to achieve a sustainable rate of growth and this is what this essay will consider.

Explain what your essay is going to say and show you appreciate the complexity of the problem

Knowledge

Economic Growth is an increase in the capacity of an economy to produce goods and services. In Figure 1, Short-term economic growth is the point going from A to B where the spare capacity in the economy is being used to achieve growth. Long-term economic growth is a shift outward of the PPF where the productive potential of the economy has increased from point B to C. The magnitude of trade-offs between economic variables, such as economic growth and inflation, are likely to change when aiming for short or long term growth. Therefore, the distinction between short-term and long-term growth is an important aspect of decision making when implementing government policy.

Define your terms- Use diagrams to aid your definitions, use long run and short run to show you understand the changes in the term used

Application

As Extract C states, an important aspect of increasing the rate of growth is to boost aggregate demand. Keynes argued, that if the economy is in a depressed state shown by point A on figure 2, the government should intervene to boost demand from AD-AD2 to reach its maximum productive potential on the LRAS curve (point B). However, a difficulty a government faces when implementing expansionary fiscal policy is the inflation rate (Extract C, Line 7-8). As seen in Figure 2, boosting AD will cause an increase in the price level (P1-P3).

Use and reference the extract- It can lead you nicely into your analysis

Analysis and Evaluation

As seen in Figure 2, boosting AD will cause an increase in the price level (P1-P3). However, the extent to which the government and the Bank of England will be concerned about high inflation will depend on its current level and the signal it is giving. For example, if the economy is suffering from a recession, then an increase in the inflation rate may be an indication that the government policy is working and more spending is taking place, subsequently increasing prices. Therefore, the inflation rate will not concern governments, as it can simply be an economic measure of growth. However, if the economy is in a period of stagflation, where inflation and unemployment are rising, the government will face a dilemma. That is, they will want to boost economic growth but any increase in AD, as seen in Figure 2, is likely to increase inflation and exacerbate the problem further.

Appreciate the multitude of variables- Use causal chains to allow your essay to flow

Use key terms: However, It depends upon, Nevertheless

Deeper Evaluation

Another difficulty governments are faced with when attempting to boost growth is that they only have so much control over policy. That is to say, the government has control of fiscal policy and supply-side policy but the Bank of England sets monetary policy. So, any policy decision made by the government to boost economic growth could be offset by a conflicting monetary policy. For instance, if a government implements an expansionary fiscal policy through a rise in government spending, aggregate demand should increase. However, if the Bank of England simultaneously raises interest rates to reduce inflation, the impact of the government policy is likely to be dampened or even stopped. It is possible however, for the governments to raise its expectation of the inflation rate it sets for the BoE in order to stop any monetary policy action through interest rate change. However, this may be to the government’s detriment as the inflation rate target of 2% is a key objective for the government and seen as an integral part of sustainable growth.

Put forward your own Ideas, as long as you can justify them you will be showing a deeper level of understanding

Conclusion

In conclusion, the government will always face difficulties when aiming to achieve growth, due to the conflicting nature of its objectives. Since high inflation is often accompanied with a high growth rate and high employment is likely to lead to high inflation. Therefore, governments may have to prioritize certain objectives in order to increase their effectiveness. However, it can be possible to achieve multiple objectives through supply-side measures, which keep inflation low and still boost growth rates. Governments should also monitor monetary policy in order to make any fiscal or supply-side policies more effective and in future, it may be seen as more beneficial to allow governments greater control of monetary policy, to ensure that key objectives of the government can be reached.

The questions will always allow you to argue for more than one point of view. Be careful of giving a definite answer to the question. Use your conclusion to appreciate the complexity of the problem and give a well rounded view of ways to improve or possible methods etc.

DONE

How do these affect or influence macroeconomic

policy and government objectives?

How do these affect or influence the Growth,

performance or recovery of an economy?

Can these be improved, impacted or sustained by the factors below and are

there any difficulties in achieving these goals

✓