Edexcel A Level Macroeconomics Model Questions and Answers
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Course
Paper 2 Essay Plans - Macroeconomics
Institution
PEARSON (PEARSON)
This document provides comprehensive essay plans for Edexcel A-Level Macroeconomics, covering critical themes in macroeconomic theory and policy. It includes detailed plans on macroeconomic objectives and policies, such as monetary policy, fiscal policy, and supply-side policies, with a focus on th...
Theme 2
2.6 Macroeconomic objectives and policies
1. Monetary policy
2. Use of Quantitative Easing
3. Fiscal policy
4. Impact of increased government expenditure
5. Impact of increasing tax rates
6. Supply side policies
7. Fiscal vs monetary policies (+ supply in case they ask this in different ways)
8. Constraints of economic growth
Theme 4
4.1 International economics
1. Benefits of globalisation
2. Causes of globalisation
3. Measures to reduce the negative impacts of globalisation
4. Reasons for protectionism
5. Impacts of protectionism
6. Macroeconomic policies apart from protectionism that could reduce the negative effects of globalisation
7. Advantages of specialisation
8. Export led growth vs import led growth
4.2 Poverty and inequality
1. Causes of poverty and inequality
2. Impact of economic change and development on inequality
3. Benefits of a bit of inequality
4. How to reduce poverty and inequality
4.4 The financial sector
1. Role of the financial markets
2. Role of financial sector in growth of developing countries
3. Why governments may intervene in the financial sector
4. Why market failure may occur in the financial sector
4.5 Role of the state in the macroeconomy
1. With reference to the information provided and your own knowledge, evaluate the macroeconomic effects
of a government policy of cutting public expenditure rather than raising taxes as a means of reducing a fiscal
deficit
2. Does reducing the fiscal deficit align with UKs economic goals
3. Impact of a large fiscal deficit and national debt
4. Policies to increase international competitiveness
5. Does expansionary monetary policy in advanced economies reduce the trade competitiveness of developing
economies?
,6. Policies to respond to increasing commodity prices
7. Consequences of a fall in the global oil prices
8. Structural vs fiscal deficit more serious
9. Policies to control global companies
,Evaluate the use of expansionary monetary policy for the UK to achieve their economic goals
1. Reduce interest rates
During GFC UK reduced interest rates from 5 to 0.5%
This leads to increased marginal propensity to consume and to
invest -> reduced returns on savings -> increased consumption
and investment -> AD shifts outwards -> reduces cyclical
unemployment as AD shifts outwards due to increased demand
for labour and as real output shifts outwards there is increased
economic growth
Evaluation - Liquidity trap
When consumer and business is too low that the reductions in interest rates have no impacts - from 2016 Japan has
had to implement a negative interest rate of -0.1% to attempt to increase economic growth -> reductions in interest
rates when confidence is low will not have the desired impacts on economic growth or unemployment
2. Quantitative easing
During GFC £200 of QE was injected into the economy
BoE creates money electronically - BoE purchase government bonds - Increase
bond prices - Yield = coupon / price - Declined bond yields - Asset holders
diversify into corporate bonds and equities - Increased demand for these other
financial and non-financial assets - Wealth effect - Increased consumption -
Increased AD - economic growth
Evaluation
However increased house prices - unaffordable housing - increased geographic immobility of labour - reduced supply
of labour in certain areas and people cannot find a job - increased unemployment - reduced incomes and increased
transfer payments - reduced economic growth
Conclusion
In the short run may be successful but long run may inhibit the UKs economic goals - both policies underpinned by
consumer and business confidence regarding the IR and economic situation of trading partners - long run - reduced
IR - reduced saving - reduced long run economic growth according to Harrod Domar
, Evaluate the use of expansionary fiscal policy for the UK to achieve their economic goals
1. Reduce tax rates
GFC the VAT rate reduced from 17.5 to 15% and £145 tax cut for basic rate
(below £34,800 pa earnings) tax payers
Reduced tax -> increased disposable income and retained profits -> increased
consumption and investment -> increased AD -> inflation increases -> UK
goods less competitive vs foregin trading partners -> current account deficit
increases
Evaluation - Ricardian Equivalence
Tax cuts now will be paid off in the future with increases in taxes - this relies on all consumers being rational and
forward thinking (which may be unrealistic) -> consumers save this extra income they receive through the tax cuts in
order to pay off the future tax increases -> AD will not increase -> no inflation -> current account stays relatively
constant
2. Increased government spending
T Levels and apprenticeship support scheme which gives firms £3000 for every new
firm that they hire
Increases AD as government spending increases - multiplier effect as consumption
and investment would increase as a consequence of this increased government
spending due to increased disposable incomes -> further increasing aggregate
demand -> increasing economic growth and reducing unemployment due to
increased demand for labour. LRAS shifts outwards due to increased quality and quantity of labourforce further
contributing to economic growth and reduction in cyclical unemployment
Evaluation - Crowding out
This expansionary fiscal policy -> increased borrowing -> reduced supply / increased demand of private loanable
funds -> IR rise -> reduced investment -> AD decreases -> reduced economic growth and increased cyclical
unemployment
Conclusion
Supply side policies have both the gains for economic growth and unemployment without leading to inflation which
may be more beneficial long run
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