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Summary ESSAYS ON MICRO AND MACRO ECONOMICS
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AS Macro EssaysThese are some suggested AS Macro economic essays. The essays are from different
exam boards. In practise they ask similar questions.
There are different ways to answer questions. But, all these answers contain enough
material to get the top grade.
Whenever the question requires evaluation, the essay contains the necessary critical
distance and evaluation.
Discuss questions are typically out of 25 or 30 marks – depending on exam board.
Note: These essays are for revision purposes, giving suggestions for how to answer
questions. Don’t try to pass them off as your own work.
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, Macro AS Essays
1. Evaluate government policies which might improve the UK balance of
trade in goods and services
2. Evaluate the importance of rising productivity in bringing about an
improvement in the UK balance of payments on current account
3. Discuss the role of supply side policies in improving rates of economic
growth.
4. Evaluate the impact of a slowdown in the US on the UK economy.
5. Discuss how a government might try to deal with economic shocks
6. Discuss the impact of a rise in the savings ratio on the UK economy.
7. Evaluate the importance of managing aggregate demand to bring about
a sustained reduction in the rate of unemployment in the UK economy.
8. Evaluate the effect of a fall in house prices on the UK macro economy
9. Discuss whether government policies can overcome a recession
10. Discuss the economic effects of an increase in the inflation rate.
11. Discuss the impact of an increase in government expenditure on
the UK economic performance
12. Discuss the impact on the EU economy of a rise in the value of the
Euro against its main trading partners
13. Discuss the relative merits of interest rates and tax increases as a
means to control inflation in the UK
14. Discuss the effects of a rise in exports on UK aggregate demand
15. Discuss the extent to which shifting resources into the public sector
will help the government achieve its macro economic objectives.
16. Discuss effectiveness of a cut in the rate of interest in influencing
consumption and investment.
17. Assess the view a fall in the exchange rate of the pound will help
improve the performance of the UK economy.
18. Discuss the impact of an increase in inward investment into the UK
economy.
19. Evaluate the importance of supply side policies in achieving the
objectives of low inflation and low unemployment.
20. Discuss the effectiveness of monetary policy in dealing with a period
of inflation.
21. Assess the contribution that fiscal and monetary policies can make
in maintaining a stable economy.
,1. Evaluate government policies which might improve the UK balance of
trade in goods and services
The balance of trade in goods and services measures the value of exports
minus the value of imports. An improvement in the balance of trade in goods
and services requires the value of exports to increase faster than the value of
imports, and therefore reduce the trade deficit.
The first policy is to reduce import spending. This can be done through
contractionary fiscal policy. Higher tax rates and lower government spending
should reduce consumers’ disposable income. Therefore, there will be a fall in
spending on imports of goods and services. In the UK, we have a high
propensity to import, therefore any increase in taxes (e.g. higher income tax
rates) might be effective in reducing demand for luxury goods (which are often
imported).
The main problem with this policy is that it would lead to lower aggregate
demand and therefore lower rates of growth and higher unemployment. These
objectives are arguably more important than improving the balance of trade in
goods and services. However, if the economy is booming and is experiencing
inflation, then reducing consumer spending, through higher tax rates, may
improve the balance of trade and also help reduce inflation.
A second policy would be to influence the exchange rate. If the government
could devalue or depreciate the value of the Pound, exports would become
more competitive and this would help improve the balance of trade. The
government could devalue the exchange rate by selling pounds, increasing
money supply or cutting interest rates. However, cutting interest rates may
boost consumer spending on imports. Also, the UK governments no longer set
interest rates, instead rates are set by the independent Bank of England who
seek to maintain an inflation target, rather than target the balance of trade.
Also, the effect of a depreciation in the value of the pound, depends on the
elasticity of demand for imports and exports. If demand for exports is inelastic,
a lower price of exports will lead to a fall in the value. A depreciation will only
be effective, if demand is relatively elastic.
To increase the level of exports the government could try implement supply
side policies to improve the competitiveness of exports. Supply side policies
could include promoting privatization and deregulation. Privatisation (shifting
state owned assets to private sector) creates more profit incentives to cut
costs. Deregulation increases competitive pressures and may lead to lower
prices. Another supply side policy could involve better education and training,
, especially in vocational training. A more productive labour force would help
increase the productivity of exports and make UK goods more competitive.
This would lead to higher exports and improve the balance of trade over a
period of time. However, it takes a long time to improve education and training
standards. Also there is no guarantee that government spending on education
would actually improves labour productivity – the money needs to be well
targeted on training schemes that are useful for firms. If labour productivity
doesn’t improve, there will be no improvement in the trade balance and the
government spending will be ineffective.
The most effective way to tackle the trade deficit is to reduce consumer
spending through contractionary fiscal policy. Reducing consumer spending
through higher taxes, will reduce imports. However, this policy also has the
biggest drawback of leading to lower economic growth and higher
unemployment. The best policy would be effective supply side policies, such
as education, more flexible labour markets and increased competitiveness -
which should help make UK exports more attractive. This will improve the
balance of trade over time. The drawback to this supply side approach is that,
in practice, it is not so easy for the government to improve the productivity of
UK industry through supply side policies.
---------
2. Evaluate the importance of rising productivity in bringing about an
improvement in the UK balance of payments on current account.
Productivity refers to output per factor input - typically output per worker.
Rising productivity means output per worker is increasing.
Increasing productivity will make British goods relatively more competitive.
Therefore, there will be higher demand for UK exports. Also increased
productivity and competitiveness means UK consumers will buy more
domestic goods compared to foreign imports. Therefore, this should improve
the current account.
Higher productivity means British firms can produce at a lower cost and
therefore may be able to reduce prices. These lower prices may lead to
increased demand for exports. However, it is possible that the firm will decide
to increase its profit margins rather than cut prices. If this happens, there will
be little improvement in the current account. Also, if firms cut price, it depends
on the elasticity of demand for UK exports. If demand is inelastic, lower prices
as a result of higher productivity, will not cause a significant increase in
demand.
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