Essay plans for a broad range of macroeconomic topics that could appear in the exam. I used these to achieve an A* at a level alongside my question banks (email me @) which forced me to actively recall the information.
Plans can be applicable for any exam board , though exam technique at the top...
- Introduction - definitions-context-definition context = prelude essay response
Make
- Analysis (Graph) - Chains of Analysis - PCC X 2 - - for cause and consequence - really
extend and final consequent point should respond to question - aim for AnA + e.g
allocative inefficiency in a monopoly, then extend to third degree pice discrimination -
therefore, all this indicates that monopolies are not efficient
- Analysis x2 - Chains of Analysis - PCC X 1/2 - same as above - explain to
non-economist Use of real world examples
- Evaluation - still use same structure - but will be opposing argument e.g monetary may
be limited in achieving economic growth due to x - context - cause - consequence -
therefore economic growth may not be achieved if x
- Evaluation (Graph)
- Either Analysis// Evaluation (Optional)
- Conclusion (Judgement needed) - 1. Answer Question explicitly// Explain why - using
most important argument i.e ranking 2. Some sort of balance - something else
required?Short run/Long run OR winners vs losers + real word example 3. Judgement
AD/AS
CONSEQUENCES OF DECREASE IN AS
P1: Mechanics
A decrease in aggregate supply involves a leftward shift of the AS curve. The potential
output of the economy would decline. A decrease in aggregate supply is usually assumed to
be harmful to an economy as it reduces its ability to achieve its macroeconomic objectives -
this is why governments’ supply-side policy measures always seek to increase aggregate
supply and do not try to reduce it. SSPs help increase AS in order to decrease inflationary
pressures. It is possible that the decrease in AS will lead to cost-push inflation, as a
reduction in productive capacity will result in greater competition for resources. The leftward
shift of the AS curve will lead to increasing price levels and reduced GDP (AS is not keeping
up with increases in aggregate demand). Reducing GDP can lead to a recession, fall in
economic growth and higher unemployment.
P2: EVAL- depends on cause The effect of a decrease in AS will depend on the cause i.e.
a decrease in investment will be particularly harmful as it will also decrease aggregate
demand. A fall due to a rise in the school leaving age/numbers in HE may later increase AS.
The effect will be influenced by the size and duration of the decrease. A larger, long run
decrease will have a larger impact.
P3 International competitiveness: When overall price levels occur due to ↓AS, the inflation
can lead to a loss of international competitiveness. This means there will be an increase in
the demand for exports and a decrease in the demand for imports, which means ↓AD and a
increase in the deficit of the current account will follow. A decrease in AS resulting from a
decrease in labour productivity may reduce net exports due to a fall in their quality and/or
,rise in their price. Lower output due to ↓AS may decrease employment in the long run
especially if fewer capital goods result in fewer workers being needed to operate them.
EVAL- There may not necessarily be a loss of international competitiveness if the quality of
UK goods are higher than the quality of substitutes from foreign countries. This will reduce
the detrimental effect of a decrease in AS leading to inflation.
The effect on unemployment is uncertain as there may be a difference in the number and
rate of the unemployed. The effect will depend on the initial level of economic activity. If there
is initially considerable spare capacity, the effect will be less harmful than if the economy is
operating at full capacity
CONC- Likely to be harmful as it will hinder a government’s ability to achieve its
macroeconomic objectives and governments aim to increase AS rather than reduce it. If
there is considerable spare capacity in the economy it may not be harmful in the short run
but will still be harmful in the long run. A fall due to e.g. a decrease in investment will be
more harmful than a fall due to a temporary decline in the labour force.
CAUSES OF INCREASE IN AGGREGATE DEMAND:
Causes
P1: Cutting income tax rates
A cut in income tax rates will increase disposable income/ability to spend. A rise in
disposable income will be likely to increase consumer expenditure, which will stimulate
investment from firms. Both consumption and investment are components of AD, so it will
increase. A cut in corporation tax will enable firms to keep more of their profits/raise profits
available for firms. Higher investment involves increased spending on capital
goods/technology. A reduction in corporation tax will reduce the costs of production and may
increase business confidence. Knowing that more profits can be kept will provide an
incentive to invest.
EVAL-Some extra income will leak out of the economy in the forms of savings and/or
imports, and lower tax rates may affect government spending.
The effect on investment will depend on the size of the cut, the initial tax rate and whether it
is offset by (e.g.) high interest rates.
Firms may not invest if there is considerable spare capacity.
Firms may not invest, despite the cut, if they are pessimistic about economic prospects or
the cost of capital goods is high/rising.
P2: Increased govt spending
Government spending is a component of AD, so an increase in government spending on
education may increase AD. This may result in a rise in real GDP. If the higher spending
increases educational standards, labour productivity may increase. Higher labour
productivity may increase aggregate supply and so result in an increase in productive
potential. In addition, higher productivity = lower labour costs = lower prices = gain of
international competitiveness = increase of exports/decrease of imports = economic growth.
, Higher spending on education has the potential to generate economic growth both in the
short run and the long run by ↑AD and ↑AS, but the impact will be influenced by whether the
education results in relevant skills being developed.
EVAL- An increase in spending on education does not guarantee an improvement in the
quality of education.
Higher government spending may increase inflation and not increase economic growth in the
short run if the economy is operating at full capacity (vertical part of the AS curve).
An increase in government spending may have a significant impact on economic growth in
the short run if there is spare capacity and there is a large multiplier effect.
Higher government spending does not guarantee higher AD as other components of AD may
decline; full advantage may not be gained from higher educated workers if investment falls.
Productive capacity will not increase if more educated workers emigrate.
CONSEQUENCES
P1: ↑Output
An increase in AD will lead to an increase in AS in order to meet this high level of demand.
This is possible if the economy on the horizontal part of the AS curve, rather than at full
capacity, the vertical part. This increase in AS and AD will lead to LREG. An increase in AD
may also increase AS if it results from, e.g. an increase in investment or an increase in
government spending on education and training. In this case, an economy can experience
both actual and potential economic growth.
EVAL-The final effect of an increase in AD may be greater than the initial increase due to the
multiplier effect. The impact will depend on the degree of spare capacity in the economy.
The effect that an increase in AD has on output (real GDP), unemployment and inflation will
depend on the size of the change. A larger increase is likely to have more of an impact than
a small increase.
P2: ↑Employment
An increase in aggregate demand would be expected to encourage firms to increase their
output due to higher spending. To produce a higher output, firms may take on more workers
which may reduce unemployment. Higher AD many lead to a rise in the price level.
EVAL- If an economy is initially operating with considerable unemployment, an increase in
AD may raise output and reduce unemployment but have no effect on the price level. In
contrast, if the economy is operating close to full employment, the impact may just be on the
price level.
Higher AD may be met by workers working overtime, an increase in labour saving
investment and so unemployment may not fall. If AD does not rise in line with an increase in
potential output (AS), unemployment may rise.
P3: ↑Inflation
The rightward shift of the AD curve will increase the price level, leading to inflationary
pressure, if the economy is operating on the vertical part of the AS curve (full capacity).
Higher AD may result in demand-pull inflation with excess demand, pulling up prices.
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