HOW TO ANSWER MACRO QUESTIONS

Question 1

Method 1

Answer 1

If the question mentions a specific macroeconomic objective
e.g. Macroeconomic effects of Unemployment

Make sure to talk about STAKEHOLDERS

The main stakeholders are:
Consumers
The Government
Firms

Consumers and govt should often go together as they often have a less in-depth chain of reasoning

Question 2

Method 2

Answer 2

If the question doesn’t mention a specific macroeconomic objective
e.g., Macroeconomic effects of an increase in government spending on infrastructure

That is when you talk about the different Macroeconomic objectives

Question 3

Extension of method 2

Answer 3

How to analyse the different Macroeconomic objectives:

1. Economic growth:
   Effect on AD and AS
2. Inflation:
   Demand pull or cost-push
3. Unemployment:
   -Cyclical (changes in AD)
   -Structural (changes in industry)
4. Balance of Payment stability
   -Imports and exports
   -Increase in export revenue compared to imports
   -Price competitiveness of exports (exchange rates, inflation, and quality)

NOT COMMONLY MENTIONED

5. Environmental sustainability:
   -Pollution
   -Exploitation of factors of production (raw materials)
6. Balanced government finances
   -Effect on government revenue (often tax revenue)

-Effect on govt spending

7. Inequality:
   -Regressive taxation increases inequality (Indirect taxes)
   -Progressive taxation decreases inequality (direct taxes)

Question 4

Typical chain of reasoning for an increase in AD

(Also positive effects on other macroeconomic objectives)

Answer 4

Increase in AD-reduction in negative output gap-reduced cyclical unemployment due to higher derived demand for labour-increase in ACTUAL economic growth-Multiplier effect

ALSO:
Improved government finances:
Economic growth leads to higher spending, incomes, and profits, which increases direct and indirect tax revenue for the government

Reduction in government spending due to lower unemployment, causing benefits spending to decrease

Question 5

Typical eval for an increase in AD

Answer 5

-If one part of AD (Consumption) increases, AD may not increase if something else falls (Government spending)

-The size of the multiplier depends on MPC and MPS, which are affected by consumer confidence

-Trade-offs (low unemployment, high inflation)

-DEMAND PULL INFLATION (reduction in price competitiveness of exports)

-Increased incomes could increase demand for imports (reducing net exports)

-Environmental impact:
-Economic growth leads to higher production, which could increase air pollution and demand for raw materials

Question 6

DEMAND INFLATION

Answer 6

Demand pull inflation always depends on the position on the Keynesian LRAS curve

Question 7

Economic growth due to higher AS
(supply-side policies)

KAA points

Answer 7

Increasing spending on education, improved skills-mobility/health of the labour force, and increased productivity and availability-outwards shift of LRAS, reduction in the general price level, and increase in POTENTIAL economic growth

Balance of payments:
Reduction in the general price level- exports become more price competitive, and an improvement in the current account deficit (only if PED of exports is relatively elastic)

Question 8

Economic growth due to higher AS
(supply-side policies)

Eval points

Answer 8

Balanced Government Finances:
If supply-side policy is achieved by an increase in government spending or a reduction in taxes
-Worsening in the budget deficit, and increased borrowing, increase in national debt, increase in interest payment burden

Optional:
-Higher tax rates for future generations
-Persistent government spending could lead to hyperinflation
-Time Lag
-Crowding out