Macro Diagrams

Question 1

Link to Natural Rate of Unemployment Diagram

Answer 1

Link to:

• Structural and Cyclical Unemployment
• Policies to reduce Natural Rate, shift S(ACTUAL) right towards S(LF)

Question 2

Benefits of Trade

Answer 2

• Allocative efficiency due to comparative advantage
• Lower Prices
• Higher Consumer Surplus
• High Quantity and Choice
• Higher Economic Growth due to Exports

Question 3

Reasons for Protectionism

Answer 3

• Lower Quantity for domestic
• Lower Revenue and Profits
• Domestic Unemployment
• Small business protection
• Protection against dumping
• Tariff revenue
• Reduces trade deficit

Question 4

Costs of Protectionism

Answer 4

• Higher Prices
• Lower Consumer Surplus
• Lower Quantity and Choice
• Domestic Producer inefficiency

Question 5

Explaining Crowding Out Effect Diagram

Answer 5

• If expansionary fiscal policy is government spending heavy, and the spending is borrowing funded, then it can crowd out the private sector
• Government demands loanable funds, so interest rates rise, causing private sector investment to decrease

Question 6

Explaining Liquidity Trap Diagram

Answer 6

• There is a point where interest rates hit their lower bound, so all individuals have converted all of their assets to cash, as the return is poor, so curve becomes flat
• So if Central Bank tries to reduce interest rates more, it won’t have any effect, AD won’t rise, growth won’t
  increase etc.
• Monetary policy loses its effectiveness completely if the economy is a liquidity trap