RWE Macro

Question 1

Economic Growth

Answer 1

Ireland:
Since Ireland has stopped their austerity policies due to the successes of the anti-austerity movement, there has been rapid economic growth. GDP per capita is almost twice as high as in the UK. HDI has increased from 7.4 in 1990 to 9.4 in 2020, showing that living standards have improved immensely.

Austerity policies = raising taxes, cutting gov spending…

Question 2

Inflation and unemployment

Answer 2

Demand pull:
China: The CPI Index rose by 2.1% after coronavirus restrictions were eased.
Cost-push:
UK: Inflation rate heading towards 11%. Caused by a surge in costs due to increases in the price of oil and gas.

Question 3

Multiplier effect

Answer 3

BritishVolt Gigafactory:
- The UK gov has committed $100M to build a gigafactory.
Multiplier effects:
3000 direct jobs
5000 supply chain jobs
+2B total investment

Question 4

Negative multiplier effect

Answer 4

Honda UK factory:
- Honda is closing their UK factory, leading to 3000 job losses
Negative multiplier effects:
Falling incomes in the regional area
Drop in spending on retail services
Likely decline in house prices

Question 5

Expansionary monetary policy

Answer 5

Japan:
- In 2014, the Bank of Japan injected 800 trillion yen into the economy by buying government bonds, increasing the money supply.
- This is because inflation fell to 1%, which is below the bank’s target of 2%. As a result, increased consumer spending was needed to stimulate demand-pull inflation.
- Increase in money supply caused the dollar to increase in value. Making japanese exports more competitive

Question 6

Contractionary monetary policy

Answer 6

Bank of England:
- The Bank of England raises interest rates to 1.25% from 1%.
Combats cost-push inflation which has driven energy costs to an 11 year high.
- However, the Treasury is spending 15bn GBP in a cost of living support package which will grow the economy by 0.3% but also add 0.1% to inflation.

Question 7

Expansionary fiscal policy

Answer 7

Saudi Arabia:
- In 2018, unemployment in Saudi Arabia was at a record high of 12.9%.
- The Saudi Crown Prince announced that he wanted the Saudi economy to diversify so that it wouldn’t be solely reliant on oil prices.
- He announced that a 7% increase in government spending would take place. This would mainly be in the form of subsidies to firms in other industrial sectors to encourage long-term growth and investment.
- However, the rate of non-oil industries is growing slowly at just 2% of the economy. Furthermore, the government already has a large budget deficit of $98bn.

Question 8

Contractionary fiscal policy

Answer 8

The budget deficit has soared after the pandemic and the invasion of Ukraine. Government revenues have fallen as 600,000 people have left the labour force, decreasing tax revenues.
Corporation tax rates are rising from 19% to 25%.
Aim is for businesses to contribute to government revenue. Corporation tax is one of the main sources of revenue for the Treasury.
Firms earning less than 50,000 GBP in profits will continue to pay 19% meaning 1.4mn small businesses will be unaffected.
Chancellor Jeremey Hunt announced that public spending is to be cut by 35bn GBP and taxes are to be raised by 20bn GBP. This would hurt households who are already struggling with an 11 year high inflation rate

Question 9

Supply-side policies (market based)

Answer 9

UK:
- Income tax cuts: Increase in tax-free allowance from 6,500 GBP to 12,500 GBP (Incentivises people to be more productive and to join the labour force).
- Corporation tax in 2010 was 28%. In 2019 it was just 19%.
- Investment incentives: Tax relief is provided for small and medium enterprises looking to engage in R&D.

Question 10

Supply-side policies (interventionist)

Answer 10

UK:
- The British Government has committed to spending 31bn GBP to a National Productivity Fund.
–> In 2019, 400mn GBP was provided as funding to schools. More funding to attract students to do maths and computer science A levels. An apprenticeship levy has been introduced, whereby firms have to commit a certain percentage towards the funding of adult apprenticeships. (Education and training)
–> Between 2020 and 2025, 28bn GBP is to be spent on the National Roads Fund, to improve infrastructure. Prevents congestion, boosting productivity. (Infrastructure)