Preparing for the May 2011
AQA AS Unit 2 Economics
Macro Paper
Geoff Riley
May 2011
Recent AQA Unit 2 Papers
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January 2009:
– Productivity growth and importance for macro performance
– Household savings and importance for macro performance
June 2009:
– Inflation and monetary policy, Inflation and AD
– Growth and consumption
January 2010:
– Exchange rate, Balance of Payments
– Economic cycle and unemployment
June 2010:
– Causes and consequences of a fall in investment spending
– Economies in recession, policies to help the UK recover from recession
January 2011:
– Demand and supply side policies to generate higher economic growth
– Role of fiscal and monetary policy in maintaining economic stability
Some possibilities for May 2011
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Causes of economic recovery, stimulus policies and multiplier/accelerator
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Why is inflation persistently above target, achieving growth without inflation
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Demand and supply-side shocks including oil & food prices
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Difficulties in achieving macro aims (policy “trade-offs”)
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Output gap, unemployment and inflation / deflation
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Saving and consumer spending and real disposable incomes
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Demand and supply-side causes of unemployment
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Demand and supply-side policies to reduce unemployment
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Policies to improve balance of payments in recent years (current account only)
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Interest rates & their impact on the macro-economy / credit supply and cost
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Cuts in government spending and their possible economic effects
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Changes in the exchange rate and their macro impact (AD and SRAS)
Reminder about timing
• 75 minute paper
• 25 Q multiple choice paper – 20 mins
• Data response question
– (1) Key term definition (5 marks) – 2 min
– (2) Data description (8 marks) – 5 min
– (3) Explanation question (12 marks) – 15 min
– (4) Evaluation question (25 marks) – 30 min
What is core?
• Determinants of macroeconomic performance
– Understanding of AD-AS analysis
– Using this analysis to explore recent and current economic
behaviour and events
• Analysing and critically evaluating a range of
macroeconomic policies (e.g. MP, FP and SS-P)
– How do policies work? The transmission mechanism
– What are the limitations / constraints of each policy?
• Understanding the external environment and how it
impacts on the British economy
• Being aware of how the different macroeconomic
topics link together e.g. Inflation and unemployment
Macroeconomic performance and stability
• Domestic objectives:
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GDP: Real economic growth (short and long term)
CPI: Price stability (low stable positive inflation)
Achieving higher employment / less unemployment
Higher living standards (i.e. GDP per capita and other
measures of well-being and social welfare)
• External objectives
– Sustainable position on the current account of the BoP
– Maintaining competitiveness in the global economy
• Restoring and then maintaining economic stability
– Smoothing some of the volatility in key macro objectives
such as inflation, growth and unemployment
Trying to achieve macro stability
The output gap is negative
Oil prices affect AD and SRAS
Jobs and prices
Trend growth is falling – why?
How much borrowing can the UK take?
Govt Spending has macro & micro effects
Taxes also have microeconomic effects!
UK exposed to external demand shocks
1. A big rise or fall in the exchange rate
2. Recession in major trading partners which
affects the demand for exports
3. A prolonged slump in the housing market
4. The credit crunch – squeezing the supply of
loans – impact on businesses and consumers
5. Unexpected (large) changes in interest rates
or taxes
A fall in aggregate demand
Price Level
An initial change in AD can have a
much greater final impact on
equilibrium national income. This
is known as the multiplier effect
LRAS
AD2
AD1
SRAS
Y1
Y2
Real National Output
Supply-side shocks
• Supply side can be affected by shock effects
• Some of these are negative for growth and inflation –
other supply-side shocks can have a positive impact
• SRAS:
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Changes in global food prices
Volatility in the prices of imported raw materials / energy
Changes in import tariffs and other import controls
Changes in indirect taxes on businesses and subsidies
• LRAS
– Impact of new technologies on costs and productivity
– Long term impact of innovation and invention
– Unexpected changes in the size of net labour migration
A fall in short run aggregate supply
Price Level
A fall in SRAS might be caused by
higher costs of production –
leading to lower supply at each
price level
LRAS
SRAS2
SRAS1
AD1
Y2
National Output
Y1
Yfc
An increase in productive potential
Price Level
An increase in the supply-side
capacity of the economy is shown
by shift in LRAS
LRAS
LRAS2
AD1
SRAS1
Y1
National Output
Yfc
Yfc2
Macro Evaluation (1)
1. Most macro problems have multiple causes
2. No single macro policy works in isolation
3. Combination of policies needed for short & longer term
1.
2.
Demand side policies and supply side policies
Be clear on the main ideas behind Keynesian macro theory
4. Remember – economics is a social science – we can
never be certain about how people will respond
5. Expectations and confidence are crucial – e.g. Weak
animal spirits during the early stages of a recovery
6. Policy time lags are uncertain e.g. The time lag between
economic recovery and falling unemployment
7. Use data to support or reject a point of view
8. Question reliability of the data – especially if out of date
Macro Evaluation (2)
• Importance of macro awareness / knowledge
1.
2.
3.
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It is crucial that you show an awareness of what is actually
happening in the British economy
Use extracts in your answer to Q (3) – make at least three explicit
data references in your final answer (from charts, table and text)
Also show awareness of events / issues in other countries – useful
for comparative illustrations e.g. Events in the USA, Europe, China
AD-AS analysis must always be used as foundation to show
impact on output, prices, employment
The UK is an open economy vulnerable to external events
Remember to offer a clear final conclusion in the 25 mark Q
– this is essential to get a level 5 answer in the 25 marker
Evaluation phrases
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However
Hence
Nevertheless
Although
It is likely that
With the benefit of hindsight
On the other hand
In the short run …….. but in the long run
It depends upon (e.g. price elasticity of demand, what
happens to the exchange rate, etc.)
• The data suggest that ... But the data in the extract is out of
date
• According to the article the writer argues that …… but
Remember the Wee-Steps Approach
W
Wider context – consider the bigger picture in an
issue and use it to weight your arguments
E
Efficiency – Does this achieve a more/less efficient
allocation of resources?
E
Equality – Do some parties benefit more/less than
others from a policy change?
S
Scope – How many people are affected by the
point? Is it wide reaching or narrow?
T
Time – How long will it last, SR or LR or both?
E
Effectiveness – does it solve the issue it was
intended to solve? Are there better alternatives?
P
Prioritisation – which of your points is the
strongest and why. Be specific about the context of
the question – use this in your final paragraph
S
Scale or Magnitude – where people are affected
how strong is the impact?
UK economy at a glance
% change unless stated
2009
2010
2011
Consumer spending
-3.3
1.3
-0.5
Government consumption
1.0
1.2
-1.0
Investment
-15.4
3.5
5.5
Stock-building (% GDP)
-1.2
0.1
0.5
Domestic demand
-5.5
2.7
0.8
Exports
-10.1
5.3
6.5
Imports
-11.9
8.0
3.5
GDP
-4.9
1.7
1.5
At a glance (2)
% change unless stated
2009
2010
2011
Manufacturing output
-10.7
3.8
4.0
Company profits
-7.5
1.0
3.0
Unemployment LFS measure (%)
7.6
7.9
8.6
Unemployment CC measure (%)
4.9
4.8
5.3
Average earnings (inc. Bonuses
-0.1
2.2
1.0
RPI Inflation
-0.5
4.5
3.2
CPI Inflation
2.1
3.3
3.2
Productivity (output per worker)
-3.5
1.5
1.7
At a glance (3)
% change unless stated
2009
2010
2011
BoP Current Account Balance (% GDP)
-1.7
-2.3
-2.0
Government Budget (Fiscal) Balance (%
GDP)
-11.8
-10.1
-7.7
Gross government debt (% of GDP)
71.3
77.9
82.6
$1.62
$1.55
$1.40
Euro 1.13
Euro 1.19
Euro 1.22
0.5
0.5
0.50
10-year UK government bond yield (%)
4.1
3.7
2.75
World economic growth
-0.8
4.5
3.5
US Dollar /£ exchange rate (annual
average)
Sterling / Euro exchange rate (annual
average)
Monetary policy: Base (policy) interest
rate (%)