Edexcel AS Economics (New Spec) Unit 2 - 23rd May 2016

Wait, you get extra time if you have bad handwriting??

Na did OCR. According to our head of maths it was the hardest paper since 2004 and i think thats when the spec started 😂

On the contrary, when there is deflation, consumers will delay consumption as goods will get cheaper gradually so as utility maximising consumers, they will keep waiting for prices to fall even more. Therefore, consumption should rightfully fall.

Wow… had you done OCR MEI it would've been the easiest paper lol

exactly what I was about to say

For the 15 maker I'm not too sure if what I said makes sense. I said that if there is deflation in the UK then consumers are more likely to spend in the domestic economy, as prices will be cheaper, than abroad as imports will seem more expensive. This will increase consumption and shift AD right, so deflation could sort itself out. But then I said that the MPC should be worried as if they are unable to control interest rates, then they are unable to combat deflation as they can't shift AD right this was, as this is one of their main policies. To conclude I said that they should only be worried if they cannot control interest rates.Also for the 6 marker on 2 reasons on controlling inflation or somthing like that I said that they cannot lower interest rates anymore and so cannot control AD and that the costs of production are reduced so SRAS would shift right and deflation would occurDo any of these point make sense??

Prices are not cheaper.

If all prices in the UK economy decrease (including everyone's wages) consumers do not find that anything is 'cheaper' in the sense you have described.
However foreign consumers will find that buying UK goods are cheaper, as long as their currency is not also deflating.

It's not that the MPC will be unable to control interest rates. They can control interest rates as much as they want (unless you are discussing the fact that the base rate may not cause high street interest rates to fall due to low bank confidence and financial health?). The issue is that once they make interest rates 0% (or 0.5% in extract), there is not much more they can do (besides QE). A liquidity trap is faced.

And your point about interest and AS is not economically correct.
Interest rates are a form of monetary policy. And therefore are demand-side only. I also, don't quite understand your reasoning behind deflation causing costs of production to be reduced? (Unless you are referring to depreciation of the exchange rate?)
(Although interest rates may affect investment, and investment affects AS we do not say that interest rates cause AS to shift - Also investment affects LRAS, not Short)

I hope this helps. Sorry that I have just ripped apart your analysis

On the contrary, when there is deflation, consumers will delay consumption as goods will get cheaper gradually so as utility maximising consumers, they will keep waiting for prices to fall even more. Therefore, consumption should rightfully fall.

Costs of production are a determinant of SRAS right? That's why I shifted it right if those costs got cheaper.

Oh yeah that reminds me. I know this may be a stupid question, but since supply side policies are "supply side", does that mean it can only affect supply? I mean I know government spending on education or training programs is a supply side policy, but since government spending is a component of AD, would that also increase AD? Or does it depend on the amount spent? Since government spending isn't as significant as other components of AD, so a small amount wouldn't really have much effect?

Are you joking?
I do MEI, that was definitely not the easiest C1!
I still found it relatively easy, but still not the easiest

Oh yeah that reminds me. I know this may be a stupid question, but since supply side policies are "supply side", does that mean it can only affect supply? I mean I know government spending on education or training programs is a supply side policy, but since government spending is a component of AD, would that also increase AD? Or does it depend on the amount spent? Since government spending isn't as significant as other components of AD, so a small amount wouldn't really have much effect?

Governments can buy things like consumers, which can increase the demand for goods and services in the economy which is why it's a component of AD, equally as important as the others but not as high value of investment and Consumption, so if governments are demanding goods and services for Cross Rail there's higher aggregate demand but also long run aggregate supply, other than that Supply side polices don't really affect demand side, however as you know demand polices can have a serious effect on supply slide, monetary policy in particular, so you're right just thought I'd give you an explanation to why you're right

* Also, no question is a stupid question in the words of my statistics teacher!

Costs of production are a determinant of SRAS right? That's why I shifted it right if those costs got cheaper.

What do you mean "governments can buy things like consumers"?

Bad grammar, I should've said "just like consumers can"

What was your reason for costs of production falling?
If your reason was to do with interest rates, then the analysis is kinda weak.
Interest rates are demand side only. So only affect AD.