AQA Economics Unit 4 11th June 2013

Does anyone know how to stop the Boom and Bust cycle? thanks

Yes please!

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Fiscal policy used to be the general approach to stabilising the economic cycle but now it is generally accepted that monetary policy is the right move. In a boom when the economy is overheating, the BoE raises interest rates to contract AD. In contrast, in a recession the BoE cuts interest rates to boost AD. To get top marks when including this in an answer it is important to realise that correct timing is the key to successfully stabilising the cycle. Bad timing can make the economic cycle more volatile, causing longer-term investments to be abandoned in favour of less risky short-term projects. Also unexpected interest rate changes may affect competitiveness and long-term growth adversely.

Fiscal policy used to be the general approach to stabilising the economic cycle but now it is generally accepted that monetary policy is the right move. In a boom when the economy is overheating, the BoE raises interest rates to contract AD. In contrast, in a recession the BoE cuts interest rates to boost AD. To get top marks when including this in an answer it is important to realise that correct timing is the key to successfully stabilising the cycle. Bad timing can make the economic cycle more volatile, causing longer-term investments to be abandoned in favour of less risky short-term projects. Also unexpected interest rate changes may affect competitiveness and long-term growth adversely.

And this is what Gordon Brown did, and look at the fantastic run of stability we had in the economy when the management of the interest rate was handed over to the Monetary Policy Committee! Good answer too, Charlie!

Things I am struggling are the fixed exchange rates and the floating, the cost and benefits part of it, it'll be very kind if you could help me out

Rarely say this to anyone

Assuming you know the details of each system (quote me if you do not) then:

one advantage of a Fixed exchange rate = Reduced risk in international trade - Meaning that by maintaining a fixed rate, buyers and sellers of goods internationally can agree a price and not be subject to the risk of changes in the exchange rate before contracts are settled. This greater level of certainty should encourage investment.

one advantage of a floating/flexible exchange rate = Macroeconomic variables (eg. interest rates) can be determined without having to worry about the exchange rate.

one disadvantage of a fixed exchange rate = It can conflict with other macroeconomic objectives. For example if a government intervenes and increases interest rates in order to raise the external value of a currency this could negatively impact on AD and economic growth and create unemployment.

one disadvantage of a floating exchange rate = Higher levels of uncertainty about a country's exchange rate tends to decrease the level of trade and inward investment.


I hope this helped

Helped a lot, thank you very much I know that floating is determined by demand and supply but I don't understand how fixed rates works

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Regarding evaluation for unit 4, does anybody have any evaluative points that they pretty much make every time regardless of the question?

For example in unit 3 mine were: it depends upon the objective of the firm, how efficiently the resources are allocated and has consumer/producer welfare been increased.

For this unit I usually use: Depends upon the state of the economy, depends upon the governments ability to identify the causes of the problem (eg. unemployment, inflation).

Just looking to see if anybody else uses anything else so I can add it to my mental list

The ones you've said you're using for this unit, I'm using those too. Also links to the macroeconomic objectives all the time, long run and short run effects, and effects of other countries in the EU and world - all evaluation points. Try and add in some real life context, like what is happening at the moment in the economy and what effects it would have currently, as this sort of application got me 100/100 on the Econ Unit 3 exam.. for example, would the fact that Barack Obama has recently threatened the UK will lose out on £10 billion worth of FDI if it exits the EU have an impact on Government thoughts about leaving the EU? This would have massive repercussions for us currently, FDI in order to improve our economic state is vital at the moment.. things like this really impress the examiner, with figures

How can i upload Word or PPF files?