Economics Unit 2 Edexcel - Managing the UK economy Tuesday 19th May 2015 (PM)

Original post by AJC1997

Most are still applicable but:

-Time lag (especially for supply side policies)
-Depends on the other components of aggregate demand
-Depends on the overall level of confidence in the economy
-The government may have poor information i.e. for privatisation which could lead to government failure
-Depends on the level of spare capacity in the economy (for AD/Inflation related things)
-Elasticity can also be used for Imports/Exports for example
-Opportunity cost is still relevant, government expenditure for example always involves an opportunity cost.

Theres probably more

Confidence in the economy is one I always discuss, yet it's very rarely present on the mark scheme, from my experience at least.

I might have asked you, or someone this before, but do all reasonable evaluation points get credited with full mark, if appropriately developed?

Reply 181

Jim Riley

3

These revision webinar videos cover a huge amount of ground for anyone making final preparations for tomorrow's AS macro paper:

UK Economy in 2015 - AS Macro Update & Overview

Aggregate Demand and Aggregate Supply

Living Standards and Human Development Index

Exchange Rates

Supply-side Policies

Multiplier and Accelerator

If you need some further help try these:

AS Macro Key Terms / Definitions

AS Macro Study Notes by Topics

AS Macro Final Exam Technique Advice

All the best tomorrow

Jim

Reply 182

Emmak26

1

Original post by irMike

I would say you should talk about Economic Growth v Sustainable environment rather than Employment v Environment, That'd be easier because you can talk about pollution from factories, and use of finite resources. The rest are fine, yeah

I'd also say Economic Growth v Inflation is potentially the easiest one to talk about, because it only requires a simple AS/AD diagram to demonstrate it, and you can talk about demand-pull inflation.

Hope that helps

Thank you soo much for your help, srsly u have no idea, thank you! xx

Reply 183

AJC1997

2

Original post by irMike

Confidence in the economy is one I always discuss, yet it's very rarely present on the mark scheme, from my experience at least.

I might have asked you, or someone this before, but do all reasonable evaluation points get credited with full mark, if appropriately developed?

level of confidence in the economy is something I usually only use for a question asking about investment, and is actually a key evaluative point for such questions, I guess it could also be used when talking about consumer spending

Yes as long as they make sense and are valid to the question they will be awarded, the mark schemes aren't fixed.

Reply 184

irMike

5

Original post by AJC1997

level of confidence in the economy is something I usually only use for a question asking about investment, and is actually a key evaluative point for such questions, I guess it could also be used when talking about consumer spending

Yes as long as they make sense and are valid to the question they will be awarded, the mark schemes aren't fixed.

Alright, that's a relief.

And I think I've used it when discussing the effectiveness of Monetary and Fiscal Policy mainly, and it's never mentioned, which I find surprising.

Reply 185

irMike

5

Original post by Emmak26

Thank you soo much for your help, srsly u have no idea, thank you! xx

No worries, give me a shout if there's anything else you're unsure on.

Reply 186

AJC1997

2

Original post by agg98

for an A and a B
What are the average grade boundaries

I think it's usually about 61/80 for an A and 54/80 for a B

Depends on the paper though of course. Sometimes an A has been 63/80 and others 60/80

Reply 187

nurav11

2

Original post by jshep000

What are some simple evaluation points you can generally use for all questions in unit 2? Like in unit 1 it was elasticity, opportunity cost, magnitude and time lag.

Time lag, magnitude and ceteris paribus still apply here. Opportunity cost works for government spending/fiscal policy, splitting up effects on different groups (e.g. subsidies for SMEs will have a greater impact on their profits than subsidies for large multinational corporations due to economies of scale with an evaluation of this evaluation that it depends on scale of subsidy). Depends where you are on the Keynesian curve (i.e how much spare capacity there is in the economy, more if coming out of a recession, less if in period of economic growth). Use of classical LRAS to show shifts in SRAS. Extent of the multiplier - MPC. Ricardian equivalence (when consumer behaviour does not always reflect what you expect such as if tax levels fall, consumption does not necessarily rise as consumers predict an increase in tax in the future and so they save for that).

Do you know of any others maybe? Perhaps more specific ones to monetary policy changes because I don't know any specifics for that :colondollar:

Reply 188

Emmak26

1

Original post by badaman

Yeah! Do you mind explaining Inflation and Unemployment? Thanks! x

yh sure, for inflation v unemployment you would say:

Basically, if there is a shortage of labour in a specific field (for example a DJ) and they ask for a pay rise, it would cause wage pressures to build up (that's because if there is a shortage of labour in DJs, you cannot simply fire him and hire another one whilst maintaining current wage) this means that wages would rise. Now wages rising would mean that people will now spend more - more consumption - which leads to an outward shift in AD which causes inflation to rise. Wages increasing also means that cost of production for firms rise (because providing wages is a cost for firms) which causes AS to shift inwards which increases inflation also.

Hope it helps! x

Reply 189

Emmak26

1

Original post by irMike

No worries, give me a shout if there's anything else you're unsure on.

oh yh ofcourse! I only joined student room like a few weeks ago, now i wished i had it during my GCSEs too! oh well

Reply 190

badaman

2

Original post by Emmak26

yh sure, for inflation v unemployment you would say:

Basically, if there is a shortage of labour in a specific field (for example a DJ) and they ask for a pay rise, it would cause wage pressures to build up (that's because if there is a shortage of labour in DJs, you cannot simply fire him and hire another one whilst maintaining current wage) this means that wages would rise. Now wages rising would mean that people will now spend more - more consumption - which leads to an outward shift in AD which causes inflation to rise. Wages increasing also means that cost of production for firms rise (because providing wages is a cost for firms) which causes AS to shift inwards which increases inflation also.

Hope it helps! x

Thanks so much! You are a life saver! :smile:

Do you mind if I ask, where does the Phillips Curve come into this? x

Reply 191

AJC1997

2

Monetary policy evaluation points:

1. The effect of higher interest rates depends on the situation of the economy - if the economy is close to full employment, a rise in interest rates is likely to reduce inflation significantly without reducing Real GDP

2. The effectiveness of Monetary policy depends upon other variables in the economy: eg. if confidence is low, a reduction in interest rates may not increase demand.

3. There may be time lags for lower interest rates to have an effect. eg. higher interest rates may not reduce investment in the short run because firms will continue with existing investment projects.

4. Monetary policy may conflict with other macro economic objectives. if the MPC reduces inflation this may lead to lower growth or higher unemployment.

5. Interest rates may conflict with the exchange rate. If the bank increased interest rates this would cause a fall in AD but would cause an increase in the exchange rate, due to hot money flows. This would make exports more expensive and lead to lower demand for exports.

6. Monetary policy may also affect the balance of payments. If AD falls, people buy less imports, improving the current account. However if interest rates increase the exchange rate this may lead to a worsening of the deficit, because exports are more expensive.

7. Fine control of monetary policy is not possible. It is difficult to get accurate information about the economy. Time lags in policy mean interest rates affect the economy too late.

8. Monetary policy will have a big effect on the housing market: this is because interest rates effect mortgage payments. eg. an increase in interest rates will reduce the attractiveness of buying a house. Thus interest rates will have a bigger effect on home-owners.

9. Stagflation: In some circumstances there may be higher inflation and higher unemployment. For example, due to a rise in oil prices. This presents the MPC with a dilemma. To reduce inflation, they need to increase interest rates. However, higher interest rates will also cause a further fall in economic growth and unemployment.

10. Redistribution of income: higher interest rates improve income of savers but worsen incomes of borrowers.

Reply 192

nurav11

2

Original post by Emmak26

yh sure, for inflation v unemployment you would say:

Basically, if there is a shortage of labour in a specific field (for example a DJ) and they ask for a pay rise, it would cause wage pressures to build up (that's because if there is a shortage of labour in DJs, you cannot simply fire him and hire another one w :smile:

hilst maintaining current wage) this means that wages would rise. Now wages rising would mean that people will now spend more - more consumption - which leads to an outward shift in AD which causes inflation to rise. Wages increasing also means that cost of production for firms rise (because providing wages is a cost for firms) which causes AS to shift inwards which increases inflation also.

Hope it helps! x

I don't think it's a good idea to go micro as then it doesn't become very relevant to a 'macroeconomic objective'. That case won't apply to every single labour market (shortage of labour) and so wouldn't have any overall effect on wages rising in an economy. If you take it like, lower levels of unemployment in the economy through a sustained period of economic growth mean that more people have a regular wage leading to more people having disposable incomes thus increasing consumption and causing demand-pull inflation. You can also illustrate this by the Phillips Curve.

Generally, wages won't rise when there's low levels of unemployment in an economy so you won't get inflation like that :smile:

Reply 193

falloutboyyy

3

Original post by MarkGavin

Hello all,
My name is Mark Gavin and I am currently the Economics head examiner at Edexcel. I was recently notified I am soon to be laid off so I decided to get my own back and give all of you a treat! I shall give you the 30 markers of the two options.
1. Assess the impact on unemployment of an increase in the tax rate on earnings above £150,000
2. Evaluate the consequences on economic growth of a deflationary spiral
The mark scheme is tough this year as well so you really need to know your stuff!

How about grow up
What a sense of humour you have.

Posted from TSR Mobile

Reply 194

badaman

2

Original post by nurav11

I don't think it's a good idea to go micro as then it doesn't become very relevant to a 'macroeconomic objective'. That case won't apply to every single labour market (shortage of labour) and so wouldn't have any overall effect on wages rising in an economy. If you take it like, lower levels of unemployment in the economy through a sustained period of economic growth mean that more people have a regular wage leading to more people having disposable incomes thus increasing consumption and causing demand-pull inflation. You can also illustrate this by the Phillips Curve.

Generally, wages won't rise when there's low levels of unemployment in an economy so you won't get inflation like that :smile:

Whaaat? So how would you describe the conflict between Low + Stable Inflation and Low Unemployment? Also, how would YOU use the Philips curve?

Reply 195

raymondthepoon

5

Original post by badaman

Whaaat? So how would you describe the conflict between Low + Stable Inflation and Low Unemployment? Also, how would YOU use the Philips curve?

The phillips curve basically demonstrates the trade off between inflation and unemployment. it shows how you cant have LOW inflation and LOW unemployment at the same time.

if the govt wants to reduce inflation- they implement the expansionary fiscal policy, this reduces AD - firms then have less profit margins because AD is low , so they lay off workers to reduce the loss of earnings. this causes unemployment

Reply 196

nurav11

2

Original post by badaman

Whaaat? So how would you describe the conflict between Low + Stable Inflation and Low Unemployment? Also, how would YOU use the Philips curve?

Basically, you won't be able to get low/stable inflation and low unemployment at the same time, giving a huge conflict between objectives. I'll illustrate it by using the Phillips curve then hopefully it should be easier to understand :smile:

.

When you are at the 4% level of unemployment, you have 4% of the population who are willing and able to work but without a job. These people do not have a regular wage and so will have low amounts of money which they can use for consumption of goods and services. When you move to the 2% level of unemployment, you now have 2% who have found themselves a job and are now earning a wage of some sort. This means they'll have greater disposable income and so more money which they can spend on goods and services. Therefore, when we moved from 4% to 2%, the levels of consumption increased. Therefore, consumption rising shifts AD right and gives you demand pull inflation, hence the rise from 3% to 6% as shown on the diagram.

The Phillips curve just shows a trade-off between inflation and unemployment and shows that due to the rise in consumption from more people in jobs, there will be a rise in inflation.

(edited 8 years ago)

phillips-curve.jpg10.3KB

Reply 197

scrawlx101

20

how would you use spare capaciity for high growth and high inflation as an eval
whats the difference between a current account deficit and a budget deficit

Reply 198

jshep000

15

Original post by scrawlx101

how would you use spare capaciity for high growth and high inflation as an eval
whats the difference between a current account deficit and a budget deficit

Current account deficit is related to balance of payments, where it is a negative value so imports are greater than exports. Budget deficit is where government spending is greater than taxation.
For high growth evaluation, you would say that like AD increases so consumption will increase due to confidence/disposable income. Firms get more profits because more consumers are spending therefore they are more likely to invest into the economy. An increase in AD causes real output to increase which means a fall in unemployment. So your evaluation point would be something like; It depends on the amount of spare capacity in the economy if the fall in unemployment is big. If there is lots of spare capacity in the economy then there will be a big fall in unemployment, if there is little spare capacity in the economy then there won't be as big a fall in unemployment.

(edited 8 years ago)

Reply 199

nurav11

2

Original post by AJC1997

Monetary policy evaluation points:

1. The effect of higher interest rates depends on the situation of the economy - if the economy is close to full employment, a rise in interest rates is likely to reduce inflation significantly without reducing Real GDP

2. The effectiveness of Monetary policy depends upon other variables in the economy: eg. if confidence is low, a reduction in interest rates may not increase demand.

3. There may be time lags for lower interest rates to have an effect. eg. higher interest rates may not reduce investment in the short run because firms will continue with existing investment projects.

4. Monetary policy may conflict with other macro economic objectives. if the MPC reduces inflation this may lead to lower growth or higher unemployment.

5. Interest rates may conflict with the exchange rate. If the bank increased interest rates this would cause a fall in AD but would cause an increase in the exchange rate, due to hot money flows. This would make exports more expensive and lead to lower demand for exports.

6. Monetary policy may also affect the balance of payments. If AD falls, people buy less imports, improving the current account. However if interest rates increase the exchange rate this may lead to a worsening of the deficit, because exports are more expensive.

7. Fine control of monetary policy is not possible. It is difficult to get accurate information about the economy. Time lags in policy mean interest rates affect the economy too late.

8. Monetary policy will have a big effect on the housing market: this is because interest rates effect mortgage payments. eg. an increase in interest rates will reduce the attractiveness of buying a house. Thus interest rates will have a bigger effect on home-owners.

9. Stagflation: In some circumstances there may be higher inflation and higher unemployment. For example, due to a rise in oil prices. This presents the MPC with a dilemma. To reduce inflation, they need to increase interest rates. However, higher interest rates will also cause a further fall in economic growth and unemployment.

10. Redistribution of income: higher interest rates improve income of savers but worsen incomes of borrowers.

Thanks a lot! These are very helpful. Sadly, just seen last year's paper and effects of a fall in interest rates was one of the 30 markers :frown:

. Still is likely to come up at some point in the paper though mind.

Economics Unit 2 Edexcel - Managing the UK economy Tuesday 19th May 2015 (PM)

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