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

for the 6 marker in question 2 all i did was define investment, gave example that investment fell from 34bn in 2008 to 28bn in 2013

How many marks is that

The question was: To what extent do demand side policies lead to conflicts between the macroeconomic objectives?

Initial 6KAA (definitions, stating objectives etc.)

> State Policy and what will happen
> State the the objective it would fulfil
> State how, by fulfilling that objective, another one is not being fulfilled, hence a conflict (e.g. Economic Growth v Environment)
> Evaluate the point

x3 or 4

If you have time, rate my (question 2) 30 marker out of 30!

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Supply side policies are macro-economic policies issued by the government to manipulate (long run) aggregate supply.

[Fully labelled AD/LRAS diagram showing both curves shifting to the right]

Point 1: One supply side policy that can increase real output is spending on education and training. This means that the economy will have a more qualified workforce which in turn increases the productive capacity of the economy Firms will get employ from a more qualified workforce which means that they can raise production which in turn leads to lower prices. This means that in the long run consumption should increase. This is shown in my AD/AS diagram: Increased consumption shifts AD to the right while the increased educated workforce shifts LRAS to the right.

Eval 1: However education and training take a very long time to take effect. Investing in education means the results will only be seen when the students/trainees finish their education and enter the labour force. Governments may be hesitant to invest in education and training as they're more like to have short term views (5 years). The current party in power is not guaranteed to be re-elected to see the results and will be less likely to invest. [ugh, I just realised I could have mentioned brain drain]

Point 2: Another supply side policy which can increase real output is investment in health. Investing in health means that the population is more healthy as they'll have better access to hospitals and health professionals such as doctors and nurses. A healthy workforce is important as it means there's less staff absenteeism. This means that healthy workers will have days off due to sickness and so enable firms to produce more. The governments benefits from this as they'll receive more money from income tax which they can potentially reinvest. Investing in health is also good because it means that the government will have to employ more public sector workers (e.g: doctors and nurses). This can decrease unemployment and it's also worth noting that an increase in public sector workers leads to an increase in consumption which leads to positive multiplier effects for the economy. This again can be shown on my diagram as increase in AD and AS.

Eval 2: However investing in health may not be a good idea as it incurs an opportunity cost. The money spent on health could have been spent on other things that could have also increased output. All of this spending could lead the government to a budget deficit where taxation is lower than government spending. The costs associated with healthcare are massive, for example: A medical student's education costs the government around £200000. Private health firms may also be "crowded out" due to increased spending on healthcare. For example: A private hospital will receive lots of competition from a new government funded hospital. [Talked about more stuff but I forgot...]

For my 3rd point I talked about trade union reform in the same style as above. I cba to type more lol:
Point 3: Less power for trade unions = Hindered ability for strikes = Less strikes = Less chance of infastructure being halted (e.g: London bus strikes) = Less staff absenteeism = Govt getting their money's worth (in wages) from their workers = OVERALL: increase in real output

Eval 3: Very controversial = Piss workers off = Current party in power less likely to do it because they want to be re-elected.
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Hopefully you found that useful!

i talked about that the level of investment was highest in 2008 because of lower interest rate
will i lose mark?

I was wondering if rapid/increase in economic growth (higher income, more imports demanded leading to a deficit) was a valid answer for the question about 'reasons why the UK has a current account deficit'. The thing is the extract suggest the economy was in a recovery so i question now if my answer was correct.

supply side 30 marker

One point and one eval example

One policy that could be used to increase output is decreasing corporation tax. Example..........
This will increase price level of firms and as a result investment will increase, this is increase productivity as well as increasing productive capacity, thus the AS curve will increase and shift to the right, the price level falls and real output will increase causing faster growth rate, unemplyment will fall and balance of payment will improve

Diagram of as shifting to right And explain


However if government decreases corporation tax, they will get less tax revenue meaning they wouldnt be able to maintain and invest in public servises and infrastructure , also this lack of gov spending will cause the ad to decrease since gov spending is component of ad

During a recovery there is a gradual increase in economic growth therefore incomes are increasing, imports have a +YED, you're fine

I argued the opp site and said there's a low demand for imports abroad due to slow economic recovery

You will not lose a mark you will lose all 4 marks as it is completely wrong, it was 5 percent in 2008 till they cut it in 2009 to 0.5

Increase in 'price level" You mean post tax profits increase... if you said the price level increases thats wrong because direct taxes can not be passed on so do not affect the actual price of the good

Can anyone tell me whether increasing immigration can be considered a supply-side policy?

Huh no, this is right, it can work as a cause of decreased investment levels because it only said 'assess 2 likely factors of this change in investment'. So yeh, just saying interest rates are high does count as a factor towards decreased investment.

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Guys for Question 2 about the level of investment change, did investment decrease so AD shift to the left??