AS economics essay question Watch

The Wayfarer
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#1
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Question: evaluate the relative importance of monetary policy and fiscal policy in achieving low unemployment.

This looks like one of the tougher questions to me: the importance bit catches me out.

My analysis would be that cyclical unemployment can be reduced by reflationary fiscal and monetary policies; but i simply don't know how to evaluate the importance.

Any help deeply appreciated!
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mjharmstone
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First define what monetary and fiscal policies are. Draw any curves you can relating to unemployment (such as an AS/AD diagram showing that fiscal and monetary could increase demand, meaning more workers are required and unemployment falls). Make sure to find real world examples, such as current monetary policy (ie 0.5% being current interest rates since the recession) and evaluate EVERY point you make.
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jumpinglunch
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Phillips curve, stagflation, interest rates to aid the recovery of an economy but which could be of detriment to unemployment in the short term but what about the long term etc etc. Also like the above poster mentioned, mention the real world. Look at Spain, very high unemployment and high inflation. It's on the road to ruin and no doubt a future bail out. Maybe express your opinion on if it will recover + why for some extra marks for a broader perspective.
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mjharmstone
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(Original post by teshla^^)
Phillips curve, stagflation, interest rates to aid the recovery of an economy but which could be of detriment to unemployment in the short term but what about the long term etc etc. Also like the above poster mentioned, mention the real world. Look at Spain, very high unemployment and high inflation. It's on the road to ruin and no doubt a future bail out. Maybe express your opinion on if it will recover + why for some extra marks for a broader perspective.
I can't remember whether we'd done the phillips curve at AS - I think we only learnt it for A2, that's why I didn't mention it! Also, around 25% of the marks are for real world stuff, so don't forget to do it!
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jumpinglunch
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(Original post by mjharmstone)
I can't remember whether we'd done the phillips curve at AS - I think we only learnt it for A2, that's why I didn't mention it! Also, around 25% of the marks are for real world stuff, so don't forget to do it!
Ah soz, yeah I did AS quite a few years ago So I'm a little out of touch.

But to get some 'extra' marks perhaps it could be included to show a deeper understanding. A simple diagram with a few sentences.
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mjharmstone
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If it's AQA, you get about 2-3 marks per definition and 2-3 per relevant and explained diagram. If it's a 12-marker (which i don't think it sounds like it is!) then you can get to the point where you only need about 4 marks to get full marks. On a 25-marker, just shove in all the relevant stuff you know and impress the examiner!
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The Wayfarer
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(Original post by mjharmstone)
If it's AQA, you get about 2-3 marks per definition and 2-3 per relevant and explained diagram. If it's a 12-marker (which i don't think it sounds like it is!) then you can get to the point where you only need about 4 marks to get full marks. On a 25-marker, just shove in all the relevant stuff you know and impress the examiner!
OK... so where unemployment is cyclical, it can be reduced with an increase in AD. This can be done through using either fiscal or monetary policy. An increased government spending will shift AD to the right, as will a lowering of direct taxation. The effect of this will depend on the magnitude of the increase in G and fall in tax. It will also depend on what the government spends on - in the long run, the economy will benefit from lower unemployment if the government spends the money on training and education. In the short run, the effect of the fall in unemployment also depends on the effect of the multiplier - in a country such as the UK where taxes are high and MPM is also large, the multiplier is likely small. Even so, an increase in government spending should be more effective than taxation, as it directly increases the AD of the economy, whereas in periods of low confidence, the extra income from the lowering of tax may just be saved.

(and then I'd go on and talk about monetary policy and stuff, adding diagrams)

But i still don't get how you would talk about their relative importance?:confused:
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mjharmstone
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(Original post by The Wayfarer)
OK... so where unemployment is cyclical, it can be reduced with an increase in AD. This can be done through using either fiscal or monetary policy. An increased government spending will shift AD to the right, as will a lowering of direct taxation. The effect of this will depend on the magnitude of the increase in G and fall in tax. It will also depend on what the government spends on - in the long run, the economy will benefit from lower unemployment if the government spends the money on training and education. In the short run, the effect of the fall in unemployment also depends on the effect of the multiplier - in a country such as the UK where taxes are high and MPM is also large, the multiplier is likely small. Even so, an increase in government spending should be more effective than taxation, as it directly increases the AD of the economy, whereas in periods of low confidence, the extra income from the lowering of tax may just be saved.

(and then I'd go on and talk about monetary policy and stuff, adding diagrams)

But i still don't get how you would talk about their relative importance?:confused:
You'd talk about how in periods such as the 2008-10 recession, the lowering of interest rates for example did very little to stimulate the economy. Real world examples of negatives are always gold star points. For your main conclusion, you'd basically say "Both fiscal and monetary policy have their advantages and disadvantages, but ultimately it was proven in 2008 that they do not always work."
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The Wayfarer
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(Original post by mjharmstone)
You'd talk about how in periods such as the 2008-10 recession, the lowering of interest rates for example did very little to stimulate the economy. Real world examples of negatives are always gold star points. For your main conclusion, you'd basically say "Both fiscal and monetary policy have their advantages and disadvantages, but ultimately it was proven in 2008 that they do not always work."
Nice. I think i've got it now. Thank you so much
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mjharmstone
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(Original post by The Wayfarer)
Nice. I think i've got it now. Thank you so much
No probs
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Tateco
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First define unemployment, talk about different types of unemployment and how resolving the issue of unemployment depends crucially upon the root cause of it. You can talk about various short-run policies as the question poses, and then evaluate how these resolve unemployment. However I would also mention the role of supply-side policies in reducing structural unemployment. You can talk about how short-term demand-side policies aren't efficient with correcting this type of unemployment.
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zedeneye1
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#12
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the Phillips loop?
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