Emergency economics essay
Hello all! Could anyone please mark this Economics essay? This would be thoroughly appreciated. Here:
('Do you think aiming for price stability should always be an economic priority for governments? Use Item A and Item B and your own economic knowledge to justify your view (it basically just said the points I talked about) [15 marks]') Aiming for price stability could be an important macroeconomic objective for governments because it can help to increase the quality of the lives of the population. This is because high inflation can lead to a decrease in real wages because nominal wages will likely not rise in line with inflation, and therefore their purchasing power is diminished and people cannot afford to buy as many goods and services as they once could to satisfy their wants and needs, and some people may even experience poverty, causing a significant decrease in their standards of living as they may be unable to afford basic essentials. Even if their wages were to, theoretically, rise in line with inflation, they would still be worse off due to fiscal drag as the tax bands do not automatically change as the general price level rises, so a higher percentage of their income would be taxed due to their higher nominal wages. Furthermore, the real value of their savings would decrease if interest rates are outpaced by inflation, which may cause rising shoe leather costs as people attempt to find a back which will offer a higher rate of interest, and in the long term, people are likely to experience a decrease in both their wealth and their real incomes.
Businesses are also likely to suffer from severe price instability because menu costs could increase. This is because the prices would constantly be being changed and they would have to print out new signs or change the prices on the internet, and (if the rate of inflation is very severe) the rapid price rises could cause some firms to go out of business. It is also possible that, due to the increased cost of living and decreased real wages as described above, workers may join trade unions and use their collective bargaining power to demand higher wages, which (especially if trade unions have been given a lot of power in the country) could result in significant wage rises and therefore rising labour costs for firms. This could decrease their profits and potentially even cause price rises, especially for goods which have very inelastic demand. This can cause a wage-price spiral as the prices continue to rise even more rapidly, causing further economic instability and worsening consumer confidence. The even higher cost-push inflation may then cause workers to demand higher wages, which could cause this to continue. This shows that the government must step in to intervene or otherwise the situation will spiral out of control.
This degree of instability can cause a decline in domestic investment from UK businesses as well as FDI, as people become less optimistic about the future of the UK economy. In the long term, UK goods and services which are exported abroad may become much less internationally competitive and this could lead to a decline in economic growth and a worsening of the current account deficit (which already stands at 2.6%). If the government was to make price stability a priority and if the Bank of England was to use contractionary monetary policy to reduce this inflation, the interest rates would increase, which would also have some other benefits as well as the obvious decrease in aggregate demand leading to a decrease in demand-pull inflation. For example, if relative interest rates are high, people in other countries may choose to put their money in UK banks to benefit from high rates of interest, and this could lead to increased demand for the pound and an appreciation in the exchange rate. This could decrease the cost of imports and therefore lead to a decrease in cost-push inflation, which would mean that both types of inflation are being reduced as a result of this policy. The increase in the interest rates encouraging more people to save may be beneficial in the long run because this could increase the supply of loanable funds available for private sector investment, and therefore it would decrease the costs of borrowing, which would be very beneficial in the long run.
On the other hand, there would be some costs of making price stability a policy for the government. For example, this could conflict with other macroeconomic objectives. For example, increase contractionary monetary or fiscal policies could decrease economic growth because people may be paying higher taxes (giving them less disposable income) and aggregate demand may decrease. This would likely decrease the revenue and profits that UK businesses make and therefore they may travel abroad to sell more in other countries (causing a capital account deficit which can be very bad for the current account) and leading to a general decline in the UK industries. If investment falls in this manner, the productive capacities of the economy could decrease leading to a worsened current account deficit, which may be harmful and unsustainable in the long run. There may also be some benefits of inflation, such as a reduction in the budget deficit and individuals’ debt, which may help to decrease the costs of borrowing for the government in the long run. Furthermore, the rise in workers’ wages as a result of inflation may be very beneficial and could be highly valued.
In conclusion, I believe that maintaining price stability should be an economic priority for the UK government because it is likely to help maintain investor confidence and general economic stability, which is vital for meeting some of the other government objectives in the long term such as a balanced current account and sustainable economic growth. Low inflation is also necessary to preserve the purchasing power of workers’ wages and maintain high standards of living. While it could be argued that the policies used to reduce inflation may lead to reduced investment and lower levels of economic growth in the short term, it would not be possible to achieve high economic growth if inflation was very high, and therefore the government must considet the long term and accept a temporary stagnation of economic growth if it will reduce inflation and help make the economy more resilient in the long term.
('Do you think aiming for price stability should always be an economic priority for governments? Use Item A and Item B and your own economic knowledge to justify your view (it basically just said the points I talked about) [15 marks]') Aiming for price stability could be an important macroeconomic objective for governments because it can help to increase the quality of the lives of the population. This is because high inflation can lead to a decrease in real wages because nominal wages will likely not rise in line with inflation, and therefore their purchasing power is diminished and people cannot afford to buy as many goods and services as they once could to satisfy their wants and needs, and some people may even experience poverty, causing a significant decrease in their standards of living as they may be unable to afford basic essentials. Even if their wages were to, theoretically, rise in line with inflation, they would still be worse off due to fiscal drag as the tax bands do not automatically change as the general price level rises, so a higher percentage of their income would be taxed due to their higher nominal wages. Furthermore, the real value of their savings would decrease if interest rates are outpaced by inflation, which may cause rising shoe leather costs as people attempt to find a back which will offer a higher rate of interest, and in the long term, people are likely to experience a decrease in both their wealth and their real incomes.
Businesses are also likely to suffer from severe price instability because menu costs could increase. This is because the prices would constantly be being changed and they would have to print out new signs or change the prices on the internet, and (if the rate of inflation is very severe) the rapid price rises could cause some firms to go out of business. It is also possible that, due to the increased cost of living and decreased real wages as described above, workers may join trade unions and use their collective bargaining power to demand higher wages, which (especially if trade unions have been given a lot of power in the country) could result in significant wage rises and therefore rising labour costs for firms. This could decrease their profits and potentially even cause price rises, especially for goods which have very inelastic demand. This can cause a wage-price spiral as the prices continue to rise even more rapidly, causing further economic instability and worsening consumer confidence. The even higher cost-push inflation may then cause workers to demand higher wages, which could cause this to continue. This shows that the government must step in to intervene or otherwise the situation will spiral out of control.
This degree of instability can cause a decline in domestic investment from UK businesses as well as FDI, as people become less optimistic about the future of the UK economy. In the long term, UK goods and services which are exported abroad may become much less internationally competitive and this could lead to a decline in economic growth and a worsening of the current account deficit (which already stands at 2.6%). If the government was to make price stability a priority and if the Bank of England was to use contractionary monetary policy to reduce this inflation, the interest rates would increase, which would also have some other benefits as well as the obvious decrease in aggregate demand leading to a decrease in demand-pull inflation. For example, if relative interest rates are high, people in other countries may choose to put their money in UK banks to benefit from high rates of interest, and this could lead to increased demand for the pound and an appreciation in the exchange rate. This could decrease the cost of imports and therefore lead to a decrease in cost-push inflation, which would mean that both types of inflation are being reduced as a result of this policy. The increase in the interest rates encouraging more people to save may be beneficial in the long run because this could increase the supply of loanable funds available for private sector investment, and therefore it would decrease the costs of borrowing, which would be very beneficial in the long run.
On the other hand, there would be some costs of making price stability a policy for the government. For example, this could conflict with other macroeconomic objectives. For example, increase contractionary monetary or fiscal policies could decrease economic growth because people may be paying higher taxes (giving them less disposable income) and aggregate demand may decrease. This would likely decrease the revenue and profits that UK businesses make and therefore they may travel abroad to sell more in other countries (causing a capital account deficit which can be very bad for the current account) and leading to a general decline in the UK industries. If investment falls in this manner, the productive capacities of the economy could decrease leading to a worsened current account deficit, which may be harmful and unsustainable in the long run. There may also be some benefits of inflation, such as a reduction in the budget deficit and individuals’ debt, which may help to decrease the costs of borrowing for the government in the long run. Furthermore, the rise in workers’ wages as a result of inflation may be very beneficial and could be highly valued.
In conclusion, I believe that maintaining price stability should be an economic priority for the UK government because it is likely to help maintain investor confidence and general economic stability, which is vital for meeting some of the other government objectives in the long term such as a balanced current account and sustainable economic growth. Low inflation is also necessary to preserve the purchasing power of workers’ wages and maintain high standards of living. While it could be argued that the policies used to reduce inflation may lead to reduced investment and lower levels of economic growth in the short term, it would not be possible to achieve high economic growth if inflation was very high, and therefore the government must considet the long term and accept a temporary stagnation of economic growth if it will reduce inflation and help make the economy more resilient in the long term.
Quick Reply
Related discussions
- Predictions for AQA History 1J The British Empire
- Will i be looked down upon for doing economics and business a level?
- Can anyone mark this geography Edexcel A level question for me please.
- Higher History
- Development Finance Graduate Schemes
- Economics BSc
- How do I revise in 1 month for my UCAS
- Can I study econcomics at russell group unis without doing it at A-level?
- Economics: how much maths vs essay writing involved?
- Least painful A-Level Choice for me?
- A level Choices
- What degree can i do with the a levels in
- Can you do law with all stem a levels
- Should I drop a subject?
- Which uni is best for economics?
- OCR A-level Geography Paper 2 - 22nd May 2025 [Exam Chat]
- A-Level Economics Study Group 2024-2025
- Economics A Level decision
- Is Avcounting and Finance right for me?
- A level economics
Latest
Trending
Last reply 1 month ago
12th of May, Edexcel a-level Economics A after exam chat
