Macro essay plans v2

03/09/2026

Importance of economic growth

Importance of economic growth

P1: demand side
- AD↑ so closure of negative output gap
- derived D labour↑ so cyclical U↓
- disposable income↑ so C↑
- further AD↑ through positive multiplier
- employ/Y/profits = tax rev↑, U↓ reduces welfare spending
- auto improvement (stabiliser) in budget balance
- greater fiscal space for G↑/T↓ w/o borrowing↑

P2: supply side
- AD↑ so firm sales/profits↑
- business confidence↑ & exp ROIs↑
- I↑ through accelerator
- capital deepning so prod↑ so unit labour costs↓
- LRAS right & productive capacity↑
- econ can sustain higher rGDP with less infl

P3: CA
- AD↑ so Y↑ from earlier explanation
- Dm↑ so M↑
- CA deteriorates as (X-M)↓ so leakages CFoY↑
- AD weakened & reliance on ext finance↑
- greater vulnerability to Δ foreign investor conf
- growth less sustainable & BoP constrained

How to reconciliate conflicts between macro objectives

How to reconciliate conflicts between macro objectives

P1: SS
- G on infra/edu/train↑ so #/quality FoPs↑
- labour prod↑ so unit labour cost↓
- SRAS/LRAS shifts right so prod capacity↑ rGDP↑ PL↓ so infl pressure↓
- derived D labour↑ so U↓
- so growth & low U achieved without dp infl

P2: growth & inequality
- explain cause
- prog tax↑ so Yinequality↓
- tax rev↑ hypothecated to edu/train/health for low Y hh
- capital deepening↑ so labour prod↑ so labour unit costs↓
- LRAS right so prod capacity↑ rGDP↑ PL↓ so infl pressure↓ & inequality↓ while LR growth maintained

P3: monetary & fiscal coordination
- i/r↑ so C/I↓ so AD↓ so dp infl↓
- normally causes growth↓ & U↑, so fiscal
- G into capital/infra = prod capacity↑
- LRAS right so potential rGDP↑ so derived D labour↑

Impact of lowering savings ratio

Impact of lowering savings ratio

P1: demand side
- savings ratio↓ so so prop of disposableY spent↑
- C↑ so AD↑
- negative output gap closes so rGDP↑
- derived D labour↑ so cyclical U↓
- disposableY↑ so induced C↑
- positive multiplier leads to further AD↑
- reverse paradox of thrift

P2: supply side
- saving ratio↓ so S domestic funds for I↓
- finance availability↓ so I↓ so capital shallowing
- labour productivity growth↓ so unit labour costs↑
- LRAS growth↓ so prod cap growth↓
- lower potential rGDP & infl pressure↑ at given AD

P3: CA
- saving ratio↓ so C↑
- Dm↑ so M↑
- (X-M)↓ so CA deteriorates
- greater net leakage from CFoY
- ceteris paribus, greater S of £ so downward pressure on exchange rate
- Pm↑ so imported infl↑ so real household PP↓

Impact of increasing investment

Impact of increasing investment

P1: demand side
- I↑ so AD↑
- negative output gap closes so rGDP↑
- derived D labour↑ so cyclical U↓
- hh disposableY↑ so C↑
- further AD↑ through positive multiplier
- actual growth & material living standards↑

P2: supply side
- I↑ so capital stock↑ so capital deepening
- labour prod↑ so unit labour costs↓
- SRAS/LRAS right so prod capacity↑
- potential rGDP↑ & infl pressure↓
- higher sustainable LR growth

P3: CA
- I↑ in R&D/tech/capital
- product quality↑ & prod efficiency↑
- non-price/price competitiveness↑
- Dx↑ so X↑
- domestic D moves away from less comp M so M↓
- (X-M)↑ so CA improves
- net injection into CFoY↑ so AD/rGDP↑

Impact of a positive output gap

Impact of a positive output gap

P1: inflation
- actual rGDP > potential rGDP so spare capacity↓
- factor markets tighten so firms compete for increasingly scarce labour/resources
- wages & input costs↑
- SRAS left so cp infl reinforces existing dp infl
- wage price spiral so infl more persistent
- 2nd round infl effects
- r.hh PP↓

P2: employment
- O above trend so derived D↑ so cyclical U↓
- hhY/profits↑ = tax rev↑, U↓ reduces welfare spending
- auto improvement (stabiliser) in budget balance
- greater fiscal space for G↑/T↓ w/o borrowing↑

P3: CA
- positive output gap, Y/expenditure↑
- Dm↑ so M↑
- (X-M)↓ so CA deteriorates
- greater net leakage from CFoY
- ceteris paribus, greater S of £ so downward pressure on exchange rate
- Pm↑ so imported infl↑ so real household PP↓

Impact of low unemployment on economy

Impact of low unemployment on economy

P1: demand side
- U↓, hhdisposableY↑
- C↑ so AD↑
- further AD↑ through positive multiplier
- auto improvement (stabiliser) in budget balance
- greater fiscal space for G↑/T↓ w/o borrowing↑

P2: supply side
- U↓ so skill depreciation & hysteresis↓
- effective labour supply↑ so further structural U↓ in LR
- LRAS right, productive potential↑, potential rGDP↑
- greater scope for non-infl growth

P3: CA
- U↓ so hhY↑
- Dm↑ so M↑
- (X-M)↓ so CA deteriorates
- greater net leakage from CFoY
- ceteris paribus, greater S of £ so downward pressure on exchange rate
- Pm↑ so imported infl↑ so real household PP↓

Impact of low and stable inflation

Impact of low and stable inflation

P1: demand side
- low/stable infl so erosion of r.hh PP↓
- r.disposableY more predictable so Cconf↑ & precautionary saving↓
- C↑ so AD↑
- further rGDP↑ through positive multiplier
- derived D labour↑ so cyclical U↓

P2: supply side
- low/stable infl so unc abt future costs/rev↓
- bsn conf↑ so I↑ so capital deepening
- labour productivity↑ so ULC↓
- SRAS/LRAS right so prod capacity↑
- potential rGDP↑ so greater scope for non-infl growth

P3: CA
- domestic infl low relative to trading partners
- Px↓ over time so P competitiveness↑
- Dx↑ so X↑ & Dm↓ so M↓
- (X-M)↑ so CA improves, AD/rGDP↑
- net injection into CFoY↑

Evaluate policies that could be used to reduce the UK’s Current Account deficit

Evaluate policies that could be used to reduce the UK’s Current Account deficit

P1: exchange rate appreciation
- i/r↓ so hot money inflows↓ & outflows↑
- D£↓ & S£↑ so £↓
- Px↓ while Pm↑, UK more competitive
- Dx↑ so X↑ & Dm↓ so M↓
- (X-M)↑, CA deficit narrows
- net injection into CFoY so AD/rGDP↑

P2: SS policy
- G in edu/infra/R&D↑ so capital deepning
- labour productivity↑ so ULC↓
- non-price/price competitiveness↑
- Dx↑ so X↑ & domestic use UK goods so Dm↓ & M↓
- (X-M)↑ so CA deficit narrows

P3: contractionary D side policy
- i/r↑ and/or G↓/T↑
- C/I↓ so AD↓
- hhY & expenditure↓
- Dm↓ & M↓
- (X-M)↑, CA deficit narrows
- finances reallocated

Evaluate whether increasing taxation is beneficial to the economy

Evaluate whether increasing taxation is beneficial to the economy

P1: fiscally
- T↑ so gov rev↑
- budget balance↑ so borrowing requirement↓
- D loanable funds↓ so upward pressure on i/r
- crowding out private I↓
- I↑ and capital stock↑
- productive capacity & rGDP↑

P2: supply side
- direct/indirect T↑
- incentivse to work, invest, entrepreneurial risk↓
- Slabour↓ & I↓
- capital shallowing & productivity growth↓
- LRAS growth↓ & potential rGDP↓ so LR econ growth weakened

P3: inequality
- progressive T↑ on high Y hh
- Y inequality↓
- tax rev hypothecated towards benefits for low Y
- disposable Y of lowY hh↑
- have high MPC so C↑
- AD↑ further through positive multiplier

Evaluate whether expansionary monetary policy is beneficial to the economy

Evaluate whether expansionary monetary policy is beneficial to the economy

P1: interest rates
- i/r↓ so cost of borrowing↓ & saving incentive↓
- C/I↑ so AD↑
- negative output gap closes, rGDP↑
- derived D labour↑ so cyclical U↓
- hhdisposableY↑ so induced C↑
- further AD↑ through positive multiplier

P2: forward guidance
- BoE signals i/r remain low in future
- exp future borrowing costs↓
- hh/firms bring forward planned C/I
- current C/I↑ so AD↑ so rGDP↑ so cyclical U↓
- unc↓ so Cconf/bsn conf↑ so strengthens C/I↑ further

P3: QE
- BoE purchases gov bonds with created elec money
- bond D↑, bond P↑, yields↓
- £borrowing↓ & asset prices↑, so wealth↑
- C/I↑ so AD↑ rGDP↑ & cyclical U↓

Evaluate whether expansionary fiscal policy is beneficial to the economy

Evaluate whether expansionary fiscal policy is beneficial to the economy

P1: essay 9 ‘taxation’

P2: G spending
- G↑ so AD↑
- negative output gap closes so rGDP↑
- derived D labour↑ so cyclical U↓
- hhdisposableY↑ so induced C↑
- further AD↑ through positive multiplier
- actual growth & material living standards↑

Evaluate whether supply-side policies are effective in improving macroeconomic performance

Evaluate whether supply-side policies are effective in improving macroeconomic performance

P1: Laissez-faire: tax cuts
- direct/indirect T↓
- incentivse to work, invest, entrepreneurial risk↑
- Slabour↑ & I↑ so capital deepening
- labour productivity↑ so ULC↓
- SRAS/LRAS right so productive capacity↑
- potential rGDP↑ & infl pressure↓, so greater scope for non-infl growth

P2: Laissez-faire: deregulation
- regulation/barriers to entry↓
- market contestability↑ so prod efficiency↑ & avg costs↓ in LR
- innovation↑ so non-price/price competitiveness↑
- Dx↑ so X↑ & Dm↓ so M↓, CA improves
- AD & rGDP↑ while infl pressure↓

P3: Interventionist: education
- G on education/training/apprenticeships
- human capital↑ so capital deepening
- occupational mobility↑ & structural U↓
- LRAS right so productive capacity↑
- potential rGDP↑ & greater non-infl growth

P4: Interventionist: subsidies
- subsidies for R&D/capital I↑
- firm CoP↓ & cost of I↓ so crowding in
- capital deepening so prod↑ & ULC↓
- SRAS/LRAS right, potential rGDP↑ & competitiveness↑