Macro essay plans

02/09/2026

Importance of economic growth

Importance of economic growth
[Keynesian AS: rightward AD near full capacity]
P1: demand side
- growth - firm sales/O↑ - derived D labour↑ - U↓ - disposable income↑ - C↑ - AD right - multiplier - further rGDP↑ (1)(2)
> (1) low spare capacity = dp inflation / (2) GDP doesn’t speak to distribution
> UK 2021 rGDP↑ 8.6% & U↓ 5.3-4.2%
P2: supply side
- growth↑ - firm sales/O↑ - induced I↑(1) - cptl deepening↑ - labour productivity↑ - unit costs↓ - LRAS right - accelerator - potential rGDP↑ + infl pressure↓(2)
> (1) expectations: if think growth temporary, induced I weak / (2) time lags
> post COVID
P3: CA
- growth↑ - disposable income↑ - C↑ - Dm↑ - M↑(1) - CFoY withdrawals↑ - net (X-M)↓ - AD growth partly offset - CA worsens(2)
> (1) elastic YeM = more M rise / (2) if growth productivity led - unit costs↓ - Px↓ - Dx↑ - CA may improve instead
> UK 2021-2022 CA↓ -0.5-3.1%

Reconciliating conflicts between macro objectives

Reconciliating conflicts between macro objectives
[Laffer curve]
P1: growth & equality
- cause: growth↑ - profits/returns to capital↑ - high-income earners gain disproportionately - inequality↑
- reconcile: prog tax↑ - rich tax rev↑ - redistr to poor↑ - poor dispY↑ - Yineq↓ - bc poor high MPC, C↑ - AD↑ - multiplier - rGDP↑(1)
> (1) if tax too high (i.e. right side of turning point on curve) capital flight - I↓ - LR growth↓
> UK 2024 richest 20% 12.2x income, with tax only 3.3x
[Keynesian AS: rightward LRAS]
P2: growth & low inflation
- cause: AD-led growth - spare capacity↓ - analyse graph
- reconcile: SSP↑ - productivity↑ - unit costs↓ (or other: LLCE) - LRAS right - productive capacity↑ - rGDP↑ while PL↓/infl↓(1)
> (1) time lags, CoP may rise in SR before LRAS shifts
> UK permanent ‘full expensing’ policy allows companies to write off entire cost of equipment from profits before tax calculated
P3: environment & low inflation
- cause: carbon tax/regulation↑ - firm E/prod costs↑ - SRAS left - cp infl↑
- reconcile: renw subsidies + I↑ - renw capacity↑ - fossil fuel reliance↓ - E£↓ - CoP↓ - SRAS/LRAS right - infl↓ & emissions↓(1)(2)
> (1) same as P2 / (2) high opportunity cost, risk of gov failure
> 2022 UK energy crisis +88% E £

Impact of lowering savings ratio

Impact of lowering savings ratio - importance of econ growth
[Keynesian AS: rightward AD near full capacity]
P1: demand side
- saving ratio↓ - C↑ - AD right - firm sales/output↑ - derived D labour↑ - U↓ - disposable income↑ - further C↑ - multiplier - further rGDP↑
> (1) low spare capacity = dp inflation / (2) multiplier strength depends on leakages through S/T/M
> UK 2021 rGDP↑ 8.6% & U↓ 5.3-4.2%
P2: supply side
- saving ratio↓ - C↑ - profit exp↑ - accel - induced I↑(1) - cptl deepening↑ - dynamic EoS↑ - productivity↑ - unit costs↓ - LRAS right - infl↓(2)
> (1) expectations: if think growth temporary, induced I weak / (2) lower S may reduce funds to finance I, potentially offsetting accel
> post COVID
P3: CA
- saving ratio↓ - C↑ - Dm↑ - M↑(1) - withdrawals from CFoY↑ - net (X-M)↓ - AD growth partly offset - CA worsens(2)
> (1) elastic YeM = more M rise / (2) if induced I↑ raises productivity - unit costs↓ - Px↓ - Dx↑ - LR CA deterioration may be offset
> UK 2021-2022 CA↓ -0.5-3.1%

Impact of increasing investment

Impact of increasing investment - importance of econ growth
[Keynesian AS: rightward AD near full capacity]
P1: demand side
- I↑ - AD right - firm sales↑ - output↑ - derived D labour↑ - U↓ - disposable income↑ - C↑ - multiplier - further rGDP↑ (1)(2)
> (1) low spare capacity = dp inflation / (2) multiplier strength depends on leakages through S/T/M
> UK 2021 rGDP↑ 8.6% & U↓ 5.3-4.2%
P2: supply side
I↑ - cptl deepening↑ - dynamic EoS↑ - productivity↑ - unit costs↓ - LRAS right - infl↓(1)(2)
> (1) depends on type/quality of I: productive capital = larger productivity gain / (2) time lags
> post COVID
P3: CA
- SR: I↑ - imported capital goods D↑ - M↑ - net (X-M)↓ - CA worsens(1)
- LR: I↑ - cptl deepening↑ - productivity↑ - unit costs↓ - int competitiveness↑ - Px↓ - Dx↑ - CA may improve(2)
> (1) depends how import-intensive I is / (2) depends how much productivity actually improves competitiveness
> UK 2021-2022 CA↓ -0.5-3.1%

Is a decrease in SRAS harmful

Is a decrease in SRAS harmful
[AD/SRAS: leftward SRAS]
P1: growth & unemployment
- CoP↑ - SRAS left - rGDP↓ - firm output/rev↓ - derived D labour↓ - U↑(1) - disposableY↓ - C↓ - AD left - neg multiplier - further rGDP↓(2)
> (1) labour hoarding may mean U rises less in SR / (2) size of multiplier depends on leakages through S/T/M
> UK 2022 E crisis rGDP (Q3): -0.1%
P2: inflation & living standards
- CoP↑ - SRAS left - PL↑ - cp infl↑ - r.disposableY↓ - PP↓ - C↓ - life qlty↓ - wage demands↑ - unit labour£↑ - 2nd round effects - infl more persistent(1)(2)
> (1) depends if shock temporary or persistent / (2) low cost pass-through = firms absorb more through lower profit margins, so infl↑ less
> UK 2022 energy crisis inflation: 11.1% peak
P3: CA
- UK inflation↑ relative abroad - Px↑ - Dx↓ - foreign goods relatively cheaper - Dm↑ - net (X-M)↓ - CA likely worsens(1)(2)
> (1) if rGDP/incomes↓ enough - Dm↓ - M↓, partially offsetting CA deterioration / (2) more price-elastic Dx/Dm = larger fall in X + rise in M = worse CA
> UK 2022 energy crisis trade deficit: £108bn

Is a decrease in LRAS harmful

Is a decrease in LRAS harmful
P1: growth & unemployment
- LRAS↓ - prod cap↓ - ptntl rGDP↓ - firm O↓ - derived D labour↓ - U↑ - disposableY↓ - C↓ - AD left - neg multiplier - further rGDP↓(1)
> (1) if fall is persistent through scarring/hysteresis, damage to growth is much larger
> UK 2021 Brexit long-run potential productivity: 4% lower than if UK had remained in EU
P2: inflation & living standards
- LRAS↓ - productive capacity↓ - econ at capacity sooner - spare capacity↓ - infl pressure↑ - real disposableY↓ - PP↓ - C↓ - living standards↓(1)
> (1) if falling productive capacity also damages confidence/I - AD may fall - limiting inflation but worsening growth
> ?
P3: CA
- LRAS↓ - prod cap↓ - domestic S constrained - PL↑ - UK goods more costly - Px↑ - Dx↓ - foreign goods cheaper - Dm↑ - net (X-M)↓ - CA worsens(1)(2)
> (1) inelastic Dx/Dm = smaller change in X/M, CA deterioration weaker / (2) rGDP↓ - disposableY↓ - Dm↓ - M↓, partially offsetting CA deterioration
> post Brexit trade friction

Is positive output gap harmful to economy

Is positive output gap harmful to economy
P1: growth & unemployment
- AD↑ - rGDP↑ above potential - firm output↑ - derived D labour↑ - U↓ - disposableY↑ - C↑ - multiplier - further rGDP↑(1)
> (1) positive output gap unsustainable: econ above potential so shortages/bottlenecks likely
> UK 2021 rGDP↑ 8.6% & U↓ 5.3-4.2%
P2: inflation
- spare capacity↓ - labour/input shortages↑ - wages/CoP↑ - pl↑ - dp inflation↑ - real disposableY↓ - PP↓(1)(2)
> (1) expectations/2nd-round effects may make inflation persistent
> UK 2022 energy crisis inflation: 11.1% peak
P3: CA
- SR: positive output gap - rGDP/incomes↑ - Dm↑ - M↑(1) - net (X-M)↓ - CA worsens - dp infl↑ - Px↑ - Dx↓ - CA worsens further(2)
- LR: high profit exp↑ - accel - I↑ - cptl deepening↑ - productivity↑ - unit costs↓ - int competitiveness↑ - Px↓ - Dx↑ - CA may improve
> (1) more elastic YeM = larger M↑ / (2) more price-elastic Dx/Dm = larger SR CA deterioration
>UK 2021-2022 CA↓ -0.5-3.1%

Is low unemployment beneficial to the economy

Is low unemployment beneficial to the economy
P1: demand side
- U↓ - disposableY↑ - C↑ - AD right - firm sales/output↑ - derived D labour↑ - further employment/Y↑ - multiplier - further rGDP↑(1)(2)
> (1) underemployment work may mean disposableY rises less than headline U suggests / (2) multiplier depends on leakages S/T/M
> UK 2021 rGDP↑ 8.6% & U↓ 5.3-4.2%
P2: supply side
- U↓ - fewer LR U - skills deterioration↓ - hysteresis↓ - human capital/productivity↑ - unit costs↓ - LRAS right - potential rGDP↑ - infl pressure↓(1)(2)
> (1) depends type of U: reducing structural U has larger LR SS benefit than reducing cyclical U / (2) U too low = labour shortages + wage pressures
> UK 2020 furlough scheme £70bn
P3: CA
- U↓ - disposableY↑ - C↑ - Dm↑ - M↑(1) - net (X-M)↓ - CA worsens - very low U - wage pressure↑ - unit labour£↑ - Px↑ - Dx↓ - CA worsens further(2)
> (1) elastic YeM = larger M↑ / (2) if U↓ comes from productivity/SSP↑ - unit costs↓ - Px↓ - Dx↑, offsetting CA deterioration
> UK 2021-2022 CA↓ -0.5-3.1%

How is low and stable inflation beneficial to the economy

Is low and stable inflation beneficial to the economy
P1: demand side
- PP protected - r.disposableY/stable(1) - c.cnf↑ - C↑/stable - AD↑/stable - firm sales/O↑ - derived D labour↑ - U↓ - multiplier - rGDP(2)
> (1) if nominal wage growth < inflation, real incomes can still fall / (2) very low inflation can become deflation - C delayed - AD↓
> UK 2022 energy crisis inflation: 11.1% peak
P2: supply side
- low & stable infl - unc↓ - business confidence↑ - I↑(1) - cptl deepening↑(2) - productivity↑ - unit costs↓ - LRAS right - potential rGDP↑ - infl pressure↓
> (1) if AD/expected profits are weak, firms may still not invest / (2) time lags before I raises productive capacity
> ?
P3: CA
- low & stable UK infl relative abroad - Px relatively↓ - int competitiveness↑ - Dx↑ - foreign goods more expensive - Dm↓ - net (X-M)↑ - CA improves(1)(2)
> (1) if trading partners have equally low infl, comp gain is small / (2) more price-elastic Dx/Dm = larger improvement in CA
> ?

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

Evaluate policies that could be used to reduce the UK’s CA deficit
P1: £ depreciation
- i/r↓ - hot money inflows↓ & outflows↑ - D£↓ & S£↑ - £↓ - Px in foreign currency↓ - Dx↑ + Pm in £↑ - Dm↓ - net (X-M)↑ - trade deficit↓(1)
P2: contractionary fiscal policy
- T↑ / G↓ - disposableY↓ / AD↓ - C↓ - Dm↓ - M↓ - net (X-M)↑ - trade deficit↓(1)(2)
> (1) if YeM Dm income inelastic, M↓ only slightly / (2) AD↓ - rGDP↓ - derived D labour↓ - U↑, improving trade balance conflicts with growth & U
P3: supply side policy
- SSP↑ - productivity↑ - unit costs↓ - UK int competitiveness↑ - Px↓ - Dx↑ - Dm↓ as domestic goods cheaper - X↑ + M↓ - net (X-M)↑ - trade deficit↓(1)
> (1) time lags before productivity/competitiveness improve

Evaluate whether increasing taxation is beneficial to the economy

Evaluate whether increasing taxation is beneficial to the economy
P1: demand side
- T↑ - disposableY↓ - C↓ - AD left - spare capacity↑ - dp infl↓(1) - firm sales/O↓ - derived D labour↓ - U↑ - disposableY↓ further - neg multiplier - rGDP↓(2)
> (1) more effective if infl is dp rather than cp / (2) size of effect depend on MPC & multiplier; if econ already weak, T↑ may cause large growth/U costs
> UK 2022 NI rise: +1.25 percentage points
P2: supply side
- T↑ - govt tax rev↑ - can G on edu/health/infra↑ - human/cptl #/quality↑ - productivity↑ - unit costs↓ - LRAS right - potential rGDP↑ + infl pressure↓(1)(2)
> (1) depends on how efficiently govt spends extra rev; gov failure may limit productivity gains / (2) time lags before G raise productive capacity
> UK 2017 Apprenticeship Levy skills/training: £2.5bn annual investment
P3: CA
- SR: T↑ - disposableY↓ - C↓ - Dm↓ - M↓ - net (X-M)↑ - CA improves(1)
- LR: if T on firms/profits↑ - profit↓ - I↓ - cptl deepening↓ - productivity growth↓ - unit costs↑ - int competitiveness↓ - Dx↓ - X↓ - CA may worsen(2)
> (1) if Dm YeM low, M↓ only slightly / (2) depends on type/size of T↑; if rev instead funds effective SSP, productivity↑ + CA may improve
> Greece 2010 austerity taxes

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↓ - £borrow + saving incentive↓ - C↑ + I↑(1) - AD right - sales/O↑ - derived D labour↑ - U↓ - disposableY↑ - further C↑ - multiplier - further rGDP↑(2)
> (1) weak c/business confidence = C/I respond less / (2) low spare capacity = more dp inflation, smaller rGDP gain
> UK 2020 COVID i/r 0.75-0.1%
P2: quantitative easing
- BoE buys bonds↑ - bond D↑ - bond prices↑ - yields↓ - £borrow↓ & asset prices↑ - wealth↑ - C/I↑ - AD right - rGDP↑ - U↓(1)(2)
> (1) banks/firms may hold extra liquidity instead of lending/investing / (2) QE may raise asset prices disproportionately - wealth inequality↑
> UK 2009 QE £200bn of asset purchases
P3: expectations & forward guidance
- BoE signals i/r will remain low - exp future £borrow↓ - C/b conf↑ - C/I brought forward↑ - AD right - firm sales/O↑ - derived D labour↑ - U↓ - rGDP↑(1)(2)
> (1) depends on BoE credibility: weak credibility = expectations respond less / (2) weak animal spirits may outweigh guidance, so I/C remain low
> UK 2013 forward guidance U 7.6-6.9%

Evaluate whether expansionary fiscal policy is beneficial to the economy

Evaluate whether expansionary fiscal policy is beneficial to the economy
P1: G
- G↑ - AD right - firm sales/O↑ - derived D labour↑ - U↓ - disposableY↑ - C↑ - multiplier - further rGDP↑(1)(2)
> (1) low spare capacity = more dp inflation, smaller rGDP gain / (2) multiplier depends on leakages through S/T/M
> ?
P2: T
- T↓ - disposableY↑ & retained profits↑ - C↑ & I↑(1) - AD right - firm sales/O↑ - derived D labour↑ - U↓ - multiplier - further rGDP↑
> (1) depends on MPC/bsn conf: households may save tax cuts & firms may not invest
> UK 2010–17 corporation tax cuts: 28% → 19%
P3: SS
- productive G↑ - infra/edu/R&D↑ - human/physical capital↑ - productivity↑ - unit costs↓ - LRAS right - potential rGDP↑ - infl pressure↓(1)(2)
> (1) time lags before SSP raises productive capacity / (2) borrowing↑ - D loanable funds↑ - i/r↑ - private I↓ = crowding out, partly offsetting LR gains
> UK Crossrail/Elizabeth line infrastructure investment

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

Evaluate whether supply-side policies are effective in improving macroeconomic performance
P1: labour
- edu/training↑ - skills/human capital↑ - ocptnl mobility↑ - strtrl U↓ - labour prod↑ - unit labour costs↓ - LRAS right - potential rGDP↑ - infl pressure↓(1)
> (1) long time lags before education/training improves productivity
> UK 2017 Apprenticeship Levy skills/training: £2.5bn annual investment
P2: capital
- govt infra spending↑ + I incentives↑ - #/quality of capital↑ - cptl deepening↑ - labour prod↑ - unit costs↓ - LRAS right - potential rGDP↑ - infl↓(1)
> (1) borrowing↑ - D loanable funds↑ - i/r↑ - private I↓ = crowding out, partly offsetting LR gains
> UK Crossrail/Elizabeth line infrastructure investment
P3: enterprise
- corp tax↓ & dereg↑ - retained profits↑ + incentive to start/invest↑ - entrepr/innovation↑ - productive I↑ - productivity↑ - unit costs↓ - LRAS right - potential rGDP↑ - infl pressure↓(1)(2)
> (1) weak bsn conf = firms may retain profits rather than invest / (2) dereg may create negative externalities or reduce worker/consumer protection
> UK 2010–17 corporation tax cuts: 28% → 19%