Macro Chains of analysis

10 Chains of Analysis from 'Increased Consumption' to increases in Real GDP

Increased consumption → Increased Demand for goods and services → Increased Derived Demand for Labour → Increased employment → Increase in tax revenue → Increase in government spending → Multiplier effect → crowding in → AD increases → Real GDP increases

6 Chains of Analysis from 'Government Spending' to increases in Real GDP

Government spending → injection into circular flow of income →crowding in (due to government spending leading to an increase in AD creating a more favourable environment for private investment) → triggers multiplier effect → AD increases as Government spending is 25% of AD → Real GDP increases

6 Chains of Analysis from Fall in interest rates to Real GDP increase

Fall in interest rates → Cost of borrowing decreases → opportunity cost of borrowing decreases → Investment increases → AD increases as investment makes up 15% of AD → Real GDP increase

Gravity Trade Theory, what point can this evaluate?

Evaluation for becoming 'more internationally competitive'

Countries in close proximity will continue to trade with each other regardless of new tariffs or trading blocs.

Ricardian Equivalence Theory for Evaluation, what point can this evaluate?

'Government Spending increases AD'

Government spending might not increase AD due to Ricardian's equivalence theory which suggests consumers will save in anticipation of a future tax increase.

National Debt for Evaluation, what point can this evaluate?

'Government Spending increases Real GDP'

Government Spending may not increase Real GDP as if it it increases national debt, this will trigger a contractionary fiscal policy.

UK will spend £102bn on debt interest in 2025.

Wage efficiency Theory for Evaluation, what point can this evaluate?

'Increases in the minimum wage reduces profits for firms (increased costs)'

The wage efficiency theory suggests that a rise in wages will incentivise workers to work harder as the opportunity cost of losing their job is now higher. This may increase productivity and thus increase profits for firms.

Evaluate "High Levels of investment will lead to an increase in Real GDP"

• What if animal spirits (confidence of investors) are low?

• What if companies don't have the money to invest (what if they are still recovering from a recession).

Evaluate "'If Government spending increases, Real GDP increases".

• Ricardian Equivalence theory whereby government spending may not boost GDP as consumer may lack confidence to spend due to the fear that the government may increase tax rates to accommodate the spending.
  Contextually also UK consumers may lack confidence as in 2025 the UK will spend in excess of £100 million on debt repayments alone.

• Crowding out can also occur as government spending may discourage private investors due to the government being possibly macroeconomically unstable.

9 Chains of Analysis for How can Quantitative Easing lead to economic growth?

QE → supply of money increasing → value of money decreases → weak pound = imports expensive and exports cheaper → cheaper exports increases international competitiveness → exports increase → net exports increases → AD increases → Real GDP subsequently increases.

How can you evaluate "Quantitative Easing leads to economic growth"?

• Could be inflationary if it leads to demand-pull inflation → an increase in poverty and inequality as savings decrease and the cost of living increases → Government may have to spend more on benefits → leading to an increase in the government debt

• Increasing the supply of money will lead to a decrease in the value of money (as shown on the curve) → imports become more expensive → The UK imports manufacturing goods such as steel due to us not being able to produce it on a large scale → cost-pull inflation can occur as our exports are less internationally competitive → demand for exports decrease → AD falls → Real GDP falls.

6 Chains of Analysis for: How Imposing a tariff can lead to an increase in Real GDP?

• Tariff forces domestic customers to pay more for imports (importers pay tariffs) → can incentivise domestic production → firms can domestically produce more to satisfy domestic demand → labour is derived demand. which causes unemployment to decrease which satisfies the UK's macroeconomic objective of low unemployment → furthermore, the revenue gained from the tariffs can be used to spend on infrastructure and education → LRAS shifts rightwards

How can you evaluate the point that "Imposing a tariff lead to an increase in Real GDP."

• Tariffs can start a trade war. The China-US trade war lost $9.1 billion globally. Furthermore the country could retaliate and impose a tariff on our exports → can lead to a huge decline in export revenues → this can cause a fall in AD → leads to a decrease in Real GDP.

• The government possibly "spending on infrastructure and education" depends on the government's ability and incentive to do so → currently the UK spends £100bn servicing debt interest yearly.

6 Chains of Analysis showing: How a Decrease in income tax can lead to an increase in Real GDP?

Tax rates decreasing → increases disposable income → Marginal propensity to consume increases → increased consumption → increase in AD (as AD makes up 60% of AD) → AD increasing causes an increase in Real GDP.

How can you evaluate the point that "a decrease in income tax lead to an increase in Real GDP."

• Increase in consumption → increases AD → can lead to demand-pull inflation → inflationary pressures raises domestic prices → exports become more expensive (other countries will have it more expensive) → international competitiveness decreases → exports decrease → this causes GDP to fall.

• Less government revenue → less government spending → GDP falls

Chains of Analysis for Multiplier effect.

An injection can occur via an increase in government spending → boosts aggregate demand → this indicates that consumers and economic agents are more willing and able to purchase goods and services → labour is derived demand meaning firms will have to employ more workers to accommodate the rising demand → output will increase further → boosts AD again.

What are the 2 key evaluations for the Multiplier effect?

• It depends on the marginal propensity to consume.
• Significant inflationary pressures can be induced.

What points can the laffer curve evaluate?

'Government should increase tax rates'

The Laffer Curve states that if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working.

• Brain drain effects (loss of high skilled workers).

• Lack of incentive to work.

• Can cause a rise in undisclosed income and tax avoidance.

What is the Keynesian Curve and what point can it evaluate?

Any point that says price levels can rise. e.g. government spending, consumption or investment 'leads to inflationary pressures'.

This is because it depends on if the economy is at full capacity, if not as evident in the keynesian diagram, an increase in AD wont increase price levels when the supply is elastic. This is because the spare capacity being used doesn't warrant an increase in prices.

Evaluation for Multiplier effect

The size of the multiplier depends on the rate at which money leaks from the circular flow. Greater leakages the smaller the multiplier effect will be.