25 mark essay plans

Evaluate policies used to reduce unemployment

Unemployment: someone of working age who is able and willing to work, actively seeking work but is not currently employed

Types of unemployment:

• frictional (in between jobs)

• Structural (mismatch skills/jobs)

• Cyclical (AD)

• Seasonal (e.g. holiday workers)

Data:

¼ unemployment is long-term (<12months)

145k redundancies

Point 1 - fiscal

Gov spending up → AD up → firms have higher demand for output → demand more employee up (cyclical) → multiplier effect

Eval:

• may cause demand-pull inflation

• Increases budget deficit

• Not effective if business/consumer confidence low (Japan stagnation)

Point 2 - monetary

Low interest rates → consumption + investment up → AD up → firm increase production + employment

Eval

• depends on confidence again

• Inflation risk

Point 3 - supply side

Education/training/reduced benefits → skills up → occupational mobility up → labour productivity up → structural down

Eval

• time lags

• Reducing benefits may increase inequality/poverty

• Outdated curricular - 2/3 don’t find successful jobs after bootcamp

Conclusion:

No single policy fixes all unemployment

Assess whether inflation is the biggest macroeconomic problem.

Increase in the general price level (CPI)

Macroeconomic objectives: low inflation, low unemployment, economic growth

Data:

Aim of 2%, currently 2.8%

Point 1 - major problem

Rising prices reduce purchasing power → real income fall if wages lag behind inflation → consumer spending falls + investment falls + exports fall → AD down

Eval

• demand-pull inflation may reflect growing economy

• Mild inflation encourages spending (gets more expensive later so buy now)

Point 2 - compare with unemployment

Unemployment worse as cause of loos of income and living standards → government spend more on benefits → tax revenue falls

long term unemployment → loss of skills (structural)

Eval

• some unemployment is inevitable e.g. frictional

• Low unemployment contribute to inflationary pressure (Philips curve)

Point 3 - economic growth

Recession reduces income and output → firms fail + unemployment rises → lower investment harms future productivity → government borrowing increases → larger national debt

Eval

• rapid growth can causes inflation

Evaluate policies designed to increase aggregate demand

Total demand for goods and services in an economy

Reasons for AD increase: reduce unemployment, economic output/growth, close negative output gap

Point 1 - fiscal

Government spending up → AD up

Tax cuts → increases disposable income → larger marginal propensity to consume → consumption up → firms increase output and employment → multiplier effect

Eval

• can cause demand-pull inflation

• Effectiveness depends on consumer confidence and marginal propensity to consume

Point 2 - monetary

Lower rates → consumption/investment up and pound depreciation → exports up

Mortgage repayments fall → disposable income rises

Quantitative easing → increased money supply

Eval

• inflation risk

• Firms may make poor investment choices

Point 3 - supply side indirect support to AD

Increased productivity → raises incomes and consumption

Tax incentives → encouraged spending

Eval

• mainly effects LRAS

• Often slow to take effect

N

Y