THE EFFECTIVENESS OF UK
MACROECONOMIC POLICIES
Session 5
Your exam may feel a bit like a
marathon….
Make sure you’re fit enough to finish
in style!
TASK: remember the main indicators of macro-economic
performance?
How is each measured, and what is the UK’s target for it...
• Measured by:
• UK target:
Growth
• Measured by:
• UK target:
Inflation
• Measured by:
• UK target:
Unemployment
• Measur...
• Measured by: Change in real GDP
• UK target: 2-3%
Growth
• Measured by:
• UK target:
Inflation
• Measured by:
• UK targe...
• Measured by: Change in real GDP
• UK target: 2-3%
Growth
• Measured by: CPI inflation
• UK target: 2% (+/- 1%)
Inflation...
• Measured by: Change in real GDP
• UK target: 2-3%
Growth
• Measured by: CPI inflation
• UK target: 2% (+/- 1%)
Inflation...
• Measured by: Change in real GDP
• UK target: 2-3%Growth
• Measured by: CPI inflation
• UK target: 2% (+/- 1%)Inflation
•...
UK economic data – application
Always put your answers in
context. In order to gain
marks for Good Application, it
is esse...
UK economic data – application
Look at the data on page 40 of your workbook - what can you say about the
trends for consum...
Consumer
spending
• Gradual recovery over the period apart from a
dip in 2011. Expected to continue to rise in 2014
Govern...
Gross
investment
• Volatile throughout the period; years of positive
change have not made up for fall in 2009. Finally
pre...
Gross investment spending
Look at the extract from the Bank of England Agents’ report – what do
they expect to happen to i...
How important is Investment?
The chancellor said his Budget would support business
investment and exports to lay foundatio...
Task 3 - The Answer Doctor
Here’s the question: Using the data and your economic
knowledge, explain why a sustained recove...
Using the data and your
economic
knowledge, explain why
a sustained recovery in
an economy is likely to
be accompanied by ...
Terminology – add reference to
Accelerator AO1
The Answer Doctor
•Use the data which shows
the accelerator effect
•Explain why this will only
happen if the businesses
be...
Now let’s consider the effectiveness of
current UK policy……
with this sample exam question
Assess the importance of both
d...
Why look for the hooks in an
essay title
Provide the focus for
developing analysis
Essential for evaluation
Makes you answ...
What are the essay hooks
in this title?
Assess the importance of both
demand-side and supply-side
policies in helping the ...
You need to consider the policies currently being
implemented in the UK in order to evaluate their
effectiveness in meetin...
We have picked four current policies:
Monetary
policy
Spending on
infrastructure
Spending cuts Fiscal policy to promote
pr...
Monetary policy
Policy
Explanation of desired
effect
Evaluation
Monetary Policy
Adjustment of interest
rates and money sup...
Infrastructure
Policy
Explanation of desired
effect
Evaluation
Infrastructure
An injection of government
spending to enhan...
Spending cuts
Policy
Explanation of desired
effect
Evaluation
Austerity – cutting
government spending in
order to reduce t...
Productivity and employment
Policy
Explanation of desired
effect
Evaluation
Productivity and
employment – spending on
educ...
Link back to the question for the final
paragraph…
Assess the importance of both demand-side and supply-
side policies in ...
The big finish – the final
judgement
Remember that, to reach the top levels of
marks for evaluation, you need to make a
ba...
What is the most important question
that we face?
“It’s the economy, stupid!”
Evaluate the best macroeconomic policies
to restore the performance of the UK
economy to pre-recession levels.
Pre-recessi...
Evaluate the best macroeconomic policies to
restore the performance of the UK economy to
pre-recession levels.
Policy
Expl...
Evaluate the best macroeconomic policies to
restore the performance of the UK economy to
pre-recession levels.
Policy
Expl...
Evaluate the best macroeconomic policies to restore
the performance of the UK economy to pre-recession
levels.
Policy
Expl...
The balanced judgement
Will short-run
policies cause
more
problems in
the long run?
How
important is
repayment
of
governme...
10/04/2014
Twitter: @tutor2u_econ
AS Macro: The Effectiveness of UK Macro-Economic Policies
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AS Macro: The Effectiveness of UK Macro-Economic Policies

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We have considered the three key areas of macroeconomic policy – monetary policy, fiscal policy and supply-side policies.

In the longest essay questions on data response papers examiners often ask students to consider how effective these are when they are used to manage the economy. How can we judge whether the performance of the economy is improving as a result of them? In this session we will remember how to assess macroeconomic performance, think about some of the issues with measuring growth,
and focus on ways to evaluate the effectiveness of different policies

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AS Macro: The Effectiveness of UK Macro-Economic Policies

  1. 1. THE EFFECTIVENESS OF UK MACROECONOMIC POLICIES Session 5
  2. 2. Your exam may feel a bit like a marathon…. Make sure you’re fit enough to finish in style!
  3. 3. TASK: remember the main indicators of macro-economic performance? How is each measured, and what is the UK’s target for it? Economic Growth Inflation Unemployment Balance of Payments (Current account) You have 2 minutes
  4. 4. • Measured by: • UK target: Growth • Measured by: • UK target: Inflation • Measured by: • UK target: Unemployment • Measured by: • UK target: Balance of Payments (current account)
  5. 5. • Measured by: Change in real GDP • UK target: 2-3% Growth • Measured by: • UK target: Inflation • Measured by: • UK target: Unemployment • Measured by: • UK target: Balance of Payments (current account)
  6. 6. • Measured by: Change in real GDP • UK target: 2-3% Growth • Measured by: CPI inflation • UK target: 2% (+/- 1%) Inflation • Measured by: • UK target: Unemployment • Measured by: • UK target: Balance of Payments (current account)
  7. 7. • Measured by: Change in real GDP • UK target: 2-3% Growth • Measured by: CPI inflation • UK target: 2% (+/- 1%) Inflation • Measured by: Claimant count/Labour Force Survey • UK target: Forward Guidance 7% Unemployment • Measured by: • UK target: Balance of Payments (current account)
  8. 8. • Measured by: Change in real GDP • UK target: 2-3%Growth • Measured by: CPI inflation • UK target: 2% (+/- 1%)Inflation • Measured by: Claimant count/Labour Force Survey • UK target: Forward Guidance 7%Unemployment • Measured by: Exports, Imports, Net investment income, Transfers • UK target: more evenly balanced between imports and exports Balance of Payments (current account)
  9. 9. UK economic data – application Always put your answers in context. In order to gain marks for Good Application, it is essential that you are aware of the current data about the UK’s macroeconomic performance, and of recent trends. Then you can use this throughout your answers.
  10. 10. UK economic data – application Look at the data on page 40 of your workbook - what can you say about the trends for consumer spending, government spending, gross investment and the current account balance?
  11. 11. Consumer spending • Gradual recovery over the period apart from a dip in 2011. Expected to continue to rise in 2014 Government spending • Rose throughout the period. Predicted to fall in 2014
  12. 12. Gross investment • Volatile throughout the period; years of positive change have not made up for fall in 2009. Finally predicted to recover in 2014 The current account balance • Remains negative; improvements in 2009 and 2011 have been followed by larger deficits
  13. 13. Gross investment spending Look at the extract from the Bank of England Agents’ report – what do they expect to happen to investment in the economy? Economic terminology – what is the term for the relationship between changes in GDP growth and changes in Business Investment? The accelerator effect! Does the data here give any evidence of the accelerator effect?
  14. 14. How important is Investment? The chancellor said his Budget would support business investment and exports to lay foundations for "long-term economic security". It would ensure that "around the world, wherever you are, you can't help but see 'Made in Britain'. That's the Budget I'm going to deliver," he said.
  15. 15. Task 3 - The Answer Doctor Here’s the question: Using the data and your economic knowledge, explain why a sustained recovery in an economy is likely to be accompanied by an increase in investment.
  16. 16. Using the data and your economic knowledge, explain why a sustained recovery in an economy is likely to be accompanied by an increase in investment. You have 2 minutes
  17. 17. Terminology – add reference to Accelerator AO1
  18. 18. The Answer Doctor •Use the data which shows the accelerator effect •Explain why this will only happen if the businesses believe that the recovery will be sustained in the long run •Explain why investment will lower costs and make businesses more competitive – and the benefits for exports How could you improve the answer?
  19. 19. Now let’s consider the effectiveness of current UK policy…… with this sample exam question Assess the importance of both demand-side and supply-side policies in helping the UK economy to achieve a prolonged period of economic growth.
  20. 20. Why look for the hooks in an essay title Provide the focus for developing analysis Essential for evaluation Makes you answer the question!
  21. 21. What are the essay hooks in this title? Assess the importance of both demand-side and supply-side policies in helping the UK economy to achieve a prolonged period of economic growth.
  22. 22. You need to consider the policies currently being implemented in the UK in order to evaluate their effectiveness in meeting macroeconomic targets. What can you tell me about: Monetary policy? Fiscal policy? Supply side policy?
  23. 23. We have picked four current policies: Monetary policy Spending on infrastructure Spending cuts Fiscal policy to promote productivity and employment
  24. 24. Monetary policy Policy Explanation of desired effect Evaluation Monetary Policy Adjustment of interest rates and money supply to control aggregate demand - demand side The Transmission mechanism – how a reduction in interest rates AND an injection of money supply leads to a rise in spending by consumers and investment by businesses, and therefore in AD – to create growth of GDP Winners/losers? Good for borrowers Bad for savers Evidence: Since March 2009, 0.5% interest rate and Quantitative Easing Link back to the question: will only help to create growth if consumers have the confidence to spend and businesses have the confidence to invest
  25. 25. Infrastructure Policy Explanation of desired effect Evaluation Infrastructure An injection of government spending to enhance the facilities or systems serving the economy – road, rail, telecoms and so on - supply side The multiplier effect: How an initial increase in spending can become a greater final increase in AD Reduction in business costs and improvement in productivity, efficiency and competitiveness Time? Long time lag between the spending and the effect being felt Evidence: Budget 2013: An extra £15bn for new road, rail and construction projects by 2020, starting with £3bn in 2015-16 Link back to the question: supply side policy which, in the long run will create the conditions for growth without inflation, which is sustainable and prolonged
  26. 26. Spending cuts Policy Explanation of desired effect Evaluation Austerity – cutting government spending in order to reduce the annual deficit, borrow less and eventually to repay government net debt To enable government to balance their budget without excessive rises in taxation, and to repay debt in the long term Wider context? Risk that cuts in budgets such as welfare lead to greater inequality May also have supply side effects if spending on infrastructure projects falls Evidence: Departmental budgets will be cut by about £1bn next year and the year after; projected borrowing 2013-14 £111bn, 2014-15 £96bn, 2015-16 £79bn, 2016-17 £51bn Link back to the question: cuts in government spending reduce AD – Demand side - which makes recovery of growth difficult to achieve
  27. 27. Productivity and employment Policy Explanation of desired effect Evaluation Productivity and employment – spending on education and training – supply side Better qualified workers are more productive; cost per unit of output is lower; prices are more competitive raising demand for goods domestically and in export markets Priority? Opportunity cost – spending on training either reduces spending in other areas, or requires higher borrowing Evidence: Autumn Statement 2013 Science, technology and engineering courses will receive increased funding; 20,000 apprenticeships to be funded over the next two years. Link back to the question: policies which shift LRAS to the right, thus enabling growth without inflation, depends upon demand for the goods produced
  28. 28. Link back to the question for the final paragraph… Assess the importance of both demand-side and supply- side policies in helping the UK economy to achieve a prolonged period of economic growth. 1. Which of the policies you have analysed are demand- side and which are supply-side? 2. Time - Which will have a short term effect and which are long-term? 3. Priority - What mix will give the best chance of prolonged growth?
  29. 29. The big finish – the final judgement Remember that, to reach the top levels of marks for evaluation, you need to make a balanced judgement between the policy options
  30. 30. What is the most important question that we face? “It’s the economy, stupid!”
  31. 31. Evaluate the best macroeconomic policies to restore the performance of the UK economy to pre-recession levels. Pre-recession levels of performance: • Long run average GDP growth of around 2.5% • Inflation at or below target • Low unemployment – approximately 1mn claimant count, 1.5mn LFS
  32. 32. Evaluate the best macroeconomic policies to restore the performance of the UK economy to pre-recession levels. Policy Explanation of desired effect Evaluation Economic stimulus Increase ‘G’ in order to stimulate AD The desired effect: The Multiplier – make sure you can define and explain it properly! IF spent on supply side, long-run growth in productive potential and capacity Priority? Debt must be cut in order to reduce opportunity cost of interest payments Inequality vs. other macroeocnomic targets – which is most important at present? Evidence: Opposition approach – cut less and spend more during recession to create jobs; Labour would borrow for investment spending Link back to the question - Targets: short run can be used to cut unemployment Gives the opportunity for long run non-inflationary growth of AD
  33. 33. Evaluate the best macroeconomic policies to restore the performance of the UK economy to pre-recession levels. Policy Explanation of desired effect Evaluation More progressive taxation increase the proportion of income paid as tax for the higher income brackets The desired effect Reduce inequality; increase tax revenue to repay government debt; more equal redistribution of income Time? Short-run spending has an opportunity cost Takes time for LRAS effect to bring a benefit Evidence: Ed Balls: "For the next Parliament, we will restore the 50p top rate of tax for those earning over £150,000.“ (Feb 2014) Link back to the question - Targets: does the higher tax burden bring a risk that entrepreneurs will leave the UK? Impact on growth and jobs if it does….
  34. 34. Evaluate the best macroeconomic policies to restore the performance of the UK economy to pre-recession levels. Policy Explanation of desired effect Evaluation Regulate to solve the ‘cost of living crisis’. Use legislation and regulation to cut energy bills, raise minimum wage The desired effect: Raise disposable income for poorer households – high marginal propensity to spend means that Consumption will rise which will result in greater AD and therefore growth of GDP and more derived demand for employees Efficiency? Risk of cutting funds for investment in future power generation Evidence: Real wages have fallen by between 2.4% and 10% (IFS); plans to freeze energy bills and raise minimum wage to the ‘Living Wage’ Link back to the question - Targets: could give a short- run boost to AD which will improve ability to meet macroeconomic targets
  35. 35. The balanced judgement Will short-run policies cause more problems in the long run? How important is repayment of government debt? Which of the macro targets should be given highest priority?
  36. 36. 10/04/2014 Twitter: @tutor2u_econ
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