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

1. THE EFFECTIVENESS OF UK
MACROECONOMIC POLICIES
Session 5

2. Your exam may feel a bit like a
marathon….
Make sure you’re fit enough to finish
in style!

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. • 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. • 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. • 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. • 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. • 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. 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. 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. 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. 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. 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. 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. 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. 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. Terminology – add reference to
Accelerator AO1

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. 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. Why look for the hooks in an
essay title
Provide the focus for
developing analysis
Essential for evaluation
Makes you answer the
question!

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. 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. We have picked four current policies:
Monetary
policy
Spending on
infrastructure
Spending cuts Fiscal policy to promote
productivity and
employment

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. 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. 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. 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. 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. 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. What is the most important question
that we face?
“It’s the economy, stupid!”

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. 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. 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. 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. 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. 10/04/2014
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