Macroeconomics Essay Practice

1. Macroeconomics Essay Practice Internal Problems and Policies

2. Pay Attention! NYJC 2006 Qn.Discuss the view that fiscal policy is the best method to promote economic growth and analyze to what extent the use of fiscal policy to achieve economic growth would lead to other economic problem. (25)

3. Discuss the view that fiscal policy is the best method to promote economic growth Command Words: • Discuss: to show analysis and evaluation taking into account both sides of the argument • In this case, Pros and the Cons of using FP. Key Words: • Identify Issue: Promote Economic Growth • Policy Tools adopted: Fiscal Policy to achieve Economic Growth • Evaluation: Effectiveness of FP in achieving EG.

4. Discuss the view that fiscal policy is the best method to promote economic growth • DefineEconomic Growth: Increase in the productive capacity of the economy • ExplainFiscal Policy: involves use of G and T to influence the pattern of economic activity • Analyse: To boost growth Expansionary Fiscal policy undertaken. INTRODUCTION

5. Discuss the view that fiscal policy is the best method to promote economic growth • Expansionary Fiscal Policy : ↑ in G or a ↓ in T • Increase in NY through the multiplier effect Price AS EXPLANATION P1 P0 AD1 AD Real NY Q0 Q1 = Yf

6. Discuss the view that fiscal policy is the best method to promote economic growth EXPLANATION • Fiscal Policy is effective Short Term Growth Long Term Growth Increase in AD • increase in output and income (i.e NY ) • Direct impact of increasing national income and employment FP with supply side effects. Eg. R&D investment, set up of training centres for labour, lower taxes to raise investment  raise incentive to work Increase in AS Shift out from point within PPC to point on PPC Shift out of original PPC Curve to a new PPC curve Idle resources better utilized Productive capacity of economy increase as increase in productivity

7. Discuss the view that fiscal policy is the best method to promote economic growth EVALUATION • Fiscal Policy not most effective 1. Time lag 2. Multiplier effect depends on mps, mpt and mpm & the country involved. 3. Uncertainty to the injections of G / amount of tax cut by the government. 4. Crowding out effects on I and NX reduce short term effectiveness to stimulate AD 5. Conflict with internal goal of price stability • May be useful as a short term measure but there still is a need to complement it with supply side measures

8. Discuss the view that fiscal policy is the best method to promote economic growth • FP not necessarily the BEST method to promote growth • Suggest alternative policy tools to promote and sustain growth Supply side policies Monetary Policy Exchange Rate Policy EVALUATION

9. Discuss the view that fiscal policy is the best method to promote economic growth • FP not necessarily the BEST method to promote growth • Suggest alternative policy tools to promote and sustain growth Supply side policies Monetary Policy Exchange Rate Policy EVALUATION

10. Discuss the view that fiscal policy is the best method to promote economic growth • Monetary Policy: changes to i/r or MS • Choice of MP: Expansionary MP • Fall in interest rates / increase in MS to stimulate investment via credit creation • Increase I Increase AD • Enhance capital formation in the longer term • Increase in ASsustain Long term EG EXPLANATION

11. Discuss the view that fiscal policy is the best method to promote economic growth Effectiveness of expansionary MP • Interest inelasticity of C and I • Time Lag • Size of multiplier • Conflict with external goals of economy BOP deficit (hot money flow out) External value of the currency falls  Singapore’s export competitiveness and growth adversely affected EVALUATION

12. Discuss the view that fiscal policy is the best method to promote economic growth • Exchange Rate policy: depreciation of the exchange rate. • Increase in export demand  in AD • Encourage domestic producers to raise investment level to meet rising demand • Increases productive capacity of economy  in AS • Enhances long term sustainable growth • Especially useful for SOE like Singapore that is highly reliant on trade for growth EXPLANATION

13. Discuss the view that fiscal policy is the best method to promote economic growth Effectiveness of Exchange rate depreciation • Marshall Lerner condition needs to hold • No retaliation by trading partners • May lead to outflow of capital  worsens capital account EVALUATION

14. Discuss the view that fiscal policy is the best method to promote economic growth SUPPLY SIDE POLICES • Since labour is Singapore main resource need to continually increase the productivity of workers 1. Income Policy: Setting guidelines on the rate of wage increases permitted. 2. Labour Upgrading: Skills upgrading and retraining 3. Pro Business policy: Tax cuts & conducive environment to encourage entrepreneurship and attract FDIs • Enhance productive capacity of economy: AS   promote LTEG EXPLANATION

15. Discuss the view that fiscal policy is the best method to promote economic growth Effectiveness of supply side policies • It may take a while before growth is observed (LT measure) . • Quality of capital: Investment must be in areas of growth industries as it is a waste of time and effort EVALUATION

16. Discuss the view that fiscal policy is the best method to promote economic growth • Choice of policy chosen by country to promote growth depends on which policy is most effective or appropriate for it. • Case of Singapore: given high budgetary surplus, choice of FP may be deemed appropriate as: i. Need not borrow to finance G expenditure ii. Tax cuts are offset by GST implementation • BUT Fiscal Policy alone is not BEST policy to achieve economic growth in Singapore. In Summary

17. Discuss the view that fiscal policy is the best method to promote economic growth • Apart from FP other applicable policies that Singapore can adopt to maintain long term economic success. • A combinationof policies would be useful. • Government must be aware of the limitations of the policies chosen & the possible spillover effects of their chosen polices in the pursuit of economic growth. In Summary

18. Discuss the view that fiscal policy is the best method to promote economic growth Level Marks Quality of Answer L1 1-3 Show some knowledge on what is FP and gives a limited discussion on how it affects NY (Short Term Economic Growth) L2 4-7 Analyse quite distinctly how FP alone can lead to EG OR Discuss inadquately how FP aids EG and also briefly bring in other policies that can lead to EG L3 8-10 A thorough clear discussion on how FP affects EG & also a discussion of alternative policies that would bring about EG.

19. To what extent the use of fiscal policy to achieve economic growth would lead to other economic problems. Command Words • To what Extent: To highlight the effectiveness of FP in achieving EG without conflict in other goals. Key Words • Key Macroeconomic objectives • Conflicts that arise between EG and other goals • Adoption of other polices

20. To what extent the use of fiscal policy to achieve economic growth would lead to other economic problems. • Brief identification and explanation of macroeconomic goals • Examine to what extentconflicts in other goals may set in with use of FP. • Adoption of other policies EG vs Inflation EG vs BOP equilibrium EG vs Equity

21. EG vs Inflation Yes, there are conflicts Noconflicts created SR: trade offs between inflation and EG LR: expansionary policy with supply side effects adopted eg. tax cuts Expansionary FP leads to demand pull inflation Expansionary policy that increase productive capacity  price level Increase in price level higher cost of living & fall in export competitiveness Lower GPL regain of export competitiveness

22. With EG • rising output and income  increase in demand for imports Import expenditure worsening of BOT and BOP (assumption needed!) EG vs BOP equilibrium Yes, there are conflicts Noconflicts created High EG capital inflow may be attracted to country (greater returns to investment) Inflow of capital Improvement in capital account and BOP

23. EG vs Equity Yes, there are conflicts Noconflicts created Widening of income disparity • Economic growth •  in GDP levels may not equally spread out Example: tax incentives given producers increase Investment productive capacity  benefit the rich more, and widens income disparity. EG may narrow the income gap between the rich and the poor. policies geared towards increasing labour productivity Example: government expenditure on training and upgrading of skills of low educated workers to  increase AS  may benefit the poor more and reduces income gap.

24. To what extent the use of fiscal policy to achieve economic growth would lead to other economic problems. Other Macroeconomic problems using FP: • Run down of government budget in LT budget deficit • Further consequences of bad debt from government expenditure that is financed by borrowing Evaluation

25. To what extent the use of fiscal policy to achieve economic growth would lead to other economic problems. • To a certain extent, use of Fiscal policies can create conflicts in other macroeconomic goals. • However, conflicts can be resolved with the appropriate choice of policy implemented or when a package of measures are used to deal with it. • In this case, for example, the use of fiscal incentives comprising of supply side effects would be useful Conclusion

26. To what extent the use of fiscal policy to achieve economic growth would lead to other economic problems. Level Marks Quality of Answer L1 1-3 Show some answer of economic tools or very surface knowledge of conflicts L2 4-7 A good discussion of how the use of FP might lead to trade offs in other objectives L3 8-11 A thorough clear discussion of how use of FP in achieving EG lead to conflicts in other goals and the extent of these conflicts E1 1-2 For an unexplained judgment, or one that is not supported by economic analysis. E2 3-4 For an evaluative discussion that is based on economic analysis

27. SOME REFRESHMENTS!!! Q: How many economists does it take to change a lightbulb? A: Eight. One to screw it in and seven to hold everything else constant.  Q. What do economists and computers have in common ? A. You need to punch information into both of them. 

28. SOME REFRESHMENTS!!! Q: What's the difference between a finance major and an economics major? A: Opportunity Cost AND A LAST ONE… A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Lets build a fire and heat the can first." What do you think the economist said? The economist says, "Lets first assume that we have a can-opener..."

29. AJC Prelim 2006 Pay Attention! Question: • Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. 10) • Discuss how these policies can affect other macroeconomic objectives. (15)

30. Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Command Words: • Recommend : Suggest and explain polices chosen Key Words: • Curb Inflation: Control Inflation • Policy options: Contractionary FP, MP and ERP Policies & / or supply side policies

31. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) • Define Inflation • Causes of Inflation • Choice of policy option undertaken depends on the cause of inflation • Policies options to curb inflation: Contractionary FP, MP, ERP and supply side policies. INTRODUCTION Demand Pull Cost Push

32. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Demand Pull Inflation AIM: To Reduce level of aggregate demand POLICIES: • Contractionary demand management policies: • Fiscal Policy • Monetary Policy • Exchange rate control: appreciation / revaluation of currency Explanation & Analysis

33. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Demand Pull Inflation • Excess of AD in relation to AS at or near full employment so prices are pulled up. • Increases in AD given an autonomous increase in C, I, G, (X-M) Explanation

34. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Demand Pull Inflation Explanation Price AS P2 P1 AD2 AD1 P0 AD Real NY NY0 NY1

35. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Cost Push Inflation AIM: To Reduce cost of production and hence bring down the AS curve POLICIES: Need to first identify the source of the increase in costs. • Exchange rate policy: solve imported inflation. • Supply Side Policies: solve wage push inflation Explanation & Analysis

36. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Cost Push Inflation • Increases in the prices of goods and services due to increase in cost of production. • Possible causes of cost push inflation: 1. Wage Push Inflation: Increase in wages > increases in productivity 2. Imported inflation Explanation

37. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) CAUSE: Cost Push Inflation Price Explanation AS2 P2 AS1 P1 AS P0 AD Real NY NY2 NY1 NY0

38. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Contractionary Fiscal Policy: Cut in G / Increase in T. Direct impact on AD AD  Decrease in inflationary pressure AS Price P Explanation P1 AD AD1 Real NY NY1 NY0

39. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Evaluation Effectiveness of FP •  Direct impact of reducing aggregate demand in economy in the case of G • × Uncertainty to the size of G expenditure to be changed estimations of multiplier Qn. What about effectiveness of contractionary FP via increase in taxes? • Increase in T depends less effective due to leakages such as savings

40. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Evaluation Contractionary MP: increase in i/r or fall in MS • Increase interest rates in the economy 1. Fall in C, I (credit conditions) 2. Increase in S  fall in C 3. Inflow of hot money appreciation of ER  Relative price changes of exports and imports  demand for imports increase while exports fall 4. Fall in net exports Fall in AD  Fall in Inflation Fall in AD  Fall in Inflation

41. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Effectiveness of MP • Interest inelasticity of C and I • Time Lag • Size of multiplier • Conflict with external goals of economy  BOP deficit (hot money flow out)

42. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Exchange Rate Control • Appreciation of the exchange rate • Lowers the cost of living and cost of production (direct transmission mechanism) •  cost push inflation • Reduces the net exports (indirect TM) • bring down demand pull inflation

43. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Effectiveness of ER policy: Appreciation of ER • Marshall Lerner condition must be satisfied • Time lag • Conflicts in the external accounts • BOP deficits as exports earning fall while import expenditure increases • Worsening of current account balance

44. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Supply side policies • Wage Restructuring: guidelines on rate of wage increases Wages may not be allowed to rise faster than the rise of productivity Control cost of production • Income / wage policy: Voluntary wage restraints wage freeze for employees for minimum no. of years

45. a) Recommendtwo policy options that a government can adopt to curb inflation and explain your choice. (10) Effectiveness of SS policies • Need for cooperation among government, employers and trade unions • Distortion of market policies if existing pattern of wage differentials is freeze. • Imposition of price ceiling may create shortages black market activities to develop

46. (b) Discuss how these policies can affect other macroeconomic goals. • Command word: • Discuss- to evaluate giving both sides of the argument • Cue words: Policies affect other macroeconomic goals • Polices used to solve inflation • Conflicts in other macroeconomic goals.

47. (b) Discuss how these policies can affect other macroeconomic goals. RECAP: To solve problem of inflation Contractionary Fiscal Policies CONFLICTS CREATED SOLVE INFLATION • Decrease G or Increase T AD falls  Price level falls • Fall in output & NY falling EG • Increase in unemployment levels • Decrease G spending Eg. education/ health care / infrastructure spending • Lowering of I in human capital  Slower rate of productive capacity • Increase in Taxes Eg. Corporate tax rate • Disincentive effect on work effort • Fall in incentive to I  Lower EG rate

48. (b) Discuss how these policies can affect other macroeconomic goals. RECAP: To solve problem of inflation Contractionary Monetary Policies SOLVE INFLATION CONFLICTS CREATED Increase in i/r Fall in C, I  Fall in AD and Prices • Outflow of capital Fall in Investment  Fall in productive capacity of economy  Slower EG Appreciation of ER Fall in X and increase in M • Worsening of BOT Assuming PED for X and M are elastic

49. (b) Discuss how these policies can affect other macroeconomic goals. RECAP: To solve problem of inflation Supply Side Policies SOLVE INFLATION CONFLICTS CREATED Price & Income Policy Voluntary wage restraint  Solve cost push inflation • Disrupt market mechanism • inability of labour market to repond to structural changes • deters productive growth in economy

50. (b) Discuss how these policies can affect other macroeconomic goals. • Choice of policies chosen need to answer / solve the cause of the problem • Cause • However, limitations of these policies and resulting conflicts like dampened economic growth may be created when such policies are adopted. • Supply side polices will also take a longer time Demand mgt policies Demand pull inflation Cost Push inflation ER / Supply side policies Evaluation