A2 Macro Mock Question

I have attached a mock A2 AQA macro data question that my students attempted this morning. Because our lessons are only forty minutes long I missed out the two short questions at the start and just got them to try a couple of analysis and evaluation questions. My answer plan for the final part is below

Question Macro_Mock_Question.doc

Using the data and your own economic knowledge, evaluate the policies that are likely to be most effective in avoiding a sustained deflationary recession in the UK economy (30 marks)

The best answers:

Defined a deflationary recession

Considered the strength of deflationary forces facing the UK economy and flagged up briefly what this might mean e.g. for asset prices, wages, jobs and company profits

Then identified a range of policy measures

(i) Pro-active monetary policy in context of the inflation target - recent decisions by the Bank of England, nominal rates cut close to zero and a large depreciation of the exchange rate (not achieved artificially by the Bank)

Evaluation

(a) Breakdown of transmission mechanism
(b) Liquidity trap effects
(c) Rising interest rates on unsecured credit
(d) Impact on spending power of savers

(ii) Introduction of quantitative easing

Explanation of procedure / BoE purchases of debt / impact on bond yields / stimulus to supply of credit in wholesale markets / monetary expansion - will this feed through to the real economy e.g. business credit and the mortgage market

(iii) Fiscal easing

Examples of recent policies / discretionary fiscal policy / going on beyond the automatic stabilisers .... tax and spending stimulus, shovel-ready jobs

Evaluation -

Fiscal multipliers
Possible crowding out from huge budget deficit
Scale of govt borrowing - Ricardian equivalence theorem - expectations of higher taxes

Further evaluation points relevant to the question include:

Any signs that the policies are working?
Deflationary effects of falling commodity prices?
CPI inflation still above target although RPI* is now below 0%
Importance of the automatic stabilisers of macro policy - can they do the job?
Lengthy time lags, much of the policy stimulus came late in 2008 - so we should expect to see results into the second half of 2009
Global economic situation - e.g. makes the depreciation in sterling less effective
What will happen to wages? Will we see flexible wages - pay cuts?

Make good use of the chart e.g. severity of slump in real GDP, inflation likely to drop too but with a lag as spare capacity increases

Recognise that domestic macro policy does not work in a vacuum - much will depend on macro-economic developments in key export markets + commodity prices

As always the student who is up to date, writes clearly and does not sink into an AS theory mentality will ALWAYS score highly.