Unit 2 Macro: Analysing Government Spending Cuts

It is rare that a day would go by without you being able to find a news article on issues that affect the macro-economy; a good tip is to constantly think like an economist and analyse these issues as you may do in the exam.

Take this article from today’s BBC website concerning government spending on education which ‘will fall by 13% in real terms between 2010-11 and 2014-15’.

It is likely that your analysis of this event (ceteris paribus) would mean the fall in government spending (as a component of AD) should shift the AD curve inwards (fully labelled diagrams please!) but this is just the starting point. Next you might consider:

• What are the macroeconomic impacts on growth, employment and inflation?
• Does it matter whereabouts the initial macro-equilibrium is and where the AD curve is positioned?
• Will this happen immediately or will there be a time-lag effect?
• What effect will these cuts have on the AS curve over the LR?
• How would this AS shift affect the key macroeconomic objectives?
• Will there be any negative multiplier or knock-on effects of this fall in government spending?

I’m going to give this article to my AS macroeconomists first lesson back after half-term (advanced warning to those reading this!) and get them to discuss the extent of government spending cuts in this article which we will then turn into an exam-style essay question.