Macroeconomics Essay Plans:
Macroeconomic Performance: inflation, unemployment, economic cycle,
Explain the possible causes of a shift in the short-run aggregate supply
curve to the left. [15 marks]
Definitions
SRAS: output supplied in the short run when wages are fixed.
Leftward shift: fall in productive capacity due to rising costs.
Paragraph 1 — Rising production costs (wages, raw materials, energy)
Chain of analysis:
Higher wages/raw material prices → ↑ firms’ costs → ↓ profitability → firms
reduce output at each price level → SRAS shifts left.
E.g., oil price shock → higher transport/manufacturing costs → cost-push
pressure.
Diagram:
SRAS shifts left → higher PL, lower real GDP.
Evaluation:
Depends on wage flexibility; if productivity rises, cost pressures may be
offset.
Paragraph 2 — Supply-side disruptions (shocks, regulation, depreciation)
Chain of analysis:
Natural disasters, stricter regulation, or currency depreciation → ↑ import
costs → ↑ unit costs → ↓ SRAS.
Depreciation makes imported capital/inputs more expensive → reduces
firms’ ability to produce.
Evaluation:
Temporary shocks may reverse quickly; long-run supply may be
unaffected.
Explain the possible causes for inflation. [15]
Definitions
Inflation: sustained rise in general price level.
Demand-pull vs cost-push.
Paragraph 1 — Demand-pull inflation
Chain of analysis:
, ↑ AD (C, I, G, X–M) → economy near full capacity → firms raise prices.
E.g., consumer confidence, low interest rates, strong global demand.
Diagram:
AD shifts right.
Evaluation:
Only inflationary if economy is close to Yfe; otherwise increases output.
Paragraph 2 — Cost-push inflation
Chain of analysis:
↑ production costs (wages, oil, imported goods) → SRAS shifts left →
higher prices.
Weak exchange rate → imported inflation.
Evaluation:
Depends on wage bargaining power; if wages are flexible, cost-push may
be limited.
Evaluate the consequences of inflation [15]
Definitions
Inflation, real incomes, competitiveness.
Paragraph 1 — Reduced purchasing power & uncertainty
Chain of analysis:
Inflation erodes real incomes → ↓ consumption → ↓ AD.
Creates uncertainty → ↓ investment → ↓ long-run growth.
Evaluation:
If wages rise with inflation, real incomes may be protected.
Paragraph 2 — Loss of competitiveness & redistribution effects
Chain of analysis:
Higher domestic prices → ↓ exports → ↑ imports → worsening current
account.
Hurts savers (real value falls) but benefits borrowers (real debt falls).
Evaluation:
Trading partners’ inflation matters; if they also have inflation,
competitiveness unchanged.
,Assess policies to reduce inflation [25]
Definitions
Monetary policy, fiscal policy, supply-side policy.
Paragraph 1 — Monetary policy (interest rates, QT)
Chain of analysis:
↑ interest rates → ↓ consumption & investment → ↓ AD → ↓ demand-pull
inflation.
Strong credibility of central bank anchors expectations.
Evaluation:
Time lags (12–24 months).
Less effective against cost-push inflation.
Paragraph 2 — Fiscal policy (reducing G, raising T)
Chain of analysis:
Contractionary fiscal policy → ↓ AD → ↓ inflationary pressure.
Automatic stabilisers help smooth demand.
Evaluation:
Politically unpopular; may worsen unemployment.
Paragraph 3 — Supply-side policies
Chain of analysis:
Improve productivity → ↓ unit costs → SRAS shifts right → reduces
cost-push inflation.
E.g., training, deregulation, infrastructure.
Evaluation:
Long time lags; expensive; uncertain outcomes.
Judgement
Best policy depends on type of inflation.
Monetary policy most effective for demand-pull; supply-side needed for
cost-push.
Evaluate how, in the long-run, governments could try to reconcile
conflicts between the various objectives of economic policy. [25 marks]
Definitions
Trade-offs: inflation vs unemployment, growth vs environment, etc.
, Paragraph 1 — Inflation vs unemployment (Phillips curve)
Chain of analysis:
Expansionary policy ↓ unemployment but ↑ inflation.
Governments reconcile via supply-side policies → shift LRAS →
non-inflationary growth.
Evaluation:
Phillips curve unstable; globalisation reduces wage-price link.
Paragraph 2 — Growth vs environment
Chain of analysis:
Growth ↑ emissions/resource use.
Reconciliation: green tech, carbon taxes, regulation.
Evaluation:
Short-run costs may reduce competitiveness.
Paragraph 3 — Current account vs growth
Chain of analysis:
Growth ↑ imports → worsens CA.
Reconciliation: export-led growth, productivity improvements.
Evaluation:
Depends on exchange rate and global demand.
Judgement
Conflicts can be reduced but not eliminated; supply-side policies help
most.
Explain the main problems for an economy of having a large positive
output gap. [15 marks]
Define positive output gap
Paragraph 1 — Inflationary pressure
Economy above capacity → firms raise prices → demand-pull inflation.
Overheating → wage-price spiral.
Evaluation:
If expectations anchored, inflation may be limited.
Paragraph 2 — Unsustainable growth & asset bubbles
Excess demand → speculative investment → bubbles (housing, stocks).
Macroeconomic Performance: inflation, unemployment, economic cycle,
Explain the possible causes of a shift in the short-run aggregate supply
curve to the left. [15 marks]
Definitions
SRAS: output supplied in the short run when wages are fixed.
Leftward shift: fall in productive capacity due to rising costs.
Paragraph 1 — Rising production costs (wages, raw materials, energy)
Chain of analysis:
Higher wages/raw material prices → ↑ firms’ costs → ↓ profitability → firms
reduce output at each price level → SRAS shifts left.
E.g., oil price shock → higher transport/manufacturing costs → cost-push
pressure.
Diagram:
SRAS shifts left → higher PL, lower real GDP.
Evaluation:
Depends on wage flexibility; if productivity rises, cost pressures may be
offset.
Paragraph 2 — Supply-side disruptions (shocks, regulation, depreciation)
Chain of analysis:
Natural disasters, stricter regulation, or currency depreciation → ↑ import
costs → ↑ unit costs → ↓ SRAS.
Depreciation makes imported capital/inputs more expensive → reduces
firms’ ability to produce.
Evaluation:
Temporary shocks may reverse quickly; long-run supply may be
unaffected.
Explain the possible causes for inflation. [15]
Definitions
Inflation: sustained rise in general price level.
Demand-pull vs cost-push.
Paragraph 1 — Demand-pull inflation
Chain of analysis:
, ↑ AD (C, I, G, X–M) → economy near full capacity → firms raise prices.
E.g., consumer confidence, low interest rates, strong global demand.
Diagram:
AD shifts right.
Evaluation:
Only inflationary if economy is close to Yfe; otherwise increases output.
Paragraph 2 — Cost-push inflation
Chain of analysis:
↑ production costs (wages, oil, imported goods) → SRAS shifts left →
higher prices.
Weak exchange rate → imported inflation.
Evaluation:
Depends on wage bargaining power; if wages are flexible, cost-push may
be limited.
Evaluate the consequences of inflation [15]
Definitions
Inflation, real incomes, competitiveness.
Paragraph 1 — Reduced purchasing power & uncertainty
Chain of analysis:
Inflation erodes real incomes → ↓ consumption → ↓ AD.
Creates uncertainty → ↓ investment → ↓ long-run growth.
Evaluation:
If wages rise with inflation, real incomes may be protected.
Paragraph 2 — Loss of competitiveness & redistribution effects
Chain of analysis:
Higher domestic prices → ↓ exports → ↑ imports → worsening current
account.
Hurts savers (real value falls) but benefits borrowers (real debt falls).
Evaluation:
Trading partners’ inflation matters; if they also have inflation,
competitiveness unchanged.
,Assess policies to reduce inflation [25]
Definitions
Monetary policy, fiscal policy, supply-side policy.
Paragraph 1 — Monetary policy (interest rates, QT)
Chain of analysis:
↑ interest rates → ↓ consumption & investment → ↓ AD → ↓ demand-pull
inflation.
Strong credibility of central bank anchors expectations.
Evaluation:
Time lags (12–24 months).
Less effective against cost-push inflation.
Paragraph 2 — Fiscal policy (reducing G, raising T)
Chain of analysis:
Contractionary fiscal policy → ↓ AD → ↓ inflationary pressure.
Automatic stabilisers help smooth demand.
Evaluation:
Politically unpopular; may worsen unemployment.
Paragraph 3 — Supply-side policies
Chain of analysis:
Improve productivity → ↓ unit costs → SRAS shifts right → reduces
cost-push inflation.
E.g., training, deregulation, infrastructure.
Evaluation:
Long time lags; expensive; uncertain outcomes.
Judgement
Best policy depends on type of inflation.
Monetary policy most effective for demand-pull; supply-side needed for
cost-push.
Evaluate how, in the long-run, governments could try to reconcile
conflicts between the various objectives of economic policy. [25 marks]
Definitions
Trade-offs: inflation vs unemployment, growth vs environment, etc.
, Paragraph 1 — Inflation vs unemployment (Phillips curve)
Chain of analysis:
Expansionary policy ↓ unemployment but ↑ inflation.
Governments reconcile via supply-side policies → shift LRAS →
non-inflationary growth.
Evaluation:
Phillips curve unstable; globalisation reduces wage-price link.
Paragraph 2 — Growth vs environment
Chain of analysis:
Growth ↑ emissions/resource use.
Reconciliation: green tech, carbon taxes, regulation.
Evaluation:
Short-run costs may reduce competitiveness.
Paragraph 3 — Current account vs growth
Chain of analysis:
Growth ↑ imports → worsens CA.
Reconciliation: export-led growth, productivity improvements.
Evaluation:
Depends on exchange rate and global demand.
Judgement
Conflicts can be reduced but not eliminated; supply-side policies help
most.
Explain the main problems for an economy of having a large positive
output gap. [15 marks]
Define positive output gap
Paragraph 1 — Inflationary pressure
Economy above capacity → firms raise prices → demand-pull inflation.
Overheating → wage-price spiral.
Evaluation:
If expectations anchored, inflation may be limited.
Paragraph 2 — Unsustainable growth & asset bubbles
Excess demand → speculative investment → bubbles (housing, stocks).
