Macroeconomic Policies and Impact on Firms and Individuals

What Macroeconomic Policies and Impact on Firms and Individuals covers

Macroeconomic Policies and Impact on Firms and Individuals is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business. It covers aggregate demand and its components, aggregate supply, full capacity output and the output gap, the multiplier effect, shifts in AD and AS: inflation, unemployment and growth, fiscal policy: government spending and taxation, monetary policy: the Bank of England, interest rates and quantitative easing, demand-side policies on the AD/AS diagram: investment, jobs and prices, time lags, policy conflicts and the limits of demand-side policy, market-based supply-side policies, interventionist supply-side policies, supply-side policies on the AD/AS diagram: strengths and weaknesses and comparing macroeconomic policies and judging their success.

The 12 subtopics

Each one has its own page.

• Aggregate demand and its componentsAggregate demand and its four components, the largest component, why the curve slopes downwards, investment in the national accounts, how consumer confidence, interest rates, postponed investment, sterling and income tax shift it, movements against shifts, order books as indicators, house prices and consumption, and imports.Open →
• Aggregate supply, full capacity output and the output gapAggregate supply, why short-run aggregate supply slopes upwards, long-run aggregate supply and its classical shape, full capacity output, shifts from productive capacity, energy prices, the exchange rate and the minimum wage, demand growth at full capacity, rising unit costs, and the output gap and what a negative gap means for a firm.Open →
• The multiplier effectThe multiplier effect and how an injection multiplies through the economy, the multiplier formula and the marginal propensity to consume, the three withdrawals, calculating the multiplier and the rise in national income, imports, the multiplier in reverse after a closure, injections that raise prices, the accelerator effect, and why the multiplier is hard to predict.Open →
• Shifts in AD and AS: inflation, unemployment and growthDemand-pull and cost-push inflation on the AD/AS diagram, rising demand with spare capacity, leftward shifts in aggregate supply and why they are awkward for policymakers, cyclical unemployment, actual against potential growth, non-inflationary growth, inflation and unemployment, rising input costs, prices in recession, the trade balance in a boom, and limits of the model.Open →
• Fiscal policy: government spending and taxationFiscal policy, direct and indirect taxes and UK examples, expansionary and contractionary policy, the budget deficit against the national debt, current against capital spending and long-run aggregate supply, VAT cuts for retailers, employers' National Insurance, automatic stabilisers, corporation tax and inward investment, crowding out, and progressive taxes and the multiplier.Open →
• Monetary policy: the Bank of England, interest rates and quantitative easingMonetary policy and the Bank of England, Bank Rate, the inflation target and its price index, missing the target, central bank independence, how a rise in Bank Rate reduces inflation, highly geared firms, interest rates and the currency, quantitative easing, why it is used near zero rates and its risks, quantitative tightening, monetary against fiscal policy, and forecast-based rate setting.Open →
• Demand-side policies on the AD/AS diagram: investment, jobs and pricesIncome tax cuts and the aggregate demand curve, expansionary policy in a deep recession and at full capacity, the inflationary cost of demand-side policy and the slope of aggregate supply, contractionary monetary policy, a positive output gap, encouraging business investment, capital allowances, macroeconomic stability, job creation, cost-push inflation, anchored expectations, and rate cuts in deep recessions.Open →
• Time lags, policy conflicts and the limits of demand-side policyRecognition, implementation and impact lags, the different lag profiles of fiscal and monetary policy and how lags destabilise, the strengths and weaknesses of monetary and fiscal policy, the Phillips curve, conflicts between growth and the current account, the environment and deficit reduction, inflation against investment, uneven effects on firms, and policy trade-offs.Open →
• Market-based supply-side policiesSupply-side policy, market-based against interventionist, income tax cuts and uncertain labour supply effects, benefit reform and the unemployment trap, privatisation, deregulation and ending statutory monopolies, competition policy, trade union reform, labour market flexibility and its benefits and costs to workers, trade openness, corporation tax cuts, and fairness criticisms.Open →
• Interventionist supply-side policiesInterventionist supply-side policy, education spending and long-run aggregate supply, under-provided training and the apprenticeship levy, transport and digital infrastructure and their benefits and multiplier, criticisms of state-led investment, industrial strategy and picking winners, research and development subsidies, and regional policy for unequal productivity.Open →
• Supply-side policies on the AD/AS diagram: strengths and weaknessesShifting long-run aggregate supply to the right and its effect on prices and output, the improved inflation and unemployment trade-off, supply-side policies that also shift aggregate demand, cutting employers' National Insurance, the strengths and weaknesses of supply-side policies, deep recessions, the equity and fiscal trade-offs, environmental conflicts, and slow effects of training subsidies.Open →
• Comparing macroeconomic policies and judging their successThe four standard macroeconomic objectives, criteria for judging an employment policy and cost per job created, counterfactuals, the speed of demand-side and supply-side policy and when each fits, combining approaches, measuring effects on firms, distributional effects, attributing changes in inflation, opportunity cost, the economic cycle, and the limits of GDP growth as a measure.Open →

What you need to know

Answer each one before you reveal it.

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Commonly confused

Pairs that lose marks when they are blurred together.

• Actual growth vs Potential growth

  Actual growth: a rise in real output as aggregate demand moves into spare capacity that already exists. Potential growth: An increase in the economy's productive capacity, shown by long-run aggregate supply shifting to the right.

• Expansionary fiscal policy vs Contractionary fiscal policy

  Expansionary fiscal policy: a budget stance that raises government spending or cuts taxation in order to lift total planned demand in the economy. Contractionary fiscal policy: a budget stance that cuts government spending or raises taxation in order to hold total planned demand back.

• Quantitative easing vs Bank Rate

  Quantitative easing: the creation of new money by the monetary authority to buy financial assets, mainly government bonds, from the private sector. Bank Rate: the official interest paid on reserves that commercial lenders hold with the monetary authority, anchoring what they charge each other.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Define aggregate demand.

   Model answer

   Aggregate demand is the total planned spending on an economy's goods and services at each price level over a given period.

2. 2

   State the four components of aggregate demand.

   Model answer

   The four components are consumption, investment, government spending and net exports, which is exports minus imports.

3. 3

   Which component of UK aggregate demand is normally the largest?

   Model answer

   Household consumption is the largest component, typically around two-thirds of aggregate demand.

4. 4

   Why does the aggregate demand curve slope downwards?

   Model answer

   A lower price level raises the real value of money balances, tends to lower interest rates and makes exports more competitive, so planned spending is higher.

5. 5

   What counts as investment when measuring aggregate demand?

   Model answer

   Investment is spending by firms on capital goods such as machinery, buildings, vehicles and technology, together with additions to stocks.

6. 6

   How does a rise in consumer confidence affect aggregate demand?

   Model answer

   Confident households save a smaller share of income and are more willing to borrow for large purchases, so consumption rises and the aggregate demand curve shifts to the right.

What is inside Levo

Six ways to work the same material.

Macroeconomic Policies and Impact on Firms and Individuals revision questions

What does Macroeconomic Policies and Impact on Firms and Individuals cover in Edexcel A-Level Economics B?

12 subtopics: aggregate demand and its components, aggregate supply, full capacity output and the output gap, the multiplier effect, shifts in ad and as: inflation, unemployment and growth, fiscal policy: government spending and taxation, monetary policy: the bank of england, interest rates and quantitative easing, demand-side policies on the ad/as diagram: investment, jobs and prices, time lags, policy conflicts and the limits of demand-side policy, market-based supply-side policies, interventionist supply-side policies, supply-side policies on the ad/as diagram: strengths and weaknesses and comparing macroeconomic policies and judging their success. Each one has its own page with questions and model answers.

How is Macroeconomic Policies and Impact on Firms and Individuals organised?

By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.