With reference to the circular flow of income, explain how fiscal policy can be used to reduce unemployment. [12]

The circular flow of income is the flow of transactions between households and firms in both the product and factor market. In order to be more realistic, we consider the circular flow of income in an open economy with four sectors, namely households, firms, government and the foreign sector.

[Include the diagram for circular flow of income in an open economy]

From the above figure, we can see that the money in an economy maintains approximately the same at all times. This is because people in the households work for firms and are given a salary which is their income. In return, the households use the income they earn to buy their daily necessities or to satisfy their wants by purchasing goods and services from firms. However, there are also withdrawals and injections for an open economy. Withdrawals (W) include savings (S), taxes (T) and money spent on imports (M) while injections (J) include investment (I), government expenditure (G) and money received from the sale of exports (X). [W = S + T + M; J = I + G + X]

Fiscal policy makes use of the G, C and I components. It injects money into the economy either through government expenditure or government investments, thus having more money in the circular flow of income. When G is increased, there will be more spending on building the infrastructure, education or providing subsidies. These will result in more jobs for the people as construction workers will now have a job to build something and hire more workers to help if the firm is short of labour. As for education, the Ministry of Education may require more teachers, thus having more jobs, or they will build more schools and need more supporting staffs as well. These will certainly help in demand-deficient unemployment.

When there is demand deficient unemployment, aggregate demand (AD) falls, resulting in national income (NY) to fall as well. The fall in AD shows that there has been a lack of demand in consumption, therefore not requiring as many workers as before, resulting in many people losing their jobs. By increasing G as said earlier, it will push AD up again, getting more people to be employed.

Also, by providing subsidies for retraining of workers, government can solve the problem of structural unemployment. Structural unemployment happens when there are people who are willing to work yet they do not have the right skills for the jobs in the market. These subsidies can serve as an incentive for them to retrain themselves to have the right skills for the jobs in sunrise industries.

By increasing investments, the government is increasing the aggregate supply (AS), therefore preventing the economy from reaching a bottle-neck situation where it is close to full-employment. It will also create more jobs for the people in future.

Increasing investments also make business look more optimistic as they have more money to work with currently. They can invest on research and technology which will provide more jobs for some people and slowly the company may expand and hire more people, thus reducing unemployment.

Since AD = C + I + G + (X – M), when a sum of money is injected into the economy, it triggers the multiplier process. The multiplier, k , is dependent on the marginal propensity to withdraw (MPW), which is make up of marginal propensity to tax (MPT), marginal propensity to  import (MPM) and marginal propensity to save (MPS). [MPW = MPT + MPM + MPS]

Assuming that the government injects $100 million into the economy for investment on companies and assuming k to be 0.5, the companies might make use of the $50 million to hire more workers. The process does not stop here as workers will then use $25 million to buy necessities and satisfy their wants therefore increasing C. The process will continue until change in NY is equivalent to k times of amount of money injected, which in this case is $50 million.

The multiplier process shows that people have more money at hand and are more willing to consume. Increase in consumption increases AD as well, resulting in firms producing more outputs and requiring labour, thus reducing unemployment.

These show that fiscal policy provides injections that expands the circular flow of income, allowing AD and AS to increase so as to provide more jobs and reduce unemployment.

JC ECONOMICS ESSAYS: Economics tutor's comments - Note: This contribution was written by an Economics student who has already graduated from Junior College, who attained a grade A at H2 Economics at the A levels, but it is the student's own opinions and analytical, essay writing methods, and should be read with an critical, analytical, observant eye. As the student has graduated from junior college already, has she made some simple mistakes? Has she written some arguments and phrases less clearly? Think about those things as you read, and always read essays with a critical mind. What can be done to develop this essay further? What skills can you bring to the table, to make this economics essay the best that it can be? What other examination techniques, skills, economics content, or economics knowledge could you use to buttress the arguments? Think always of how to improve your essays and cross refer to other essays, to read and see the best essays, or the good essays, to improve on your writing, skills, and knowledge. Thanks for reading. 

Hints and Approaches to H1 and H2 A Level Economics Essay Questions for Practice

H1 and H2 A Level Economics Essay Questions for Practice (Hints and Approaches)

Essay Questions: Quick Recap and Introduction

These are the promised Economics hints (covering Economics concepts, definitions, ideas, arguments, and logical approaches) for the Economics essay questions for practice posted in my earlier post. 

(Do please see the bottom of this page for the relevant links if you want to refer to that post.)

Suggested Economics Tutor's Hints

Q: "Protectionism is better than free trade.” Discuss. [15]

HINT: Define protectionism, and international trade. List and explain various methods of protectionism (tariffs, quotas, subsidies). Talk about gains from trade, and maybe terms of trade. Thesis argument: protectionism is better than free trade. Why? Think about the infant industry argument and other arguments you could use. Anti-thesis argument: on the other hand, free trade is beneficial. Why? Define comparative advantage, opportunity cost. Show the diagram for the small country case, demonstrating deadweight loss from tariffs. You may discuss quotas too. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore/China/USA/UK. Conclude with a justified argument – which is better, why, or are both equally important?  

Q: Explain how imperfect information can lead to market failure, using examples from Singapore. [10]

HINT: Define market failure, and imperfect information. Define merit and demerit goods also. Explain how this leads to market failure – overconsumption (in what case?) and underconsumption (in what case?). Draw and explain diagrams. Use examples from Singapore, such as healthcare (Medisave, Medishield), etc. You may bring in other areas if you wish. List other forms of market failures. Other forms of market failures are important too, such as externalities. How would you conclude?  

Q: Explain comparative advantage and why international trade is beneficial for countries. [10]

HINT: Define comparative advantage and international trade. Talk about gains from trade, and terms of trade. Free trade is beneficial. Why? Demonstrate that countries can consume outside their PPC (on the PPC is for the autarky case) when their consumption possibilities increase (the trade case has CPC); draw diagrams. Explain the diagrams. Can also show the diagram for the small country case, demonstrating deadweight loss from tariffs; argue that protectionism is bad. Define and explain protectionism briefly. Discuss other reasons why trade is beneficial. Be sure to give examples from Singapore or China/USA/UK. 

Q: Explain the likely demand and supply factors affecting the oil (petroleum) market. [10]

HINT: Define demand and supply; talk about market prices and equilibrium output and how these are determined. Factors affecting the demand for oil are: derived demand (define), substitutes and complements (define), population changes, expectations, and rising incomes. Which of these is most likely? Factors affecting the supply of oil are: cost of production, expectations on the part of producers, number of firms, and government policies on the part of OPEC producers.  Which of these is most likely? Draw the demand and supply diagram with simultaneous shifts, explain it, and conclude your essay.

Q: Explain the difference between public goods and merit goods, using examples from the United Kingdom. [10]

HINT: Define public goods and merit goods. Define market failure, and say that these are instances of market failure. Why? Public goods are non rival and non excludable – leading to P = MC = 0 and also to the free rider problem, respectively. Give UK examples. Merit goods are goods that have positive externalities or due to imperfect information are underconsumed. Give UK examples (see next question for further hints). What is the difference, based on the explanations that you have written? Which is the most important difference?

Q: Explain using economic theory why in the United Kingdom, entry to national museums and art galleries is free and tickets to the opera are subsidised. [10]

HINT: Define public good and merit goods, and define market failure. The central problem here is underconsumption. National museums and art galleries can be considered quasi-public goods or merit goods. Why (for each of the possibilities), justification? Opera can be considered a merit good. Why, justification? Talk about imperfect information and positive externalities. Talk about a paternalistic state; talk about government intervention. Conclude.

Q: Discuss how the Singapore government deals with negative externalities in Singapore. [10]

HINT: Define market failure, externalities in general, and talk about negative externalities in particular. Focus on car congestion, cigarette smoking for this paper to make it easier. Draw the negative externality diagram and explain why it is a problem. What should the government do? Either impose taxes or quotas. Define those, explain, show. For congestion in particular, talk about ERP and COE. Conclude with the limitations of government policies.

Q: Explain how fiscal policy in the USA can be used to increase the circular flow of income in the USA. [10]

HINT: Define fiscal policy, and circular flow. Draw the circular flow diagram. Explain it. When G is increased, what happens to the circular flow? When corporate taxes are lowered, what happens to I, and in turn what happens to circular flow?  I, G, X are injections, and S, T, M are withdrawals. Talk about net injections and net withdrawals, but focus on injections. Give examples from the USA. (You may also in the course of the essay, define and discuss GDP, national income, standard of living.)

JC Economics Essays - Economics Tutor's Comments: These are some suggested hints (possible approaches, possible ideas/ concepts/ logic/ economics materials) to the Economics essay questions posted earlier (with a few general instructions, ideas, and pointers/tips for students). Do remember to think through them, and see if there are other Economics ideas, concepts, and approaches that you could use in addition to those provided by Economics tutors. 

For the earlier post on JC Economics Essays' questions for practice: H1 and H2 A Level Economics Essay Questions for Practice. 

For ease of reference, here is my List of Economics Exam Questions for Practice. Note that these questions are practical, heuristic, and training questions that test fundamental Economics understanding and fundamental, basic application. Some students have kindly, and rightly, pointed out that these questions in the "List" are for training purposes, and not all are reflective of the rigour of A levels or introductory undergraduate Economics - true!  

Tips on Writing a Good Macroeconomics Essay Paper

Hi my dear readers,

Tips on Writing a Good Macroeconomics Essay Paper (for A levels) 

I'll be sharing useful tips and tricks on how to write a good macroeconomics essay paper today. 

There are actually many good articles and guidebooks on how to write a good economics essay during a timed examination. I myself have a few here on JC Economics Essays. 

However, one article I read recently was quite unique - on "how to write a good Macroeconomics essay for A levels". 

Now that was quite special, and gave me a lot of material to think about! It was a nice emphasis on an important, but specific, particular aspect of economics. 

It said that basically there are a few important things to take note of: 

First, know the allocation of marks. 

Second, know the basic macroeconomic demand-side and supply-side policies very well. 

Third, explain your Economics clearly. 

Fourth, make sure you use case studies (which basically means use evidence and examples). 

Fifth, make sure there is a good evaluative conclusion to the Economics essay. 

Last, but certainly not least, be sure to have good time management. 

These are all good points. 

In fact, knowing the allocation of marks, explaining Economics clearly, having an evaluative conclusion, and allocating your time wisely are in fact also good tips on writing any Economics essay during an examination. 

Let's look at these useful and relevant ideas in detail, for your benefit. 

Know the allocation of marks for the particular Economics examination. 

H1, H2, H3 for A levels? Paper 3 for the A levels? GCSE? AS level? IB Economics? 10 or 15 marks? 25 marks? 35 marks? The principle is simple once you know the rubrics of the examination: the higher the marks, the more Economics material you will have to provide. What is the allocation of the marks for the particular examination you are taking? 

Understand macroeconomic policies extremely well. 

To be frank, most Economics essays on macroeconomics are extremely predictable. 

Economics examiners and tutors can only basically test students on fiscal policy, monetary policy, exchange rate policy and supply side policies (prices and incomes, etc) and how these affect the general price level, real output, and a particular country’s macroeconomic objectives – whether the country in question is the United States, United Kingdom, or Singapore for that matter. 

It goes without saying that if you are sitting for the A level examination in Singapore, then be prepared for questions about Singapore (and a few other countries as well). 

If you are sitting for the Economics examination in the UK, then be prepared for questions about the United Kingdom; sitting for the exam in India, Russia, and so on, then the questions set will be about India, Russia, and so on. It really is that simple! 

For demand management policies, anything that increases consumption (C), investment (I), government spending (G) & net export (X-M) will surely increase AD (Aggregate Demand). 

Meanwhile, for the supply side policies, anything that increases the quality or quantity of the factors of production will definitely affect AS (Aggregate Supply). 

A quick revision: the factors of production are - land, labour, capital, and enterprise /entrepreneurship/ risk-taking entrepreneurs. Some other economists also suggest that anything affecting levels of productivity, the level of employments of capital or labour, and competition will also increase AS. 

The economics explanation must be clear. 

Economics students must practice or develop their writing skills, to make clear explanations, to a very high degree. Economics students must be able to explain a logical, clear, theoretical-based transmission mechanism (process of an event) clearly. Here is a good example, about monetary policy using loanable funds theory: 

"When money supply is reduced, according to loanable funds theory, interest rates will increase, and thus firms may be tempted to cut investment spending and households may be tempted to cut consumption. This is because the costs of financing a project or business expansion have increased, and the costs of borrowing for consumption have increased. When investment and consumption both fall, AD will also decrease, and the AD curve will shift to the left, curing demand-pull inflation."

I often use a different formulation (which can be found in my e-book called Success in Macroeconomics), but the idea is still the same - have clear economics explanations. 

Read Economics case studies; provide contextual evidence. 

Sometimes, students do not realise that they can actually impress Economics tutors or examiners to get some extra marks by showing a decent level of maturity in their writing and also by projecting themselves as a well-read, knowledgeable candidate. 

Students can always give examples of real life events. 

For instance, in the UK for the A level examinations students could write about incidents during the era of Margaret Thatcher (say, the coal mine strikes) when they write about supply side policies, or what happened during the era of Nigel Lawson, or write about Gordon Brown's economic ideas and policies. 

Sometimes Economics students tend to give only real world examples without a theoretical framework. That is not good. However, sometimes the reverse problem is true. Some students tend to be very theoretical without actually relating any real-life examples or incidents to support the Economic theories and models. 

A good evaluative conclusion is needed for the best essays. 

According to many Economics teachers, there are few standard techniques that usually work for evaluation, and can be applied in various combinations. 

First, Economics students can always write about time lags (delays) in policies, such as the J-curve effect, recognition lags, and implementation lags - and government failure in general. 

Second, students can also always compare between macroeconomic policies. For instance, students could discuss all the policies, then justify which is more suitable for economic growth, and what is the reason for this argument? Always justify your economic argument. 

Third, students can also comment on what will happen to the general price level and the real output level in an economy near or at full employment after demand-management policies happen - demand-pull inflation will result. 

Fourth, students can also do a basic CBA (cost benefit analysis). For instance, for fiscal policy, an increase in government spending may not raise AD that much due to the crowding out effect; supply side liberalisation might have massive problems, for instance during the privatisation and deregulation for British Rail and British Energy there were massive failures, whilst the dismantling of the national minimum wage could potentially create greater income inequality in the UK, and so on. 

Time management/ time allocation is crucial. 

Time management is crucial, not just for Economics at A levels, but also for any other examination you might be taking, beyond just economics examinations. 

Time allocation works on the same principle as mark allocation - if you are getting more marks for the essay, you have to allocate more time to it. 

Be sure to spend some time planning, and then spend most of  your time writing. You will have to do some thinking before you start crafting your essay. 

These are really good and useful ideas which can help you write a really strong macroeconomics paper. 

Hopefully those tips help in crafting an excellent Economics essay; all the best for your examinations, thanks for reading and cheers! 

JC Economics Essays - tips on writing a good macroeconomics essay paper

Discuss monetary policy and fiscal policy’s importance for the USA, in the light of stagflation.

Introduction to Monetary and Fiscal Policy, and Stagflation

Monetary policy means to control the money supply and interest rates to affect aggregate demand (AD) in an economy, according to what is known as demand-management. Fiscal policy is another demand-management policy that deals with manipulating government spending and direct taxes so as to affect AD. Stagflation is defined as a situation of low economic growth with high inflation - both stagnation and inflation. Inflation is defined as a persistent and sustained increase in the general price level (GPL), that poses a problem to society because this increase in GPL is sustained and inordinate. 

This Economics paper discusses the strengths and limitations of monetary and fiscal policy, each in turn, in relation to stagflation in the USA. This paper concludes that both policies are equally important for the US, but they should be used in conjunction with supply side policy. 

Monetary Policy

Monetary policy works, in theory, by two ways. First, according to the classical direct transmissions mechanism, increases in money supply help consumers spend more and firms invest more directly because they have more money and they feel richer. Second, according to the indirect transmissions mechanism, increases in the money supply lower the interest rate, which lowers the cost of borrowing. Since it is cheaper for households to borrow money to consume, and cheaper for firms to borrow money to invest, C and I both increase, and since AD = C + I + G + (X-M), then AD increases, which helps to solve unemployment and which also causes actual economic growth. 

Unemployment is defined simply as the situation where people who are able and willing to work cannot find jobs, or they are unwilling to take up the jobs at the wage rate given to them. Actual economic growth merely refers to increases in real output at the macroeconomic level caused by increases in AD. Hence, it would seem that prima facie, monetary policy can help solve unemployment and lack of growth in the USA, and hence fight stagflation by countering the “stagnation” part.  

Limitations of Monetary Policy

However, monetary policy might suffer from the liquidity trap, which means that beyond a certain point interest rates cannot be lowered further, thus hampering the workings of monetary policy. If interest rates cannot be lowered, the costs of borrowing cannot be reduced. This can be seen in an analysis of the liquidity preference theory put forth by Keynes. 

Fiscal Policy

On the other hand, Keynesian fiscal policy works when governments spend more, for instance on national defence and education, or when they tax less, through lowering income and corporate taxes. Increasing G raises AD directly given that G is one of the components of AD. Lowering direct taxes cause C and I both to increase, and since AD = C + I + G + (X-M), then AD also increases, which helps to solve unemployment and which also causes actual economic growth. Because of the multiplier effect, where the multiplier means that national income increases by a factor more than the initial increase in the injections into the economy, the USA’s AD will increase, promoting and boosting growth. 

In the USA, both C and I are large components of the AD. It can also be argued that G is also a big component given that the USA has a large military. Hence, it would seem that prima facie, fiscal policy can also help solve unemployment and lack of growth in the USA, and thus fight stagflation by countering the “stagnation” part.  

Limitations of Fiscal Policy

However, there are also limitations to fiscal policy, one of which is the famous “crowding out effect”. If governments run a budget deficit, and the USA is arguably famous for running both a budget as well as a trade deficit for many years, then they will have to borrow money. According to the loanable funds theory, this increase in demand for funds by governments will crowd out private consumption and investment, and hence C and I will fall despite G increasing, thus negating the effects of fiscal policy. The US government would be “crowding out” private consumption and investment. 

Supply Side Policies?

Hence, supply side policies that target the aggregate supply (AS) curve, which is affected by the factors of production which are land, labour, capital, and enterprise, could be better for the USA in handling stagflation. Subsidies for energy and other natural resources, increases in the US labour force in both numbers and quality, for instance by increasing American high school education and human capital, and increases in both the quantity and quality of American capital, plus encouraging immigration especially of entrepreneurial foreigners, would help massively. 

These methods and means would shift the AS curve both down and to the right and help solve cost push inflation in the USA. These would be better because they would solve both the “lack of growth” and “high inflation” aspects. 

Conclusion

In conclusion, perhaps both demand side and supply side policies should be used hand in hand, and together they can help solve stagflation because they encourage both potential and actual growth, which is great for the American economy. 

JC Economics Essays: Tutor's Comments - This Macroeconomics essay on monetary policy and fiscal policy, set in the context of the USA, is interesting and provides a suitable level of analysis. There are consistent references to the USA as well as relevant macroeconomic policies, and the underlying economic reasoning behind those policies. There are also well-defined terms that are explained clearly. Note: this particular Economics essay on the USA is related to the earlier Economics question on stagflation: Explain possible causes of stagflation in the USA. However, my usual question applies here: if you were the Economics tutor grading this Economics paper, what areas of improvement would you suggest? Let's look, for example, at the conclusion. While this essay's conclusion makes a good argument and tries to justify the argument made, there is a lack of detailed evaluation which could possibly make it an even better essay. What other areas of improvement for this Economics essay do you observe or notice? Thanks for reading and cheers!

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Discuss whether fiscal policy is the most effective way for Singapore to sustain a successful economy, with low unemployment, low inflation, and economic growth. [25]

Introduction

This paper discusses if fiscal policy is the most effective way for Singapore to sustain a successful economy, where the idea of a “successful economy” is based on attaining the macroeconomic goals of generally low unemployment, low inflation, and economic growth. The means of attaining each of these desirable macroeconomic objectives may sometimes be at odds with other macroeconomic goals because of trade-offs. The most effective way for Singapore to sustain a successful economy is not to depend on one single macroeconomic policy; in particular, due to Singapore’s small and open economy, fiscal policy would go only a little way to help Singapore attain her macroeconomic goals, and a combination of exchange rate policy and supply-side policies would work more effectively instead.

Fiscal Policy Can Be Effective

First and foremost, it can be argued that fiscal policy could theoretically achieve the macroeconomic goals of low unemployment, low inflation, and economic growth. First, low unemployment can be achieved through the use of expansionary fiscal policy. What does expansionary fiscal policy mean? It  means increasing government spending (G) or lowering taxes (T), in times of high unemployment or recession. The discretionary expenditure by the government, for instance on the military or on education, would raise aggregate demand (AD) and drive up employment, due to the multiplier effect, thus resulting in a higher level of employment. AD shifts to the right and causes unemployment to fall. What is unemployment? Unemployment is defined as the situation in which people who are willing and able to work are unable to find employment. Secondly, likewise, stable actual economic growth can attained the same way, because expansionary fiscal policy can ensure that growth is maintained during recessions. Actual growth can be thought of as an increase in real national output. These implications are reflected in the diagram below.

Likewise, fiscal policy can be used to reduce inflation by contracting AD in times of high inflation in order to reduce inflationary pressures and control prices. This is the reverse of expansionary fiscal policy; contractionary fiscal policy can reduce AD in times of inflation. Inflation is defined as a persistent and inordinate increase in the general price level, and if it is demand-pull, contractionary fiscal policy reduces AD accordingly.

Limitations of Fiscal Policy

On the other hand, the way fiscal policy works in reality is different from theory because policymakers may not know exactly where the full employment level is in reality, and time lags, recognition lags, and implementation lags are all real. All the theoretical effects of fiscal policy also assume that the economy has a sufficiently large multiplier for the injections by the government to make large impacts on national income and employment. It also presupposes that the government’s budget does not suffer from massive deficits, and that fiscal policy would not result in the “crowding out effect”, when the government drives up interest rates, negatively affecting the private sector, when it attempts to finance policies through borrowing.

However, more importantly, while the Singapore government’s finances is such that it can potentially deliver a fiscal stimulus without financial or political problems, the fact that Singapore’s national multiplier is small implies that this would not have a great impact on growth or employment. The high level of imports and high proportion of savings in Singapore means that the multiplier effect would be small. Furthermore, fiscal policy seems most effective in reducing cyclical unemployment, associated with falling AD during a recession, and does not go a long way in relieving structural or frictional unemployment; as for inflation fiscal policy helps reduce demand-pull inflation and does not go a long way in alleviating cost-push inflation. Even if fiscal policy could generate employment, it is only in the short run, and unemployment will eventually return if it was actually due to structural unemployment, the mismatch of skills and knowledge in an economy due to structural changes in the methods of production, and hence such reductions in unemployment and the concomitant growth would not be sustainable.

Exchange Rate Policy

In order to sustain a successful economy, arguably a combination of fiscal, monetary and supply-side policies is required instead. In particular, monetary policy – in Singapore’s context, an exchange rate policy – would be able to affect AD during short-term economic fluctuations. It should be noted that interest rates-based monetary policy cannot be applied in Singapore as a result of Singapore’s vulnerability to short-term capital flows and thus an exchange rate policy has to be adopted in Singapore. As Singapore is dependent on imports, low inflation can be sustained instead through a gradual appreciation of the currency, because the imports would look relatively cheap vis-à-vis other countries. However, it should be noted also that this would affect exports negatively, on the flip-side.

On the other hand, depreciation can be used to increase AD, by raising demand for Singapore’s exports, since short-term depreciations of the Singapore dollar could help to raise competitiveness of Singapore’s exports and thus drive growth and generate employment. However, it should again be noted that this would affect inflation, on the flip-side. Hence, trade-offs are inevitable, although exchange rate policy is clearly a viable alternative.

Supply-Side Policies

As for long-term economic growth and stability, supply-side policies are necessary to sustain potential growth. Education and retraining of workers has to be implemented in order to maintain flexibility of labour and allow Singapore to cope with structural changes.

Furthermore, in terms of reducing unemployment, job fairs and placement or matching agencies could also help reduce frictional unemployment. Low domestic inflation can be maintained in the long run through continuous improvements in productivity and the enhancement of cost-competitiveness. The productive capacity of the economy must grow continuously in order for increases in AD to translate into sustained, non-inflationary, real economic growth in Singapore's national output; this increase in LRAS can be encouraged through fiscal spending that has supply-side effects such as investments in infrastructure and education, which would both affect AD and LRAS, leading to economic growth both actual and potential.

Conclusions

In conclusion, the application of fiscal policy is not an effective way for Singapore to sustain a successful economy that achieves its macroeconomic aims, thanks primarily to the small and open nature of the Singapore economy that gives rise to a small multiplier resulting from the high level of leakages due to high savings from CPF and high import contents in inputs. This reduces the impact that fiscal policy can have on the economy because the famous Keynesian multiplier effect is mitigated. The current managed float exchange rate policy that Singapore adopts is more significant in achieving short-term demand-management objectives. In the long-run, the government would sustain a successful economy through a combination of both demand-management and supply-side policies that enhance the long-term productivity and productive capacity of the economy, thus providing potential growth, whilst driving AD through actual growth, which reduces unemployment and spearheads economic development. Hence, fiscal policy is clearly not the most effective way – an economic policy package is better. 

JC Economics Essays: Tutor's Comments - This Economics paper is very well written, full of Economics perspectives, theories, concepts, and arguments. It also has good content on the Singapore economy. It covers the relevant Economics materials required and has an excellent thesis- anti-thesis - synthesis approach, that uses relevant examples that are contextual, real life, and related to the question. The conclusion presented and argued is clear, relevant, and evaluative in nature - do remember the important keyword here is "evaluative". The usual Economics tutor's caveat applies, of course, that naturally to get the highest grades, students must always remember to add Economics diagrams that are well-labelled, properly and carefully explained, and relevant to the context and question. This Economics essay under examination conditions can definitely get the highest marks in an examination. As a friendly, useful tip, do think through this particular Economics paper and reflect on these educational comments presented. Thanks for reading and cheers!

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion? [17]

(b) "Fiscal policy works best to achieve price stability in a small and open economy like Singapore." To what extent do you agree with this assertion?

Inflation brings about some adverse effects to the economy and hence it is important for governments to implement policies to curb inflation. The policies used would differ according to the type of inflation as well as the nature of the economy. This paper discusses if fiscal policy works best to achieve price stability in a small and open economy, and uses Singapore as a case study in particular. First, it should be noted that Singapore is a small and open economy with no natural resources, relying heavily on trade, international capital flows, and foreign direct investments to drive growth. This paper argues that fiscal policy can be used, but its impacts are massively limited given Singapore’s context.

What is fiscal policy?

Fiscal policy refers to the manipulation of government expenditure and taxation to achieve macroeconomic goals. A contractionary fiscal policy could be used to curb inflation. Government expenditure could be reduced or taxation could be increased. With a lower government expenditure, this would translate to a lower aggregate demand (AD) which consists of AD = Consumption + Government expenditure + Investment + Net Exports, or AD = C + I + G + (X-M).

Through the multiplier process, a fall in G would lead to a multiple fall in AD. With a fall in AD, firms would accumulate inventories and this would be a signal to reduce production and output. Firms will reduce their number of workers hence resulting in a fall in output and a rise in unemployment and a fall in national income. With a fall in household incomes, there is a fall in spending and hence through the multiplier process, this would result in a contractionary effect on the economy. Hence, AD would shift to the left as shown, resulting in a fall in the general price level.

With higher taxes such as income taxes, this would reduce the disposable incomes of consumers and hence this would also reduce consumption expenditure, shifting the AD curve to the left, and, hence, also resulting in a fall in the general price level.

Limitations of Fiscal Policy in Singapore’s Context

However, the effectiveness of fiscal policy would depend on the size of the multiplier. In the case of Singapore, the size of the multiplier is small due to the high marginal propensities to save and import. This is firstly due to compulsory savings such as the Central Provident Fund (CPF), and, secondly, a high marginal propensity to import, among other factors. Because Singapore is a small and open economy that relies heavily on foreign trade, there would be high leakages from the economy. Also, it would also be difficult to reduce government expenditure for long-term, major projects. Increasing personal income tax could also result in a disincentive to work and a higher corporate tax could drive businesses away from Singapore.

Other Possible Solutions

On the other hand, the Singapore government can also use contractionary monetary policies (in Singapore’s case, an exchange rate policy), or supply-side policies instead to tackle inflation, rather than just fiscal policy.

Monetary Policy, in Singapore’s Context

Monetary policy refers to the use of interest rates to achieve macroeconomic objectives. In Singapore’s case, her monetary policy is tied to exchange rates, and Singapore uses a form of exchange rate policy because Singapore is dependent on external demand. Therefore, it is more effective to control exports and imports in Singapore’s context. Hence, the exchange rate is used as a tool of monetary policy in Singapore instead.

In Singapore, a managed float system is adopted where the Singapore dollar is allowed to fluctuate within a band against a basket of currencies of her trade partners. The central bank will then intervene in the foreign exchange market to move the exchange rate to a desired level by buying up or selling the Singapore dollar using her foreign reserves, when the currency level approaches the bands. For instance, to curb inflation, the Singapore central bank (the MAS) could buy up the Singapore dollar, resulting in an appreciation of the Singapore dollar. This appreciation of the Singapore dollar would lead to a fall in the price of imports in terms of Singapore dollars. This would lead to a lower cost of living as the price of imported products would be lower. With a lack of natural resources, Singapore depends heavily on imports as inputs to manufacture our exports. Therefore, the fall in the price of imports would lead to a fall in the cost of production.

The lower price of imports would also mean that consumers switch away from local goods and purchase more imports instead, assuming they are substitutes. With an appreciation of the Singapore dollar, this would mean that Singapore’s exports are more expensive in foreign currency terms and hence less price-competitive. Assuming demand for exports to be price-elastic, this would lead to a more than proportionate fall in quantity demanded of exports from Singapore. If the Marshall-Lerner condition holds, this would lead to a fall in net exports and hence a fall in AD. The AD curve would shift to the left, resulting in a fall in the general price level, ceteris paribus.

Limitations of Singapore’s Exchange Rate Policy

However, there are limitations to the effectiveness of Singapore’s exchange rate policy. Intervention in the foreign exchange market to generate an appreciation of the currency would require Singapore to maintain significant reserves. A fall in export earnings through an appreciation of the dollar would also lead to a worsening of the current account.

On the other hand, besides fiscal and monetary policies, the Singapore government could also use supply-side policies to tackle both demand-pull and cost-push inflation. With supply-side policies, the aggregate supply (AS) could be increased through labour retraining and education. By increasing the productivity of workers, in the long run, the cost of production would fall, resulting in a rightward shift of the LRAS curve, leading to a fall in the general price level, ceteris paribus. Cost-push inflation can also be curbed using wage and income policies. For instance, a flexible wage structure would enable wages to be adjusted downwards. In Singapore, the National Wages Council (NWC) recommends the level of wage increases. This could control labour costs and ensure that wage increases do not outstrip productivity increases.

However, supply-side policies would not work effectively if AD continues to increase. Therefore, there is a need to use both contractionary fiscal or monetary policy to reduce AD to reduce the upward pressure on prices. In the long run, supply-side policies are important to curb inflation.

Conclusions

In concluding, it should be mentioned there could also be considerable time lags involved in the implementation of policies. It takes time for policymakers to gather data. There could also be implementation lags due to the time taken to implement suitable policies. Once policies are implemented, there could also be impact lags as it takes time for policies to take effect. Also, due to the characteristics of the Singapore economy, it is arguably better to adopt contractionary monetary policy using exchange rates to curb inflation, as Singapore’s monetary policy is in the form of exchange rate policy. This poses a tricky problem, in that, with a small multiplier in Singapore’s context, the effectiveness of fiscal policy is limited, yet the benefits of supply-side policies might only be reaped in the long run. However, it should also be noted that curbing inflation could lead to a trade-off with another macroeconomic objective of unemployment. By curbing inflation, a fall in national output will occur and that might lead to an increase in unemployment. In the final analysis, fiscal policy is only one of many solutions and its impact is massively limited in Singapore, and as such as plethora of policies should be used instead of one single policy.

JC Economics Essays: Tutor's Comments - This paper was written by an Economics tutor friend of mine, who was my former classmate at the NIE (National Institute of Education), doing PGDE (Postgraduate Diploma in Education, JC, Economics specialisation). For part (a) of this question, see the suggested "model" Economics answer why low inflation is an important macroeconomic aim of the Singapore government.  My usual tutor's comments and questions apply here to this essay: what do you like about this paper, and what have you learnt here? Also, what have you studied that is different or similar to what is written in this Economics paper? Using your knowledge of macroeconomics, what diagram must you use here to explain the words? Remember, although this was written under simulated examination conditions by an Economics tutor, you can always think of other ways to improve it, refine it, and make it better suit the context. Also remember that you should know how and when to apply your Economics concepts and theories, rather than just merely memorising and regurgitating. Be sure to think hard, clearly, and properly when writing your Economics essays, especially during examination conditions. Thanks for reading, and cheers!

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

(a) Explain why low inflation is an important macroeconomic aim of the Singapore government. [8]

Inflation is defined as a sustained and persistent increase in the general price level. There are different possible causes of inflation, such as demand-pull or cost-push inflation. According to economists, a generally low inflation rate of 2 to 3% is optimal for an economy; however, hyperinflation results in adverse internal and external effects on an economy. Therefore, price stability is considered one of the important, major macroeconomic aims of any government, and Singapore is not an exception.

Internal Effects

There are adverse internal effects on an economy due to inflation. First, there could be an increase in “menu costs” as businesses would have to change price lists on their menus and catalogues often when inflation occurs, therefore incurring high transaction costs. Inflation could also result in “shoe-leather costs”, for instance, when firms frequently move money in and out of financial institutions to get the highest possible returns. Hence, high transaction costs could be an internal problem generated by inflation.

Secondly, inflation could also lead to a redistribution of income. Fixed income earners would suffer as the real value of their income would decrease due to inflation. For instance, pensioners or people on fixed wages would suffer due to inflation as their incomes would be able to buy less goods and services. Variable income earners, such as insurance agents or property agents, might not suffer that much because their incomes could increase due to inflation. Simultaneously, inflation would reduce the real value of debt. Hence, debtors would gain while creditors would lose in terms of purchasing power. The amount of the debt repaid by the borrower would have a smaller purchasing power due to inflation. Hence, a redistribution of income in favour of variable wage earners and debtors would occur.

Third, inflation damages investment. This is because the real value of savings will fall and people might be inclined to consume and spend instead of saving. This fall in savings would reduce the amount of funds available for investment, hence increasing borrowing costs (interest rates would rise as a result). Inflation also creates uncertainty as it is difficult for businesses to predict costs and revenues, profits, and losses. This would lead to a fall in investment, which would limit the future economic growth of the economy as well as the productive capacity of the country.

External Effects

When it comes to the foreign sector, inflation also has adverse effects. Inflation could negatively affect the competitiveness of a country’s exports. With higher inflation, a country’s exports would become relatively more expensive compared to goods from other countries. Assuming that the demand for Singapore’s exports is price-elastic, this would mean a larger than proportionate fall in the quantity demanded of exports when Singapore’s exports are priced higher relative to other countries due to the effects of inflation. Furthermore, with a higher relative rate of inflation as compared to other countries, this would mean that domestically-produced goods are relatively more expensive as compared to imports. Consumers would then switch from locally-produced goods to purchasing imports instead, assuming these are close substitutes. Therefore, import expenditure would also increase.

The Balance of Payments (BOP) would therefore be affected. For a small and open economy like Singapore, which depends on exports to drive economic growth, inflation could greatly worsen the country’s current account and thus worsen the BOP, assuming the capital/financial account remains unchanged. As a small economy with no natural resources, Singapore is dependent on imports of raw materials. Therefore, this makes Singapore susceptible to imported inflation, where the rising prices of such imports would lead to a higher cost of production, hence leading to a spiral of higher prices. Due to the high import content of Singapore’s exports, this could lead to a higher price of Singapore’s exports, hence adversely affecting export competitiveness.

Conclusion

In conclusion, the higher the rate of inflation, the greater the adverse effects on the country, be it internal or external effects. There are many different policies that the Singapore government can potentially use to curb inflation, such as fiscal policy, monetary policy, and supply-side policies.

JC Economics Essays: Tutor's Comments - This is part (a) of a two part Economics examination question set by an Economics tutor who was one of my classmates at NIE (National Institute of Education), where we did the PGDE (Postgrad Diploma in Education) for Economics. She kindly allowed me to modify her essay to fit this post. However, despite the fact this Economics essay was written by an Economics tutor, under simulated examination conditions, the question still remains: how can I improve on this work? Now, try a little more "feeling-based" or even "emotion-based" questions - what do I feel is correct about this Economics paper? what do I feel is right about this paper? is it just right in length? does it address the question? and so on. You can get a right gut feel about an Economics paper if you have reviewed many related Economics questions and gotten a feel of what a correct answer will or should look like. On my Economics site here, I have many other related questions - do explore them and see the comments that I have given to my students, other fellow Economics tutors, and to professional Economics paper writers. Thanks for reading and cheers! 

“Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

(b) “Governments should focus primarily on a low and stable rate of inflation.” Discuss. [15]

This essay discusses the macroeconomic aims of governments. This essay argues that, while low inflation is an important macroeconomic aim, governments should also focus equally on other macroeconomic aims such as low unemployment, economic growth, and a stable balance of payments. There are a few types of policies that governments can use to achieve their aims. First, monetary policy is the manipulation of monetary variables such as money supply, interest rate and the exchange rate. Second, fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. However, other than such demand-side policies, governments can also use supply-side policies, which increase the quantity and quality of resources, and improving technology.

Targeting Inflation

First and foremost, clearly there are good reasons for governments to use demand-management or supply-side policies to tackle inflation. This is because a persistent and sustained increase in the general price level hurts fixed-income wage earners and retirees on pensions, as well as consumers of goods and services, who find that their incomes buy fewer goods and services. Inflation reduces the real value of their incomes. In addition, inflation makes it difficult for trading and exchanges within an economy, for instance due to menu costs – the costs of constantly updating prices. Furthermore, inflation makes it difficult for a country to engage in international trade. This is because cost-push inflation reduces the competitiveness of a country that depends on exports, for instance, Singapore, which might suffer from imported inflation. These culminate in a wider socio-political impact: for instance, the hyperinflation in Weimar Germany in 1923 led to socio-political unrest and the collapse of the Weimar government.

Targeting Unemployment

Yet, inflation is not the main goal or the only focus of government policies. Another important goal of government can be to increase employment, or lower unemployment. Unemployment refers to the situation where people able and willing to work are unable to find jobs, and can be structural, demand-deficient, frictional, or seasonal. Being unemployed causes financial hardships for citizens, therefore governments have to ensure that there is job creation for citizens. For example, during 2008-2010, in the depths of the financial crisis and economic recession, there was massive unemployment in many developed economies, especially in the West. Governments can also tackle structural, frictional, and seasonal unemployment by focusing on these problems rather than concentrating their efforts on inflation.

In fact, reducing inflation sometimes leads to increased unemployment. This is because if the inflation comes from demand pressures, policies that lower AD might inadvertently cause demand-deficient unemployment. In a similar vein, focusing on solving unemployment might lead to higher inflation. This is because of government failure – governments do not always know where the AD and AS curves of the economy are, and their actions suffer from time lags and delays, due to imperfect information. If governments use demand side policies such as Keynesian fiscal policy, and the economy is near the full employment level, then an overshooting AD might lead to inflation. Therefore, there is a trade-off between inflation and unemployment.

Targeting Economic Growth

Another goal of government can be to raise economic growth, which leads to a rise of the standards of living in a country, which will generally make citizens better off. Economic growth is measured by percentage increases in real Gross Domestic Product (GDP), which measures the production of an economy. Generally, a higher real GDP per capita means a higher standard of living for the people of that country. There are two aspects to growth: actual growth measures the rate of change in the volume of output produced within the country in a year, and increases mean increased employment, another of the government’s goals. Potential growth is the percentage annual increase in the economy’s capacity to produce. Economic growth can be increased via increasing aggregate demand and increasing aggregate supply. Thus, the government may introduce demand management policies, such as monetary and fiscal policy, as well as supply-side policies in order to aid actual and potential economic growth respectively. Supply-side policies generally lower inflation by shifting LRAS to the right, and therefore it would seem that there is no trade-off.

However, increasing actual economic growth sometimes results in more inflation, because the AD shifts rightwards, and there might be a trade-off to be made between economic growth and a low rate of inflation; higher rates of economic growth are generally accompanied by higher rates of inflation, ceteris paribus.

Targeting the BOP

Another possible macroeconomic aim of government is to maintain a balance of payments (BOP) surplus. Generally, some governments like Singapore run BOP surpluses for most years, where export values exceed import values. For example, Asian countries such as China have been running huge BOP surpluses, vis-à-vis their trading counterparts, mainly western countries; they have been selling more exports than imports they buy, and this provides a net inflow of capital into their countries rather than an outflow.

However, running a current account surplus might lead to demand-pull inflation because exports (X) exceed imports (M), if the economy is already near or at the full employment level. Therefore there is a trade-off decision to be made between a current account surplus and demand-pull inflation.

Conclusions

In conclusion, one disagrees with the statement posed. All the macroeconomic aims of government are important and the government has to maintain a balancing act, considering various trade-offs. Also, governments may have to tackle different problems at different time periods, and thus inflation should not be the primary focus. In the final analysis, governments should use a combination of demand-management and supply-side policies to manage society’s macroeconomic aims, and not merely focus primarily on inflation, because it is one problem among many.

JC Economics Essay - Tutor's Comments: This is the second part to a question on inflation. There are many relevant real life examples in this essay, and this "A" grade essay also tackles a wide range of macroeconomic aims and  policies, which makes it a balanced, sound, and well-written Economics paper. In addition, the conclusion is considered, evaluative, and generally quite interesting to read. Overall, it is very well done! However, the usual question applies: if you were an Economics tutor, what would you do to make this Economics paper better? How would you improve on it? To take a specific case: if you were going to edit or correct the conclusion, what better conclusion, or what alternative conclusion to this Economics essay could you come up with? Think, think, think; thanks for reading and cheers!

What can a government do to increase economic growth? Discuss. [25] (Second Version, Revised)

What can a government do to increase economic growth? Discuss. [25]

Note: This essay has appeared before on my site; this is a second version.

What can a government do to increase economic growth? There are many policies a government can utilise to achieve this macroeconomic objective. Economic growth can be measured by percentage increases in real Gross Domestic Product (GDP), and there are two main aspects – actual and potential growth. Actual growth measures the actual rate of change in the volume of output produced within a given country, within a year. Potential growth is the percentage annual increase in the economy’s potential capacity to produce output. Economic growth can be increased via increasing aggregate demand (AD) and increasing aggregate supply (AS), which target actual growth and potential growth respectively.

Thus, this paper suggests that a government may introduce demand-management policies, such as monetary and fiscal policy, which target actual growth, as well as supply-side policies, which target potential growth, in order to increase economic growth.

Demand-Management Policies

First, a government can use expansionary demand-management policies. Monetary policy is the manipulation of monetary variables such as money supply, interest rates, and even the exchange rate (for example in Singapore’s case) to achieve macroeconomic policy objectives such as steady, sustained economic growth, low and stable inflation, a healthy Balance of Payments (BOP) and full employment. Expansionary monetary policy may be employed to promote economic growth. It involves reducing interest rates, where the reduction of interest rates leads to an increase in consumption spending (C) or firms’ investments (I), thus raising AD, or reducing the external value of the currency which makes a country’s exports look relatively cheaper, thus boosting export sales. A reduction in interest rates will increase consumer spending on consumer durables and may encourage spending at the expense of savings. A lowered interest rate will also encourage investment. As AD is made up of C + I + G + (X-M), (G means government spending and (X-M) means net exports), hence, when both C and I increase, AD shifts to the right. A lower cost of borrowing will increase the incentive for investment as now the returns would be greater. The increase in both consumption expenditure (C) and investment expenditure (I) will cause AD to rise and thus, promote actual growth.

In terms of exchange rate policy, devaluation or depreciation in the exchange rate is often used by governments of open economies that operate a fixed exchange rate system or a managed float system. By devaluing their domestic currency, a country would be more export competitive as their exports will appear to be cheaper relative to other countries. Assuming the Marshall-Lerner condition is satisfied, net exports as well as AD will rise. This, in turn, will cause output and employment to increase.

Fiscal policy refers to the use of government spending and taxation to achieve macroeconomic objectives. To promote economic growth, to boost output and to increase employment, a government can also employ an expansionary fiscal policy. The government can increase government expenditure (G) or reduce taxes (t). An increase in G will cause an increase in aggregate demand directly since AD = C + I + G + (X-M). A reduction in personal income tax would raise consumption as it would further increase the disposable income of households and thus their ability to spend. Moreover, a decrease in corporate tax will increase profits and hence raise the level of investment in the economy. An expansionary fiscal policy thus raises AD, and hence output and employment, and thus promotes actual growth.

Supply-Side Policies

Secondly, and on the other hand, to promote potential growth, the government may adopt supply-side policies. Supply-side policies are designed to shift the AS curve to the right by increasing the quantity and quality of resources via improving the efficiency in product and labour markets, and also by improving the level of technology.

A reduction in labour market rigidities can be carried out via provision of education and training, reduction in direct taxes, cut in unemployment benefits, reforming trade unions, and wages and prices policies. Education and training can raise labour productivity and mobility and thus increase productive potential of the country. Labour productivity or the efficiency of labour is measured by output per hour worked. Reducing personal income tax and corporate tax rates can raise the productive capacity of a country by increasing the quantity and quality of labour and capital available to a country. A lower income tax rate would create incentive for work as now there is as expansion in the amount of disposable income. A lower corporate tax rate would also increase investment as businessmen would be able to keep a larger share of profits. The cut in unemployment benefits will also increase the incentive to work as the unemployed would be disadvantaged if they are not engaged in productive labour. The power of trade unions can also be reduced by the government as this would result in a reduction of wages of labour. This, in turn, will increase employment, labour markets flexibility and efficiency. Thus, if labour costs to employers are reduced, their profits will probably rise. This would encourage and enable more investment and economic growth.

Pro-business policies are designed to promote greater private investments in the country. These include building world-class infrastructure, investing in R&D and tax reforms to ensure greater compatibility with international trends in taxes. The government can also increase AS via the adoption of more pro-competitive policies such as the passing of anti-monopoly laws, removal of barriers to entry to certain regulated industries, eliminating tariffs as well as other restrictions on imports.

Limitations of Policies

However, both aggregate demand and supply side policies have their share of limitations. Reducing interest rates may cause the country’s currency to depreciate as it encourages hot money outflows. A lower exchange rate will make the exports of a country more competitive whereas imports will be dearer. Moreover, if the consumer and business outlook is gloomy, a fall in interest rates may not encourage firms and households to increase borrowing because firms’ profits are falling and consumers may be expecting lower wages and lower year-end bonuses. When the exchange rate is reduced, if the economy is operating near or at full employment, inflation will result. If the demand for exports and imports is price inelastic, net exports and AD will fall. This, in turn, will cause output and employment to fall. Hence, inflation can cancel out the price advantages resulting from a reduction in the external value of the currency.

Fiscal policy may conflict with other macroeconomic goals because if AD increases by too much, economic growth will be achieved at the cost of demand-pull inflation. Also, if the government has to borrow in order to increase spending, it may result in a BOP deficit. The decrease in tax rates may not bring about the desired increase in consumption and investment if households and businesses are pessimistic about future prospects. Moreover, a cut in personal income tax may induce an increase in the amount that they save rather than spend. The full effects of an expansionary fiscal policy may only be felt after a considerable time period. Thus, its effectiveness may not be realised in the short term.

Supply-side policies such as education and training take time to have an effect and are also very costly. Reducing taxes may encourage some people to work fewer hours so that they can enjoy more leisure. Reducing corporate taxes may result in firms paying higher dividends rather than undertaking more investment. Cutting unemployment benefits would also not guarantee that it would reduce unemployment as jobs are not created and neither are their skills upgraded. It increases the urgency of finding a job. However, it does not increase their capability of getting a job.

Conclusions

Thus, economic growth can be achieved via fiscal policy, monetary policy, supply-side policies as well as by pro-business policies. However, it may be achieved at the expense of the limitations discussed and thus, a combination of policies could result in better economic growth rather than the policies being utilised as standalone measures to improve the economy.

JC Economics Essays – Tutor’s Commentary: This Economics essay on economic growth has appeared before on my site; this is a second version (amended, revised, changed version). One major problem with this Economics essay is that the conclusion is still not evaluative enough. Economics tutors usually lament that their students cannot write excellent evaluations after writing many excellent paragraphs before that. How do you write an evaluative paragraph? One tip that many Economics tutors give is that students should be sure to signpost their essays with phrases such as: “to a large extent, in my opinion, it is likely that, one can argue that”, and so on. Now put yourself back into the shoes of your own Economics lecturer in school, here once again. How would a good Economics tutor make this conclusion here better? Also, which diagrams do you need here, and why? A good Economics tutor would point out that AD/AS would be really useful here: my advice for this piece of work would be – always include a relevant Economics diagram and also write an evaluative conclusion to get the highest, best grades.