How far are a government’s macroeconomic policy decisions affected by the extent to which the economy is open? Discuss. [25]

This economics essay question is adapted from an actual past year H2 economics essay question but modified to focus on economic decision-making

Generally, governments will face trade-offs when making decisions to choose between different macroeconomic policy objectives. How far are a government’s macroeconomic policy decisions affected by the extent to which the economy is open? Discuss. [25]

Governments often face challenging trade-offs when making macroeconomic policies. When they aim to promote high or steady economic growth, low unemployment, low inflation (or stable prices in the economy), and a healthy balance of payments, and sometimes even promote equity, there may be trade-offs, especially when economic policies are used. A trade-off is when one policy objective conflicts with another, and a choice has to be made between the two conflicting objectives - in other words, one cannot have one's cake and eat it too. 

In this paper, there are clearly defined trade-offs that we could discuss to illustrate the arguments. First, there is a trade-off between inflation and unemployment (often taught in schools in the form of the Phillips Curve); second, there is a trade-off between demand-pull inflation and actual economic growth; third, there are trade-offs between promoting economic growth and equity; and finally there may be economic conflicts in dealing with internal as opposed to external stability. 

This paper argues that policy decisions are affected by the extent to which an economy is open, but are also affected by other factors like the size of the economy and the stage of its development, which also need to be considered by governments when making economic policy. 

To achieve these objectives, macroeconomic policies are used - for example, fiscal, monetary, and exchange rate policies, and supply-side policies. Each of these economic policies affects the parameters that governments are trying to address. For instance, expansionary fiscal policy which involves increasing government spending and reducing direct taxes would lead to an increase in AD, which would increase the level of prices in an economy, if AD were near or at the full employment level. 

However, while this would raise inflation, it would reduce demand-deficient unemployment. In fact, expansionary monetary and devaluations of the exchange rate would also likely cause governments a trade-off between promoting economic growth, which tends to lower unemployment, and demand-pull inflation in general. The government of an open economy would need to take into account the fact that choosing exchange rate policy may lead to such a trade-off. 

An open economy would also face issues of internal and external stability - for example, to maintain a healthy balance of payments, for instance, a devaluation or depreciation of the currency would be useful. But this choice would need to take into consideration the fact that economic growth may increase and unemployment may fall, but inflation may rise! Therefore, it is quite clear that governments' policies are limited by the openness of their economy. 

However, openness is only factor. Other factors that have to be seriously considered are the size of the economy and the level of development of the economy. First, taking Singapore as an example - as Singapore is a small and open economy - Many of the demand-management policies, like fiscal and monetary policies, cannot be used. With a small multiplier (k = 1/mpw), and a relatively large external sector, exchange rate policies are more useful. In addition, supply-side policies - which may not address every economic problem we are facing - could be used, sparingly. 

Yet, this is not to say that larger economies can easily use economic policies as well - they would also face limitations to each policy, such as the Keynesian liquidity trap and interest insensitivity for expansionary monetary policy, and the crowding out effect for larger economies which would lead to a countervailing reduction in C and I for a rise in G. 

Development is important as well. Macroeconomic policies to achieve competing objectives do not have to be limited to traditional fiscal, monetary, exchange rate, and supply side policies - with globalisation, protectionist measures, the promotion of free trade through FTAs, and the use of international and regional institutions to promote growth and development also matter. A smaller, less developed country, for instance, when faced with openness could even use a range of policies - Import Substituting Industrialisation (ISI) at first and then maybe Export Oriented Industrialisation (EOI) later on. 

In the final analysis, to a large extent the state of an economy - being open, small or large, or developed - does affect a government’s macro policy decisions. In Singapore's case, policymakers must always take into account the fact that we are small and open, and therefore need to understand what policies we can and should take. At the end of the day, there will always be trade-offs, and a rational decision has to be made. 

JC Economics Essays - Economics editor's comments: A few years ago, I worked out some draft answers and responses with some of my former economics students. This piece was one of the economics essays that we had worked out for the 2012 H2 A level economics paper. However, because it is a draft, there are a few questions that students or readers should ask: How can this be improved? Other than examples from Singapore, what other countries could be used as examples? Always remember to give relevant examples that fit the question's requirements. Also, this paper is very strong in economic theory as my former students were good in theory - but moving beyond economic theory, could there be greater relevance to the question? The evaluation could also be much improved - while it makes the required moves by signposting and giving a few opinions, it could have a lot more detail. All considered, for a 25 mark economics essay, this answer is quite good as a response by a team of students. Thank you for reading and cheers! 

This is an economics blog that deals with economics views, perspectives, and opinions, as well as a range of economics essays aimed at A level economics students and IB students, even undergraduate economics students. There is a wide-range of materials on many economics topics and themes. Thank you for reading and cheers. 

E-Book: Success in Macroeconomics - A Concise Companion to Core Concepts

Hi my dear readers, 

Allow me to introduce the next economics e-book in my series, "Success in Macroeconomics: A Concise Companion to Core Concepts". 

Written by myself (the editor) of the popular, useful, and relevant economics blog, JC Economics Essays, "Success in Macroeconomics" is a clear cut, concise companion to core economic concepts and theories for success in understanding Macroeconomics simply and effectively, which will help students gain an edge to excel academically in their economics examinations. 

Often, students want a clear and simple guide or effective lecture notes that provide the main arguments and explanations of key economics concepts, rather than a long, verbose textbook. They often lament that their school economics notes sometimes give a deluge of information, or an overload of economics case studies, and they are unsure of what the core economics content is, or what economics theories and concepts they should be focusing on for their studies. 

Since 2012, I have heard this common comment over and over (and as well as the reverse comment, incidentally, that some other junior college's economics lecture notes are totally in point form and need students to fill in the blanks, so as to keep them awake during econs lectures - such clever teachers). 

It's a legitimate issue: what learning resource provides a clear and simple economics guide that summarises key concepts and theories needed for the A levels? 

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In this effective yet concise guide to core A level macro-economic theories and concepts, students will learn:  

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How a book helps students is often dependent on how it is used, so let me share some useful suggestions for your consideration. (Don't worry, I have also included a small section in the e-book to remind readers of how best to utilise the resource to reach their fullest potential.)

First, this book is an excellent complementary companion to supplement a traditional economics education, because it focuses students' attention on core macroeconomic issues and useful concepts. 

It can be used for additional reading. Usually, strong economics students already have a good understanding of the subject, so they can just read this book from cover to cover. It will still help them, a lot! 

Secondly, Success in Macroeconomics can be alternatively used effectively as a set of simple yet clear-cut notes for easy memorisation for quick success in economics examinations. 

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With concise yet incisive arguments that are easy to understand, yet pack an impactful, powerful punch, with relevant theories and concepts, this economics book can be used for effective examination preparation. 

If you want to learn A level Macroeconomics more effectively, do click on the link and get this useful guide now. 

In Success in Macroeconomics - A Concise Companion to Core Concepts - you will be receiving: 

Pages: 68 pages including cover pages 

Chapters: 28 chapters 

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Details: Full colour; high resolution; with varied economics diagrams

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JC Economics Essays supports social enterprise! 

This book was kindly contributed by JC Economics Essays to Sallyforth Enterprise, and some proceeds from the book will be given to support and build up less privileged communities. Sallyforth Enterprise is a social enterprise that strongly supports social enterprises, volunteerism, and charity work. Part of the proceeds from this book will be given to charity, to build up less privileged communities, especially in less developed economies and rural communities. In particular, women and children are supported by such funding. Social enterprise can and should be a force for good. 

Thank you for your kind and invaluable support, which will definitely go a long way to greatly supporting the needy and vulnerable.  

JC Economics Essays - Here on this economics learning site, you will find economics education and learning resources for "A" levels, especially H1, H2, H3 A level Economics, and also many economics essays, also including undergraduate, and post-graduate and master's economics essays. Fundamentally, JC Economics Essays is mainly an economics essays blog that shares contributions and economics articles to help students learn economics and how to write excellent essays. Thank you for reading, and cheers. 

Discuss whether governments should rely solely on supply-side policies to achieve its macroeconomic aims. [15]

(Please see previous post on JC Economics Essays on macroeconomic aims and conflicts.)

Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10] 

In the light of these macroeconomic conflicts, discuss whether governments should rely solely on supply-side policies to achieve its macroeconomic aims. [15]

This paper argues that in the light of these conflicts, supply-side policies which focus on shifting the SRAS and LRAS can be used by governments to avoid these macroeconomic conflicts. However, on the other hand, supply-side policies also have limitations and may also result in other macroeconomic conflicts. Hence, it may not necessarily be true that governments should rely solely on supply-side policies.

On the one hand, it can be argued that there are some important reasons why governments should rely solely on supply-side policies.

Firstly, supply-side policies should be used to avoid conflict between achieving full employment and price stability. Since expansionary demand management policies will always lead to inflationary pressures, especially as the economy approaches full employment, supply-side policies should be used instead. If governments focus on increasing productivity of the economy, for example, through subsidising R&D efforts and retraining programmes, the LRAS of the economy will increase  and shift to the right. This allows the economy to achieve both actual and potential growth, while keeping general price levels low. There is thus no conflict between increasing real output and employment and price stability.

Secondly, supply-side policies should be used to avoid conflict between achieving healthy balance of payments and price stability. Since currency depreciation to keep exports competitive may result in imported inflation, supply-side policies should be used to maintain export competitiveness instead. For example, the government may choose to encourage firms to invest in R&D, through the use of tax rebates, in order to use more efficient production techniques. This can cause costs of production to fall and prices of exports can remain competitive. For example, the US government has anti-monopoly laws to encourage more competition. This may give firms more incentive to improve the quality of their products and exports can also be more competitive if their quality is superior to products made in other countries. These would help boost the demand for exports and increase export revenue. The demand for imports might fall if local consumers prefer buying domestic goods. Import expenditure may fall too. This causes the current account and hence the balance of payments to improve. At the same time, because of the increase in R&D across industries, the productive capacity of the economy may increase and LRAS may increase. This helps to keep general price levels low. Hence there is no conflict between achieving a healthy balance of payments and price stability.

However, when (X-M) increases, AD would increase and if the economy is approaching full employment level, there would be inflationary pressures. Thus the extent to which price stability can be achieved depends on the pace of the increase in LRAS. If the LRAS is increasing at the same pace as AD, price stability can be maintained. If AD rises much faster, the conflict with price stability would still arise.

Thirdly, supply-side policies should be used to avoid conflict between achieving healthy balance of payments and economic growth. When expansionary demand management policies to help achieve economic growth, there will be an increase in import expenditure, resulting in a worsening current account and hence balance of payments. However, if supply-side policies are used to attract FDI to promote economic growth instead, the capital and financial account is likely to improve. For example, the government might lower corporate tax rates or offer foreign firms incentives such as tax rebates in order to attract them. They may also reduce the red-tape to make application processes for new foreign businesses more efficient. If there is a net inflow of FDI, the capital and financial account will improve and this may offset the worsening current account. Hence, balance of payments may improve. However, it should be noted that, in the long run, the current account of the balance of payments may worsen even more as profits from foreign firms are sent back to their home country.

On the other hand, supply-side policies also do have their limitations and hence governments should not rely solely on them. While it is true that supply-side policies can help to some extent to avoid some of the conflicts in achieving macroeconomic aims, they also have their shortcomings. For example, supply-side policies like encouraging firms to invest in R&D can not only be costly, they may take a long time before any effects are seen, and even then, the success of these policies is very uncertain. Subsidising R&D can cause a strain on the government budget, depending on how substantial the subsidies are. Since R&D efforts tend to be costly, firms would probably only be incentivised to invest in R&D if the subsidies are significant. This is in contrast with demand management policies like MP where the government need not tap on budget reserves. Furthermore, there is no guarantee that R&D efforts would lead to increase efficiency. The effects of research can be uncertain and often takes many years before a breakthrough brought about by technology or discovery of new methods can be seen. Hence, it may be wise to also make use of some demand-management policies which may have more certain and immediate effects. This is especially so if the economy is facing a recession and needs to get out of it quickly. If there is severe demand-pull inflation, the government may need to take quick action to reduce AD in order to reduce general price levels. Using supply-side policies to shift the LRAS may take too long, especially if the policies are targeted at increasing productivity through technology, training and R&D. If AD is in the Classical range and there is demand-pull inflation, shifting SRAS downward, for instance by subsiding costs, may not help either, since there is no more spare capacity to increase output even if costs are reduced. The inflation will thus not be alleviated. Thus it would not be wise to solely rely on supply-side policies.

It would be better to argue that both demand management and supply-side policies can be used together. While expansionary fiscal or monetary policies can be used to stimulate AD and growth, supply-side policies can be used to ensure that LRAS can continue to increase so that when the economy recovers from the recession, the general price levels may still be kept relatively low.

Furthermore, when using supply-side policies, there may also be conflicts in the achievement of macroeconomic aims which arise and hence governments should not rely solely on them. When supply-side policies such as investment in more R&D and technology are used, there are also other conflicts which may arise. Hence it may not be wise to solely depend on supply-side policies as they also bring about unintended consequences. For example, in Singapore, with the government’s push to increase productivity through encouraging more firms to use technology, for example through the Productivity and Innovation Credit Scheme (PIC), not all workers will be able to adapt. Some workers without the relevant skills may find themselves out of a job. Also, with the rise in the use of technology, some workers may be replaced by machines. If these workers do not have other skills which are relevant to the changing needs of employers, they will face structural unemployment. Hence, pursuing actual and potential growth quickly via supply-side policies may result in a conflict with achieving low unemployment.

However, this does not mean that supply-side policies should not be used. Instead, there can be other policies put in place to mitigate these unintended consequences. For example, governments can put in place retraining programmes and provide subsidies to firms to encourage them to upgrade the skills of their employees.

In the final analysis, in the light of these conflicts, whether or not governments should rely solely on supply-side policies depends on the macroeconomic aims the government is trying to pursue; the prevailing economic conditions; and the nature of the economy. First, if the government wants to achieve sustainable economic growth, it would be wise not to depend only on supply-side policies. This is because supply side policies tend to help achieve potential growth but can be slow in achieving actual growth. If both demand management and supply-side policies are used, actual and potential growth can be achieved together. This helps ensure sustainable economic growth. Some conflicts between macro-economic aims can be avoided when using supply-side policies as discussed above. Hence, supply-side policies alone may be adopted where appropriate. However, it is important to note that supply-side policies may also result in other problems and hence in those instances, relying solely on supply-side policies may not be appropriate. Second, if the economy is facing cost-push inflation, the government may want to rely solely on supply-side policies to increase SRAS in order to reduce general price levels. Using demand management policies in such a situation may be inappropriate because while general price levels may fall with contractionary fiscal or monetary policies, there will be a conflict with growth as real output falls. If the economy is facing a severe recession, the economy is likely to be operating rather far away from the full employment level. This means that expansionary demand management policies are unlikely to cause a conflict with price stability. Thus, the best measure may be to use expansionary fiscal or monetary policies which has quicker and more certain effects than supply-side policies. Third, if the economy has a small multiplier, the effectiveness of demand-management policies may be limited. For example, in Singapore, due to high MPM and MPS, the multiplier is small, any increase in government spending would lead to a small increase in real national income. Thus the government tends to focus on the use of supply-side policies, and depend on external demand instead. However, this does not mean that the Singapore government relies solely on the use of supply-side policies. A mix of both demand management and supply-side policies are considered too.

JC Economics Essays: Once again, special thanks to W for her kind contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions and was planned and argued carefully. An economics student who delivers this level of content and argumentation within the examination conditions would easily and likely score a grade A. 

This economics paper discusses the pros and cons of relying on supply side policy, and tackles the question through a few important angles. What are these perspectives? Do test yourself to see if you understand the various arguments made and the perspectives through which the arguments were made. 

There are also, of course, many good points to learn from this paper. First, it directly addresses the question. It also has many strong arguments followed up with examples, which suggests that the candidate has learnt her economics material well. It makes many good analytical points by logical, reasonable argument, and does not reply on assertions and stating points. Remember to always argue a point or make a point in your essays. This economics essay is also very well written and crafted, and is clear cut, accurate, and to the point; however, on the other hand, perhaps some economics diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10]

This paper explains possible conflicts in the achievement of macroeconomic aims. When governments utilise demand management policies, there may be conflicts or trade offs amongst those goals. The most common conflict is the conflict between achieving full employment and price stability. There are also other conflicts such as those between achieving internal and external stability. This paper explains various possible conflicts in the achievement of macroeconomic aims when governments use demand management policies, such as fiscal and monetary policies.

First, demand management policies such as expansionary fiscal and monetary policies are often used to achieve full employment. For example, when there is an increase in government spending as governments spend on building infrastructure to boost economic activity, there is an increase in AD and hence an increase in real national income. As more resources are employed, the economy operates closer to full employment. However, there is a trade off as the economy will also face demand pull inflation as demand rises and bids up costs of factors of production. Demand pull inflation is defined as a persistent, sustained, and inordinate increase in the general price level due to increases in AD near or at the full employment level. Many fast developing countries like China with fast-rising AD and increasingly less spare capacity will likely face this conflict. On the other hand, contractionary fiscal and monetary policies can be used to reduce demand pull inflation, but this in turn conflicts with economic growth and employment, thus posing yet another trade off.

Second, as expansionary demand management policies are used to achieve economic growth, the balance of payments may worsen. For example, if interest rates are lowered to reduce costs of borrowing, households will borrow more to spend on consumer durables and firms may also invest more as expected net profitability increases. This leads to an increase in AD and real national income. However, the demand for imports and hence import expenditure increases too. This is because many consumer durables may be imported and firms may also import raw materials and machineries for their investments. Assuming that export revenue does not rise as quickly, the balance of trade worsens. Ceteris paribus, the current account and hence balance of payments worsens. Thus countries like Singapore with high MPM will be more likely to suffer from this conflict. This is because the increase in import expenditure is larger when national income increases. Vice versa, contractionary demand management policies to correct or address a balance of trade deficit can conflict with economic growth and employment.

If a country wants to achieve economic growth, it may choose to use expansionary monetary policy to increase AD. When interest rates are lowered, the cost of borrowing is lowered. This causes households to borrow more to purchase consumer durables such as televisions and refrigerators. This causes C to increase. Firms will also find that expected profitability of investment increases as costs of borrowing falls, given that economic conditions remain the same and returns on investments do not change. Thus I increases. Since C and I are components of AD, AD will increase, resulting in an increase in real national output and hence actual economic growth. However, in an open economy, the lower interest rates would likely result in capital outflow. If there is massive capital outflow as funds move to countries which offer higher interest rates, the capital and financial account will worsen. This leads to a worsening balance of payments. Hence, the desire to achieve actual growth via expansionary monetary policy can conflict with the desire to achieve a healthy balance of payments.

Furthermore, there is also a conflict between achieving a healthy balance of payments and price stability. If a country is facing a deficit in its current account and balance of payments, it may make use of demand management policies to improve the current account. For example, an expenditure switching policy of currency depreciation would help decrease the price of exports in terms of foreign currency and increase the price of imports in terms of domestic currency. As export competitiveness increases, the demand for exports and hence export revenue increases. At the same time as imports become more expensive, consumers switch to purchasing domestic goods instead. Assuming that Marshall Lerner condition holds, when IPEDx + PEDmI >1, balance of trade improves. Since X-M increases, AD increases and general price levels increase too.  However, if the economy is import-reliant, the depreciation of the currency could lead to imported inflation as the prices of imported raw materials increase. This causes the SRAS to fall and the general price level to increase. Thus a healthy balance of payments is achieved at the expense of price stability. An example of this would be Singapore, where imported inflation is likely to happen if the currency depreciates. This explains why Singapore is reluctant to depreciate its currency even when BOT is worsening.

In conclusion, there is a need to consider the use of supply side policies in some cases to minimise these trade-offs, conflicts in macroeconomic goals. Alternatively, a suitable mix of government policies may be considered to mitigate possible unintended consequences which may arise.

JC Economics Essays: Special thanks to W for her contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions. 

This paper explains the possible conflicts amongst macroeconomic goals of governments, and is basically about explaining the various trade offs and conflicts: inflation versus economic growth, internal versus external stability, and other such conflicts. 

There are many good points to learn from this paper. First, it directly addresses the question. It also has many definitions and examples, which suggests that the candidate has learnt her economics material well. The essay is also very well written, and is clear cut, accurate, and to the point; however, perhaps some diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

Many economists argue that achieving a low and stable rate of inflation is the single most important macroeconomic objective for governments. Discuss the view that a government’s fiscal and monetary policies should be focused primarily on achieving a low and stable rate of inflation. [15]

A government’s fiscal and monetary policies can take on two main forms; expansionary and contractionary demand-management policies. Fiscal policy refers to the manipulation of government spending and direct taxes, while monetary policy refers to central banks manipulating money supply and thus interest rates, to affect the AD of an economy. To argue that these demand management policies should lean more towards keeping inflation low and stable essentially implies that these policies must necessarily be contractionary. A low and stable rate of inflation translates, for most governments of developing countries, to a rate of about 2-3%. This paper argues that, while on the one hand one could agree that in light of the numerous benefits of low inflation, the monetary and fiscal policies of a government should be biased to achieving this end, on the other hand it is imperative to consider the other macroeconomic goals – low unemployment, high economic growth, and a stable balance of payments – a country may also wish to pursue, and in the light of these, may want to reconsider the focus of these demand-management policies.

First and foremost, a government’s decision to focus fiscal and monetary policies on achieving low inflation has many benefits. Primarily, a low inflation rate protects the real income of the majority in the country. Secondly, affordable prices serve to cater to both low and high income groups who can satisfy their basic needs or save, and therefore does not widen the income gap. A low inflation rate also encourages savings at the expense of consumption, since in a high-inflationary environment, the general price level rises rapidly, which implies that rapidly rising prices – especially those of big-ticket items such as houses or cars – mean that consumers will try to make purchases sooner rather than later, before they become even more expensive. High inflation then creates a disincentive to save. Savings together with the atmosphere of stability, confidence and security that low inflation provides promotes investment, which in turn promotes capital accumulation, and hence long run economic growth. 

It can thus be argued that another argument for low inflation is that low and stable inflation in fact stimulates economic growth. This would translate to an increase in productive capacity with the building of more factories, hence contributing to the potential growth of the economy, as well as an increase in employment as firms seek out more workers to increase production, as labour is a derived demand. Wages also increase as firms seek to improve productivity which would increase the real income of the masses and hence improve material standards of living. Increase in real income would in turn translate to higher levels of consumption and investments that would, through the multiplier process, cause an additional increase in the national income of the country, more than the initial injection amount. 

However, despite these benefits of inflation, given a country’s current economic situation, there may be other more pressing macroeconomic objectives that need to be met that conflict directly with the objective of low inflation rates. Some pressing problems a country may face include firstly low economic growth and material standard of living; a recession, or perhaps the desire of a developing country, one such as China and India, to catch up with the more advanced economies of the world. It is thus not wise in such situations to focus contractionary monetary and fiscal policies on achieving low inflation as it is relatively less important to them at their level of development at the present time. Another problem countries, such as Indonesia and the Philippines, may face is massive unemployment, the situation where people are willing and able to work but are unable to find employment at current prevailing wage rates, and uncontrollable birth rates that could lead to social upheaval, political turbulence, and overall unrest, especially if the government chooses not to address the problems at hand. 

Yet another problem faced by a country would be having a huge current account surplus, where exports far exceed imports. Examples of such countries include Japan and China who have been registering record current account surpluses, to the extent that they have proven inflationary, and are under pressure to increase their imports. There is hence a conflict between inflation and maintaining this surplus or giving in to the demands of the rest of the world that governments need to choose between. These conflicts between the other macroeconomic goals of a country and inflation need to be thoroughly analysed first before a conclusive decision can be made.

In conclusion, when it comes to competing macroeconomic aims, there is never an easy answer of whether fiscal and monetary policies should be targeted at achieving low inflation or some other macroeconomic goal, given that there are real and pressing trade offs. Each macroeconomic aim is important in its own way and deserves a policy response from the government. Inflation in the short run is inevitable and a government must carefully consider reducing or ameliorating high inflation. For a country facing a recession, with low growth and unemployment, as well as countries that need to catch up with the more developed economies of the world, focusing monetary and fiscal policies on expansionary intent would be more beneficial. In the light of the problems of slow growth and inflation, a government would be better off choosing to ignore the lesser of the two evils, in this case inflation. Slow economic growth brings with it, not only unemployment but lower standards of living that could translate to social and political turbulences that could impede, not only the efforts of the government in bringing social, political and economic stability to the country, but ultimately hinders the progress of the nation as a whole. Inflation thus becomes a necessary evil by-product of pursuing expansionary monetary and fiscal policies that counter the greater evil of a recession and its dire consequences to the country. 

JC Economics Essays - H2 A level economics essay about the macroeconomic goals of governments (part (a) was focused on the causes of inflation) with economics tutors' comments. This economics essay is about the macroeconomic aims and goals of governments and is more broad-based, exploratory, and wide ranging than an "explain" question. Do remember to always take note of the command word and the keywords in addressing the economics question. There can be several ways of approaching this economics topic, but this essay approach seems to be the best and most effective, most productive way to discussing the topic at hand. For improvement: it could bring in more economics concepts, such as Tinbergen's Principle, or could bring in the idea of addressing efficiency versus equity. However, overall, this economics essay is a well written piece of work that adequately addresses the requirements of the question. Remember: always answer the question posed. Do also think of ways in which you would better answer this economics question, or how you would make improvements to this particular method of answering. What would an alternative approach be? How effective is this method of writing? Thank you for reading and all the best for your economics revision. 

Discuss whether a reduction in unemployment improves the standard of living of a country. [13]

Material standard of living (SOL) refers to the amount of goods and services one can enjoy in their narrow measurable material form. In its non-material form, non material SOL includes leisure, having enough rest, healthcare benefits and personal welfare. 

Most of the time, real Gross National Product (GNP) is the closest form of measurement of material SOL. Real GNP is the total output produced regardless of geographical boundaries, so long as it is owned by a citizen of the country, over a period of one year, after taking into account the inflation rate of the country. This is because real GNP takes into account not only the inflation rate, but also population growth and only includes factors of production by citizens only. 

A reduction in unemployment will increase total national income (NY) since more people are currently working. This increase in NY can be an increase in GNP as well since more workers may produce more products. Also, the increase in NY can result in higher consumption, pushing up aggregate demand (AD = C + I + G + X - M) as people see that the economy is doing well and consume more. Furthermore, the newly-employed will now have an income to spend. These will improve their material standard of living as they satisfy more of their material needs or wants.

Also, as one becomes employed, they will be relieved of the emotional stress and psychological burden of being jobless or unable to provide for their family. This way, a reduction in unemployment will improve the emotional well-being of the newly-employed, leading to improvement in non-material standard of living. 

Furthermore, a reduction in unemployment rate can bring down the crime rates as well. Given that more people are employed, there will be less people going against the law such as robbing others as a result of desperation. This will also improve the non-material aspect of standard of living. 

However, it is not always true that a reduction in unemployment will lead to a better standard of living.

If more people are employed to work for long hours, there will be a fall in their welfare as they may be overworked and have a higher tendency to fall sick due to the lack of rest. The workers’ health is at stake and they might have to pay for their own medical bills, resulting in a fall in both the material and non-material aspect of standard of living.

Also, a reduction in unemployment rate may actually mean that both the parents are working instead of one. This might be bad for the children as they might be left at home on their own. The lack of communication and bonding time within the family might cause the children to feel neglected and the family ties may not be as strong. Parents might not understand the needs or wants of their children well and this may lead to misunderstandings and disputes. Therefore, this reduction of unemployment may lead to a fall in non-material standard of living.

Moreover, more people working together in a small area might result in poor working conditions. If more people are working under a worse off condition then they are unhappy during their time working. This will also lead to a fall in the non-material standard of living.

Furthermore, an increase in employment rate might not necessarily means an increase in the amount of goods and services produce due to the law of diminishing marginal returns. It states that the last person added to the production may produce lesser than the previous and there will be a point where increasing the quantity of labour will not help to increase production. Given that the increase in income led to an increase in AD, it might cause demand-pull inflation as there is too much money chasing too few goods. Therefore, there might not be an increase in the material standard of living as well. 

Additionally, if the reduction of unemployment rate leads to higher level of production that causes higher levels of pollution or higher rates of environment degradation, then the non-material standard of living did not improve since we are exposed to more pollution that may affect our health. 

All in all, a reduction in unemployment is a good thing and it is also one of the macro-economic aims of the government. However, firms should take care of the welfare of their workers and ensure that the higher level of production does not cause any harm to the environment or people. The workers should have a work-life balance, leaving enough time for leisure and family as well. 

JC ECONOMICS ESSAYS: Economics tutor's comments - Note: This economics essay 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. This economics essay is slightly different from the others in that this was a reflective attempted piece by a former student who is now an undergraduate, whereas the other essays on this site were written by economics tutors or students studying Economics at the point in time their respective essays were written. Some light essay editing was undertaken by me, the editor, because this essay was written free style. However, the main thrust of the essay and its original flavour are the same. This essay shows that there are a variety of equally valid approaches of tackling Economics essay questions, and that essay skills and techniques are very important and transferable skills, that last the test of time. However, critical thinking and reflection still applies - what is good about the essay's introduction, body, and conclusion? What can I learn from this essay, written by a former student who achieved a grade A? What can I do better, or how can I reach this standard or exceed it? Thanks for reading, and cheers. 

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

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

(b) Discuss if a low and stable rate of unemployment is what governments should only aim for. [15]

Should governments only aim for a low and stable rate of unemployment? First, what is unemployment? First, this paper defines unemployment. A low and stable rate of unemployment refers to a situation where workers who are willing and able to work are largely able to find employment, in contradistinction to a situation of unemployment. This is indeed one of the macroeconomic objectives of governments. However, governments also have other objectives, such as sustained economic growth, price stability, and a healthy Balance of Payments (BOP). This essay argues whether a low and stable rate of unemployment is the only macroeconomic objective that governments should aim for would depend on the economic conditions and status of the economy.

Increases in AD in a Developing Economy

This paper argues that a low and stable rate of unemployment could be the primary aim if the economy is a developing economy, as it would achieve other macroeconomic objectives relevant to developing economies. By assumption, a developing economy can be characterised by having spare capacity and massive unemployment. A developing economy is characterised this way as there is more spare capacity in such economies because they have huge populations. A low and stable rate of unemployment means more employed workers being able to spend more on consumption (C). Firms can take this steady increase in C as an indication for more investment (I). The rise in C, I and (X – M) would lead to a rise of the AD of the economy, and the economy would reach full employment eventually.

Other macroeconomic objectives can be achieved because of a focus on low unemployment. The General Price Level (GPL) can be considered virtually unchanged due to the spare capacity of the developing economy. Inflation is defined as a persistent and sustained increase in the general price level, and while inflation can be dangerous, mild inflation can be seen as useful as it stimulates economic growth and production. Production would increase, leading to more workers being employed. This would trigger an increase in the AD due to the probable increase in the components of C, I, G and (X – M). As a result, the economy is able to achieve sustained economic growth. This leads to governments being able to collect a steady stream of taxes from the economy. The tax revenue collected can potentially be used for basic needs of housing, healthcare, and education, among other things. This helps to increase the standard of living for the economy. Hence, all these effects collectively would lead to full employment, with stable inflation, and economic growth, which are all good objectives for the developing economy, but if pursued to its logical end, inflation could result once the developing economy enters developed status or if it hits the full employment level.

Increases in AD in a Developed Economy

However, a low and stable rate of unemployment should not be what governments should only aim for if the economy is a developed economy. A developed economy can be described as having its AD near or at the full employment level (Yf); developed economies are characterised as such as there is less spare capacity there, because, due to their low and stable rate of unemployment, developed economies are usually operating near to full employment (Yf) or even at full employment. The effects of a low and stable rate of unemployment would translate into an increase in the AD. Assuming an unchanged AS, an increase in the AD is undesirable. This is because the increase of AD results in an increase in the GPL. In such economies, such inflation would cause overheating in the economy as the GPL increases while real national output remains the same. An increase of the AD beyond a certain point would result in hyperinflation affecting the objective of price stability. Hyperinflation would cause increases in the prices of products, leading to the loss of the value of money.

Hyperinflation would also affect the aim of having a satisfactory balance of payments (BOP), for instance, a BOP surplus where there are more exports than imports. With higher prices, the export price competitiveness of the economy would fall as domestic goods are now more expensive relative to other economies. There would also be an increase in the amount of imports (M) as foreign goods are now cheaper. This would lead to more imports than exports. Though one can argue that the fall in the net exports (X – M) could be a corrective mechanism to bring AD down, it would not be applicable as developed economies tend to import more than export, generally due to their high incomes and wealth. Hence, if a low and stable rate of unemployment is the only aim of such economies, it would compromise other macroeconomic aims of price stability and having a healthy BOP. Therefore, a low and stable rate of unemployment should not be the only macroeconomic objective that governments of such economies should aim for.

Conclusions

In conclusion, whether a low and stable rate of unemployment should be what governments should only aim for would depend on the conditions of the economy in question, with developing countries possibly focusing more on employment. There are also other macroeconomic objectives that governments should also aim for, such as low inflation, economic growth, and a healthy BOP, and there seem to be trade-offs when focusing solely on one macroeconomic goal. A delicate balancing act should and must be maintained. In the final analysis, governments should aim for a set of macroeconomic aims rather than only having one aim. 

Junior College (JC) Economics Essays: Tutor's Comments - This Economics paper is part (b) of a two part question on unemployment in Singapore. It was written and contributed by TJL, an Economics teacher I knew from PGDE (JC) and National Institute of Education (NIE) times, and who is an excellent, motivated, and hardworking Economics tutor. However, having said that, as part of Socratic questioning and learning for the benefit of students - TEACHER'S QUESTION: putting yourself into the shoes of an Economics tutor, how would you improve on this essay? Reflect on the essay's structure, and reflect on how you would make this essay better, stronger, tighter, and more evaluative in the conclusion. Think about it. Think about it some more. Do remember to read Economics essays with a critical, probing, and intellectual mind, because you want to think of ways of how you can learn, study, and revise Economics, as well as improve on your essay writing skills and approaches to Economics examinations. 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!