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Showing posts with label monetary policy. Show all posts
Showing posts with label monetary policy. Show all posts

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. 

Evaluate the view that full employment should be the primary macro-economic objective of governments. [25]


The main macro-economic objectives of governments include ensuring stable prices and low inflation; promoting economic growth, both in terms of actual and potential growth; full employment (or conversely low unemployment), and ensuring a healthy balance of payments (BOP). This paper argues that, on the one hand, while governments should aim for full employment, full employment should not just be their primary macro-economic objective.   

Unemployment is defined as the situation where those who are able and willing to work are not able to get jobs, and full employment involves zero or very low unemployment. (In economic theory, there are many types of unemployment, such as frictional unemployment and demand-deficient unemployment, among other examples.) In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. It can be argued that an unemployment rate of around three percent is close to full employment. However, it is difficult to determine the full employment level precisely. Full employment implies that the economy is operating at its full capacity and there is no output gap or demand-deficient unemployment.

One of the most important reasons that governments target full employment is that because high unemployment has various social and economic costs. First, unemployed citizens will earn little income, enabling little consumption as they do not have much disposable income. Also, the unemployed may become less motivated and less skilled, losing their human capital, which makes it more difficult to find employment in the future, and with a lack of skills, even with economic opportunities, they cannot get jobs. Also, during periods of high unemployment, the government will have to spend more on unemployment benefits and other transfer payments, which may increase government borrowing. Finally, unemployment may exacerbate social problems such as crime, vandalism and social alienation, especially if unemployment is concentrated among young people, for example in Spain during the financial crisis, when youth unemployment rose massively. Therefore, given the social and economic costs of unemployment, there are many benefits to achieving full employment.

To achieve full employment, Keynesian economists will argue that it is necessary to increase AD when the economy is in a recession. For example, this can be achieved by expansionary fiscal or expansionary monetary policy, which means increasing government spending and reducing direct taxes, and increasing money supply and reducing interest rates respectively. These expansionary policies will cause AD to increase and shift to the right, increasing inflation if the economy is at or near the full employment level, but if there is spare capacity or un-utilised resources there should only be a limited increase in inflation. Therefore, there is a strong economic case for aiming for full employment through demand management policies. And the Phillips curve suggests there is a trade-off between inflation. Therefore, achieving full employment may cause the side effect of demand-pull inflation.

On the other hand, not all economists agree that full employment should be the primary objective of governments. They argue that unemployment cannot be reduced below the natural rate of unemployment (or NAIRU, or Non Accelerating Inflation Rate of Unemployment) without causing inflation. Keeping inflation low is also another objective of governments. Also, any reduction in unemployment below the natural rate, due to demand management policies, will just be temporary. This is because the economy will return to the equilibrium level of national output. Therefore, monetarist economists do not believe there is any point in reducing unemployment below the natural rate because the only effect will be to increase inflation. Therefore, according to monetarist economists, attempts to achieve ‘full employment’ of three percent may conflict with other macro-economic objectives, such as higher inflation. For example, many economies have an inflation target as the primary objective of their Central Bank, such as the Federal Reserve, and the economic argument here is that if low inflation is achieved, it will enable economic stability and encourage investment and sustainable growth in the long term. This is preferable to a government using demand-management policies and causing economic boom and bust cycles.

However, another way of aiming for full employment is to use long run supply side policies to try and reduce the natural rate of unemployment. For example, increased training opportunities and better education can upgrade the skills of workers and reduce structural unemployment, which is what initiatives such as SkillsFuture aim to achieve. However, these economic policies will take time and it may not be possible for the government to reduce all unemployment because of imperfect information and bounded rationality on the part of government agents.

And low unemployment can also be achieved through keeping inflation low and maintaining steady and sustainable growth. For example, in the 1990s, both unemployment and inflation fell due to supply side policies and effective demand management. Therefore, this suggests that a low inflation target can also be effective in meeting other objectives. 

In conclusion, overall, low unemployment is a desirable objective, but the economic policies to achieve this need careful examination because of their limitations and alternative macro-economic objectives. Increasing AD will only be effective if there is a recession and spare capacity in the economy. To reduce the natural rate, long run supply side policies will also be needed. In addition, full employment does not necessarily have to be inflationary too, as economic growth is sustainable, we could get close to full employment without inflationary pressures.


JC Economics Essays – This A level economics essay was based on lecture material from a UK economics tutor. It was in response to an adapted question from the A level Economics syllabus. Also, it was written during examination conditions of time pressure. What did you learn from this response, and what economic theories did it tap on to addressing the economics essay question? However, this economics paper is not very strong in the anti-thesis arguments - what could be done better? How could the other side of the story or narrative be made even better? In addition, there were some economics terms which were mentioned - did the writer define the terms? How could the writer have woven the definition of the terms into the sentences? These critical thinking questions should be asked when you read economics essays. 

At JC Economics Essays, we focus on strong economic writing skills, clear and direct explanations of core economic concepts, and the use of relevant, real-world examples to strengthen arguments. And we also strengthen students’ understanding of economics as a subject. We also focus on critical thinking and evaluating economic arguments. Thank you for supporting us, and cheers! 

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


Hi my dear readers, 

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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). 

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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. 


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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. 

A government decides that its economy is currently operating with an unacceptably high level of unemployment. Discuss the view that the government's best option as a method of reducing unemployment is to use discretionary fiscal policy. [15]


Unemployment refers to the situation where people are actively seeking employment but are unable to find work or unwilling to accept the jobs that are currently available. There are many types of unemployment, such as real-wage unemployment, demand-deficient (cyclical) unemployment, structural unemployment, seasonal, and frictional unemployment. In this essay, I will be discussing whether discretionary fiscal policy is the best option to reduce unemployment.

(Insert AD-AS diagram)

In figure 1, the economy was originally below the full employment level at Y1. In order to reduce unemployment, the government can use expansionary fiscal policy to shift AD1 to AD2 so that Y1 will reach Yf which will reach full employment level. Expansionary fiscal policy involves increasing government spending and reducing direct taxes. There are two main types of direct taxes, personal income tax and corporate income tax. When personal income tax is reduced, households will have more disposable income, and thus consumption will increase. Moreover, when corporate income tax is reduced, firms will have more post-tax profits, and thus investments will increase. Since AD = C + I + G + (X-M), AD will increase and shift to the right, hence solving the problem of demand-deficient unemployment.

However, there are limitations to expansionary fiscal policy. Firstly, it can be massively limited by tax insensitivity. Even when corporate taxes are cut, firms may not invest during an economic downturn as they are likely to be pessimistic about the future. Similarly, despite a reduction in personal income taxes, households who are fearful of future pay cuts and retrenchment are more likely to save rather than spend any potential increase in disposable income. Secondly, it may also result in the crowding out effect. Expansionary fiscal policy involves running a higher budget deficit that is probably financed from increased borrowing, especially since increases in government spending are sometimes matched by decreases in the rate of taxes. The demand for loanable funds rises and hence raises interest rates, which in turn deters consumption and investment. Higher interest rates will also cause the currency to appreciate, thereby curbing net exports because exports appear relatively more expensive while imports appear relatively cheaper. The expansionary effects of the budget deficit are therefore negated by a reduction in consumption, investment and net exports. What occurs is therefore merely a diversion of private demand towards public demand, rather than any real net rise in overall demand. Private sector demand is said to be ‘crowded out’ by public demand.

Alternatively, the government can also use expansionary monetary policy to reduce unemployment. Expansionary monetary policy occurs when the central bank increases the money supply. Interest rates will decrease and the cost of borrowing becomes cheaper. Households will find it cheaper to borrow to consume and firms will find it cheaper to borrow to invest. Both consumption and investment will rise. Since AD = C + I + G + (X-M), AD will increase and shift to the right thus reducing demand-deficient unemployment. Assuming the country has an open economy with a freely floating exchange rate system, the decrease in interest rate will cause the currency to depreciate. Currency becomes weaker and there will be hot money outflow. Exports become relatively cheaper while imports become relatively more expensive. Exports will increase while imports will decrease. Since AD = C + I + G + (X-M), AD will increase further and shift to the right further, hence, further reducing unemployment.

However, there are also limitations to expansionary monetary policy. One of the limitations is that consumption and investment are likely to be interest insensitive during a severe economic downturn as firms and households are unlikely to borrow when the economic outlook is very poor. Another limitation is the liquidity trap, which refers to the situation where interest rates are already so low such that the further cuts in interest rates are unlikely to have any impact in stimulating borrowing. At the extreme, when interest rates hit zero, this means that there is no more room for further interest rates cuts and expansionary monetary policy stops being viable.

In conclusion, it is not enough to use expansionary fiscal policy as the only way to reduce unemployment as there are many limitations to the policy. However, it will be best if both expansionary monetary and fiscal policy are used concurrently, so that the strength of one policy can overcome the weakness of the other. For instance, in a mild economic downturn, using monetary policy is arguably better than using fiscal policy as interest insensitivity has not set in and monetary policy is not affected by the crowding out effect. Whereas, in a deep recession, interest insensitivity is high and expansionary monetary policy generally loses its effectiveness. Hence, by using both policies concurrently, it will be able to reduce unemployment more effectively. 

JC Economics Essays - This is a H1 / H2 A levels economics essay paper response with a well developed and interesting answer. This is a very good effort. As good practice, the questions to ask yourself here are - what alternative approaches could you take to answering this economics question? This economics essay was also written under timed conditions, and so is not a complete response. What other arguments could be brought in to help bolster or counter-argue against the case? Think like an economics tutor critiquing and analysing the essay - what could be better improved, and why? 

Special thanks to HH for her kind and useful contribution, and also special thanks to SS for vetting and editing her response. HH has made great improvements in her economics  since 2015. Thanks 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 with relevant examples the best way to sustaining long run economic growth for a small country, such as Singapore, with an aging population. [25]


Economic growth is defined as an increase in the real output of an economy over a period of time. Positive growth means that real output has increased while negative growth means that real output has fallen. Sustaining economic growth means long-run growth, defined as the rate of growth in real output of a country over a extended period of time. For long-run growth to occur, productive growth capacity needs to rise which means that there should be potential growth. Therefore, a sustaining economic growth needs not only actual growth but also potential growth. This essay attempts to explain the impacts on the economic growth due to small country with aging population, various methods to counter these problems and discuss about the best method to achieve a sustaining economic growth.

An aging population in a small country results in two major problems: shrinking labour force and decreasing national income. When there is a shrinking labour force, the burden on the productive workforce in supporting non-productive residents would rise. This means the number of new entrants into the workforce is smaller than the number of people retiring from it. Shrinking size of the workforce results decrease in labour supply. As a factor production, shrinking labour force leads to AS curve to shift left. Therefore, the potential growth slows down. Meanwhile, more retirees have lower income than the time when they work. They feel poorer to consume. Hence, consumption decreases. Shrinking workforce means that firms have more difficulty finding workers, so they might downsize, close down or relocate. They will not want to invest anymore. A decrease in consumption and investment results a decrease in AD as AD = C + I + G + (X – M). Hence, actual growth is reduced. Both AD and AS are likely to decrease due to an aging population; the economy would contract and economic growth would be negative. Hence, there is a need to raise AD and AS. 

[Insert diagram on increase in AD and AS]

From the diagram above, when the AS curve shifts to the right, at full employment level, an increase in AD will not cause demand-pull inflation, hence, a sustaining economic growth is achieved. 

To increase AD, there are several methods, namely, expansionary fiscal policy, expansionary monetary policy and exchange rate policy. 

Expansionary fiscal policy involves raising government spending on infrastructure like transportation, public utilities and telecommunication and on merit goods like education and healthcare. Cutting direct taxes can also have beneficial effects on long run growth. Cutting personal income taxes raises the monetary returns to work thereby increasing the incentive to work harder. Furthermore, more disposable income generates greater savings thereby increasing the funds available for investment. Lastly, cutting corporate taxes raises firm’s post tax profitability and hence their incentive to invest. As AD = C + I + G + (X – M), a increase in C and I and G will then raise AD.

The first limitation of expansionary fiscal policy is that it results in government debt as the government has to borrow to finance its budget to finance a budget deficit. Hence, future welfare is actually being sacrificed for the sake of raising current welfare. Secondly, in a small country with small multiplier (k), expansionary fiscal policy is very costly and not very effective. For instance, Singapore has a high MPS as we have compulsory savings like CPF and also a high MPM due to our dependence on imports. Since k = 1/(MPW) and MPW = MPS + MPT + MPM, Singapore has a high withdrawal and therefore a small multiplier. Thirdly, there is crowding out effect. Expansionary fiscal policy involves running a higher budget deficit that is probably financed from increasing borrowing. The demand for loanable funds rises and hence raising interest rates. This deters consumption (C) and investments (I) and also causes the currency to appreciate, thereby curbing net exports (X – M). As AD = C + I + G + (X – M), AD decreases due to decrease in C, I and (X – M). The expansionary effects of the budget deficits are therefore negated by a reduction in consumption, investments and net exports. Fiscal policy also has limitations like time lags and tax insensitivity. 

Expansionary monetary policy refers to increase money supply by Loanable Funds Theory, hence boost borrowing for consumption and investment. Lowering interest rates also causes hot money outflow, which causes the currency to depreciate because the demand for currency decreases hence boosting net exports. As AD = C + I + G + (X – M), AD is increased due to increase in C and I or (X – M). 

One of the limitations of expansionary monetary policy is the liquidity trap which refers to the situation where interest rates are already so low such that the further cuts in interest rates are unlikely to have any impact in stimulating borrowing. At the extreme, when interest rates hit zero, this means that there is no more room for further interest rates cuts and expansionary monetary policy stops being a viable policy tool. Meanwhile, small country such as Singapore is usually trade dependent. With free capital mobility, and fixed or managed exchange rate, small countries find it hard to implement monetary policy because of the economic trilemma. 

Exchange rate policy can be used to increase AD by depreciation of the currency. When the exchange rate is lowered, consumers find imports more expensive compared with domestic products, hence consume fewer imports. With lower exchange rate, country’s exports are more competitive and the quantity demanded for its exports increases. Hence an increase in net exports results in an increasing AD as AD = C + I + G + (X – M).

However, depreciation of currency will cause imported inflation which is very harmful to import-dependent small countries. These small countries prefer to have fixed or managed exchange rate, hence exchange rate policy may not be used. 

Governments can also use supply-side policies to ensure long-run economic growth. To counter the decreasing AS due to shrinking workforce, governments can choose to increase the quantity of labour or improve the quality of labour. 

The first option is to increase the size of the population with higher birth rates. i.e. pro-natal policies. Tax rebates and subsidies can be given to encourage more births. The labour market can also be regulated to allow for more flexible work arrangements so that parents can better balance work and family commitments. The size of the working population (labour force) can be increased by raising labour force participation. This can be done with policies to encourage non-working women and retirees to re-join the labour force. One way to do so is to increase the retirement age. Policies should also create more flexible and less intensive work arrangements which make jobs less demanding for older workers, hence encouraging them to remain in or to re-join the workforce. 

Besides trying to raise birth rates, a faster and easier way of increasing the size of the labour force is to allow more inflow of foreign labour. i.e. increase immigration. Allowing more inflow of higher skilled foreign labour like doctors, managers and engineers usually does not face that much social and political resistance. Being more educated and generally small in numbers, it is arguably easier for such foreigners to integrate into the local society. To improve the quality of labour force, governments have to increase labour productivity and occupational mobility. This involves two main elements. i.e. education and training. 

However, these supply-side policies have limitations as well. It is very hard to increase birth rate due to the fact that the opportunity cost of having children in terms of the sacrifice in consumption, leisure and career advancement is often too high. Re-joining the workforce is not easy as this cannot prevent people from getting old and retiring early. Immigration creates social tensions and depresses the wages of domestic low skilled labour, thus worsens the country’s income distribution. Education programs typically take many years to implement and their effects are felt only much later. Most of the labours and companies are reluctant to take and set up workshops for training. 

In conclusion, to achieve sustaining economic growth in a small country with aging population, the best way is to use supply-side policies to increase AS which is the root cause of slowing economic growth. Expansionary fiscal policy can be considered as one of the better choices if the small country has a relatively large multiplier hence it will not be so costly to use fiscal policy. Monetary policy is usually not a good choice due to the fact that small country is usually trade dependent and is limited by the economic trilemma. Small country which is usually import dependent will not choose to depreciate its currency. Therefore, supply-side policy is considered as the best way to sustaining economic growth for a small country with an aging population. 

JC Economics Essays - H2 'A' Level standard essay on the Singapore macroeconomy: Economics Tutor's comments. Macroeconomics essays covering the various macroeconomic aims and goals of governments, as well as the demand management policies and supply side policies are important. Often, macroeconomics essay topics will focus on either the goals as a standalone topic, or in conjunction with economic policies. Economics policies often come accompanied with some economics issues or economics news in a preamble, but economic policies can be assessed also on their own theoretical merits. (In a way, that's the beauty of macroeconomics - it can be quite theoretical and while often macro is in the news, and often catches attention with the headlines, in economics examinations macroeconomic policies can be considered theoretically too. The thrill of theory is often too beautiful for economists to ignore.) In any case, the usual economics tutor's questions apply: what are the strengths and what are the weaknesses of this economics paper? Does the student develop her arguments cogently, clearly, and build on theory and real world economic examples? Think about how you could help this student write an even better essay, or how you could help the student to get the highest marks possible. Having said that, this economics essay is very well written for a variety of reasons. The materials presented are wide ranging and very well applied to Singapore's context. There is a lot of economic theory, but also examples as well. The conclusion is nuanced, evaluative, and generally very well written. Note: this essay was written under examination and timed conditions by an actual A level student in a class Economics H2 test (not an economics assignment). Special thanks for AG, SS, and other students for their kind feedback and invaluable contributions and suggestions. 

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

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