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Unit 10 · Government macroeconomic intervention
Unit 10 essay review checklist
Every piece of knowledge, every analysis chain and every evaluation point that the 22 Unit 10 Paper 4 essay questions in the bank (2016–2026) ask for. Tick an item only when you can explain it from memory, out loud or on paper, without looking.
清单条目使用英文，也就是考试作答所用的语言。标题、按钮和说明仍为中文。
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Cover the page and try each item out loud or on paper. Tick it only when you got it right without looking.
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10.1 Government macroeconomic policy objectives 10.2 Links between macroeconomic problems and their interrelatedness 10.3 Effectiveness of policy options to meet all macroeconomic objectives ★ Evaluation toolkit and exam technique
10.1 Government macroeconomic policy objectivesChapter 45 notes → · No essay in the bank is set on this section ·
Builds on: Unit 5 · 5.1 Government macroeconomic policy objectives
No essay in the bank is set on 10.1 directly. You still need it: every Unit 10 essay judges a policy against these objectives, several ask about 'the macroeconomic aims' as a set, and the A Level list is longer than the AS one.
Knowledge and understanding (AO1) Analysis: the chains (AO2)
10.2 Links between macroeconomic problems and their interrelatednessChapter 46 notes → · 1 essays set on this section ·
Builds on: Unit 9 · 9.3 Employment and unemployment · Unit 4 · 4.5 Unemployment · Unit 4 · 4.6 Price stability · Unit 6 · 6.2 Protectionism · Unit 6 · 6.4 Exchange rates
Only one essay is filed here, on how a tariff and a limit on immigration affect inflation. The Phillips curve and the links between objectives are used again in many 10.3 essays, which are cited here too.
The 1 past-paper questions on this section
9708/44/O/N/25 A country imposes a tariff of 20% on imported goods and restricts the number of immigrants entering the country. Evaluate, with the aid of a diagram(s), the impact of these two policies on the rate of inflation in that country. [20] Knowledge and understanding (AO1) Analysis: the chains (AO2)
I can explain the chain from a rise in a country's inflation rate above its trading partners' to the demand for and supply of its currency and its exchange rate. I can explain the chain from a fall in the exchange rate to import prices, firms' costs and the internal value of money. I can explain the chain from inflation above trading partners' to the current account, and how a growing current account surplus can raise inflation until the currency appreciates. I can explain why actual growth brings rising inflationary pressure as the economy nears full employment, while potential growth can lower inflation. I can explain why growth can worsen the current account in the short run, and how export-led growth and growth in productive capacity can improve it. I can explain, with the traditional Phillips curve, how expansionary fiscal or monetary policy lowers unemployment at the cost of higher inflation, and why that cost rises as unemployment falls. Show the diagram I can explain what shifts the Phillips curve outwards or inwards, including higher expected inflation, a less skilled workforce and improvements on the supply side. I can explain, with the expectations-augmented Phillips curve, the chain from a rise in AD that pushes unemployment below the natural rate to unemployment back at the natural rate with a higher rate of inflation. Show the diagram Unemployment
Inflation SRPC(πᵉ=2%) SRPC(πᵉ=5%) LRPC A B C NRU Expectations-Augmented Phillips Curve · Open the diagram sheet I can explain why repeated attempts to hold unemployment below the natural rate make inflation accelerate rather than settle at a higher rate. I can explain how a wage-price spiral develops once workers build expected inflation into their wage claims, shown as an upward shift of the short-run Phillips curve and a leftward shift of SRAS. Show the diagrams I can explain, with the expectations-augmented Phillips curve, why reducing inflation by cutting AD raises unemployment above the natural rate until expected inflation falls. Show the diagram Unemployment
Inflation SRPC(πᵉ=2%) SRPC(πᵉ=5%) LRPC A B C NRU Expectations-Augmented Phillips Curve · Open the diagram sheet I can explain, with a tariff diagram, how a tariff raises the price consumers pay for imported goods and lets domestic producers of substitutes raise their prices. Show the diagram I can explain, with an AD/AS diagram, the chain from a tariff on imported raw materials and components to firms' costs, SRAS and cost-push inflation. Show the diagram I can explain how a tariff can also cause demand-pull inflation, as spending switches from imports to domestic output. I can explain, with a labour market diagram and an AD/AS diagram, the chain from restricting immigration to the supply of labour, wage rates, firms' costs and cost-push inflation. Show the diagrams I can explain how restricting immigration also reduces AD and productive capacity, and what each of these does to inflation. Evaluation (AO3)
I can judge whether a tariff causes a one-off rise in the price level or a lasting rise in the rate of inflation, depending on whether it changes inflation expectations and wage claims. I can judge how much a tariff raises prices, using the share of imports in consumer spending and in firms' costs, the price elasticity of supply of domestic substitutes, retaliation and any appreciation of the currency. I can judge how far restricting immigration raises wages, using whether domestic workers are willing and able to do the jobs migrants did, and how mobile labour is between industries and regions. I can judge whether restricting immigration raises or lowers inflation overall, weighing lower AD against higher labour costs and lower productive capacity, and how close the economy is to full employment. I can judge whether a tariff or a limit on immigration is likely to have the larger effect on inflation, and whether the answer differs between the short run and the long run. I can use the record of the Phillips curve to evaluate it: why the trade-off broke down in the 1970s, and why low unemployment came with low inflation in the 2000s, including weaker trade unions and globalisation. I can judge the Keynesian and the monetarist views of whether there is a long-run trade-off between unemployment and inflation, including how quickly expectations adjust (adaptive or rational expectations). I can judge whether the internal and external values of money always move together, using a fixed exchange rate and inflation that is still below trading partners' as counter-examples. I can judge whether faster growth and a stronger current account can be achieved together, depending on whether growth is led by exports, by investment in capacity or by consumer spending.
10.3 Effectiveness of policy options to meet all macroeconomic objectivesChapter 47 notes → · 21 essays set on this section ·
Builds on: Unit 9 · 9.1 The circular flow of income · Unit 9 · 9.2 Economic growth and sustainability · Unit 9 · 9.3 Employment and unemployment · Unit 9 · 9.4 Money and banking · Unit 5 · 5.2 Fiscal policy · Unit 5 · 5.3 Monetary policy · Unit 5 · 5.4 Supply-side policy · Unit 6 · 6.5 Policies to correct imbalances in the current account of the balance of payments
Nearly every Unit 10 essay is filed here, and they lean on the A Level theory of Unit 9 as much as on this chapter. The injections and withdrawals graph, the multiplier and accelerator, output gaps, the natural rate of unemployment, the money supply and the liquidity trap are in the Unit 9 checklist, linked under Builds on with the AS policy chains. This section adds the policies themselves and how to judge them.
The 21 past-paper questions on this section
9708/42/F/M/26 The Bank of China has a target inflation rate of around 3%, the Bank of India has a target inflation rate of 4% and the Federal Reserve, the European Central Bank and the Bank of England all have a 2% target inflation rate. Consider whether central banks should have a target inflation rate of 0%. [20] 9708/42/M/J/25 With the help of an injections and withdrawals graph, assess the impact of a decrease in interest rates on the level of employment in an economy. [20] 9708/41/M/J/25 A country is experiencing stagflation, when there is a high rate of inflation at the same time as a negative output gap. With the help of a diagram, evaluate the effectiveness of using fiscal policy to solve this problem. [20] 9708/42/F/M/25 With the help of a diagram, assess the effectiveness of government policies that might be used to reduce demand-pull inflation. [20] 9708/43/O/N/25 With the help of a diagram, evaluate the effectiveness of using monetary policy to increase the rate of economic growth in a country. [20] 9708/41/O/N/24 In periods of rising and persistent inflation, consumers and workers change their expectations of the future rate of inflation. Evaluate, with the help of a diagram(s), the consequences of these changes of expectations for fiscal policy. [20] 9708/42/F/M/24 With the help of a diagram, assess the effectiveness of government policies which might be used to reduce cost-push inflation. [20] 9708/43/O/N/23 With the help of a diagram, assess the effectiveness of using fiscal policy to close a negative output gap in an economy [20] 9708/41/O/N/23 Assess the extent to which monetary policy can be used effectively to solve the problem of unemployment. [20] 9708/42/M/J/23 Evaluate the effectiveness of using monetary policy to reduce the rate of inflation and how this policy may affect a government's ability to achieve its other macroeconomic aims. [20] 9708/41/M/J/23 An increase in a government's budget surplus will increase unemployment in the short run but it will make it easier to control a balance of payments deficit on the current account in the long run. Evaluate this statement. [20] 9708/41/O/N/22 A government's decision to increase its budget deficit as a proportion of the economy's GDP will depend significantly upon whether the economy's output gap is positive or negative. With the help of a diagram explain and evaluate this statement. [25] 9708/42/F/M/22 Government policies which rely on increasing budget deficits to solve the problem of unemployment will not be successful because they do not affect the natural rate of unemployment. Discuss the extent to which you agree with this statement. [25] 9708/42/F/M/21 Explain why an economy might be in equilibrium at less than a full employment level of output and critically evaluate alternative policy measures which might be used to move the economy to a full employment level of output. [25] 9708/43/O/N/20 'The rate of interest is one of the most important macroeconomic variables because changes in the rate of interest have a significant impact on each of the key macroeconomic aims.' To what extent do you agree with this statement? [25] 9708/42/O/N/19 Evaluate how the relative size of injections into and leakages from the circular flow of income can affect the ability of a government to achieve its macroeconomic aims. [25] 9708/41/M/J/19 'The failure of the policy of quantitative easing (QE) to solve problems associated with an economic recession illustrates the weakness of monetary transmissions mechanisms in particular and monetary policy in general.' Critically evaluate this statement. [25] 9708/42/F/M/19 'Keynesian policies to solve the problem of unemployment will not work because they will conflict with the attainment of other key macroeconomic aims.' Assess the accuracy of this statement. [25] 9708/41/O/N/18 Recession in some economies has caused high unemployment. At the same time high levels of national debt and substantial budget deficits have been experienced. This means that governments can no longer use Keynesian demand management policies to solve the problem of unemployment. To what extent do you agree with this conclusion? [25] 9708/42/M/J/17 Economic models have little practical relevance. Discuss whether this is true of the analysis of how a fall in interest rates might affect an economy's GDP. [25] 9708/43/M/J/16 Equilibrium is a key concept in the study of economics. Explain what an equilibrium level of national income means and discuss the relative merits of policies a government might use to cause the equilibrium level to change in an open economy. [25] Knowledge and understanding (AO1)
I can define stagflation and identify it on an AD/AS diagram. I can contrast the Keynesian and the new classical (monetarist) views of the macroeconomy: whether it returns to full employment by itself, the shape of the AS curve, and which objective each puts first. I can explain what Keynesian demand management is, what it means for a policy to work counter-cyclically, and which fiscal and monetary tools it uses. I can define crowding out and crowding in. I can draw the Laffer curve and mark the revenue-maximising tax rate. Show the diagram I can name the instruments of monetary policy (the rate of interest, open market operations, the reserve ratio, quantitative easing and the exchange rate) and define quantitative easing. I can define an incomes policy and list the short-run and long-run policies a government can use against cost-push inflation. I can define exchange rate policy, a devaluation and a revaluation, and explain how a central bank can push its currency's value up or down. I can state the Marshall-Lerner condition and draw the J-curve. Show the diagram I can name the recognition, implementation and behavioural lags, and explain how they can turn a counter-cyclical policy into one that reinforces the business cycle. I can define government macroeconomic failure and list its causes: inaccurate information and forecasts, time lags, unexpected responses, election pressures, pressure groups and corruption. I can say what an economic model is and why it relies on simplifying assumptions such as ceteris paribus. Analysis: the chains (AO2)
I can explain why new classical economists expect an economy below full employment to return to it without government action, through flexible wages and prices. I can explain how the relative size of injections and withdrawals affects each macroeconomic aim: growth, unemployment, inflation and the current account. I can explain how the size of the multiplier decides how large a fiscal change is needed to close an output gap, and how misjudging the multiplier or the gap can swap a negative output gap for a positive one. I can explain, with an AD/AS diagram, how a larger budget deficit can close a negative output gap, including the role of the multiplier. Show the diagrams I can explain, with a diagram, why a larger budget deficit when there is a positive output gap mainly raises the price level. Show the diagrams I can explain, with an AD/AS diagram, the chain from a larger budget surplus to AD, real output and cyclical unemployment in the short run. Show the diagram I can explain two routes from a larger budget surplus to a smaller current account deficit, one that works in the short run and one that works in the long run. I can explain the chain from a larger budget surplus to government borrowing, interest rates, private investment and productivity in the long run. I can explain, with a loanable funds diagram, the chain from higher government borrowing to interest rates, private investment and consumption, and the exchange rate (crowding out). Show the diagram I can explain the Keynesian argument that higher government spending crowds in private spending when there is spare capacity. I can explain, with an AD/AS diagram, why expansionary fiscal policy raises real output only temporarily once workers build higher expected inflation into their wage claims, leaving a higher price level. Show the diagram I can explain, with an AD/AS diagram, the chain from a rise in firms' costs, such as higher oil prices, to high inflation with a negative output gap (stagflation). Show the diagram I can explain, with AD/AS diagrams, what expansionary and contractionary fiscal policy each do to the output gap and to inflation in stagflation. Show the diagrams I can explain the monetary transmission mechanism, from a change in the central bank's interest rate or the money supply to AD, real GDP and the price level, through at least three channels. Show the diagram ↓ Base rate (CB)
↓ Commercial lending rates
↑ Consum. credit, wealth eff.
↑ Invest. cheaper finance
↓ Ex. rate ↑(X−M)
AD ↑
↑ Real GDP and/or ↑ Price Level Monetary Transmission Mechanism · Open the diagram sheet I can explain how a rise in interest rates meant to cut inflation can worsen the current account, even as it draws hot money onto the financial account. I can explain the chain from a cut in interest rates to the exchange rate, and on to cost-push inflation through import prices and demand-pull inflation through net exports. I can explain, with an AD/AS diagram, the chain from a devaluation or a managed depreciation to net exports, AD, growth and employment. Show the diagram I can explain how a revaluation of the currency can reduce demand-pull inflation, and what it does to the current account, growth and employment. I can explain, with an AD/AS diagram, how interventionist supply-side policy (education, training, infrastructure and support for new technology) could in the long run improve every macroeconomic objective at once. Show the diagram I can explain how a monetarist would reduce demand-pull inflation by slowing the growth of the money supply, and how a Keynesian would use fiscal policy to reduce AD. I can explain, with an AD/AS diagram, how subsidies, cuts in indirect tax, removing tariffs on imported inputs and an incomes policy each aim to reduce cost-push inflation. Show the diagram I can explain, with an AD/AS diagram, why cutting AD to fight cost-push inflation lowers inflation only at the cost of a further fall in output and rise in unemployment. Show the diagram I can explain how trade policy and policies to attract foreign direct investment can change the equilibrium level of national income through exports, imports and investment. I can explain the main conflicts between objectives: growth and low unemployment against price stability, low inflation against the current account, and greater equality against growth. I can explain the case for a 0% inflation target rather than 2%, using the long-term spending plans of households and firms and the menu and shoe leather costs that even low inflation imposes. I can explain why a 0% inflation target leaves a central bank less room than a 2% target to cut interest rates in a recession, and link this to the liquidity trap. I can explain the chain from a 0% target that tips the economy into falling prices to consumer spending and investment, and on to economic growth and unemployment. I can explain why a low, stable rate of inflation led by rising demand can encourage firms to expand output and invest, and how a 0% target changes their profit expectations. I can explain the chain from a lower inflation target to the interest a government pays on its index-linked debt and on new borrowing, and on to its budget deficit. Evaluation (AO3)
I can judge whether a budget deficit should be increased by asking whether the output gap is negative or positive and how large, and whether apparent spare capacity is really structural unemployment that extra demand cannot absorb. I can judge how far crowding out weakens fiscal policy, using the spare capacity in the economy, how the deficit is financed and how interest rates respond, and the Keynesian case for crowding in. I can judge whether a government with high debt and a large deficit can still use demand management, considering the debt's interest cost, who holds it, the multiplier in a deep recession and what the spending buys. I can judge how far Keynesian demand management conflicts with other aims (inflation, interest rates and growth, the current account) and whether those conflicts matter while the negative output gap is large. I can judge whether budget deficits fail against unemployment because they do not touch the natural rate, by separating the cyclical unemployment they can reduce from the natural rate they cannot. I can judge whether demand management can lower the natural rate after all, because long spells of unemployment can raise it through hysteresis. I can judge whether fiscal policy can solve stagflation, comparing it with supply-side policy in the short run and in the long run. I can judge how far a larger budget surplus raises unemployment, using the spare capacity already in the economy, the cause of the existing unemployment and what happens to interest rates. I can judge whether a budget surplus makes a current account deficit easier to control in the long run, using the marginal propensity to import, price competitiveness, and what lower interest rates do to credit, imports and the exchange rate. I can judge whether changed inflation expectations stop fiscal policy from reducing unemployment, separating the short run from the long run and adaptive from rational expectations, and asking how strongly wages respond today. I can judge whether cutting tax rates will raise tax revenue, using where the current rate sits relative to the revenue-maximising rate, how the curve's shape varies between countries, and the US tax cuts of the 1980s. I can give at least four reasons why a cut in interest rates may raise consumption and investment by less than expected, including pessimistic expectations and investment that is insensitive to the rate of interest (an inelastic MEC curve). I can judge why quantitative easing may fail to raise lending and AD, using banks' willingness to lend, households' and firms' willingness to borrow in a recession, and the liquidity trap. I can judge whether quantitative easing 'failed', by comparing what happened with what might have happened without it, and by weighing its side effects on asset prices and the distribution of wealth. I can judge whether the limits of quantitative easing show that monetary policy in general is weak, using the argument that monetary policy can restrain spending more easily than revive it, and the cases where interest-rate policy has worked. I can judge how far a rise in interest rates will reduce inflation, using how accurately the central bank judges the size of the rise, time lags, inflation expectations and the credibility of its target. I can judge whether the rate of interest matters more than other macroeconomic variables, such as government spending, taxation and the exchange rate, for each of the key aims. I can judge whether monetary policy can raise long-run growth or only actual growth in the short run, using spare capacity, the risk of inflation and asset bubbles, and whether lower rates raise investment in productive capacity. I can judge the side effects of interest-rate changes on the housing market: a house price boom and rising household debt when rates are low, and falling house prices when they rise. I can judge whether a lower exchange rate will raise net exports and growth, using the Marshall-Lerner condition, the J-curve, the import content of exports, rising import costs and retaliation. I can judge whether a revaluation will cut inflation without harming the current account, using the Marshall-Lerner condition and how much of the inflation comes from import prices. I can judge whether a central bank can hold the exchange rate it wants, given speculation, the size of its foreign currency reserves and the actions of other central banks. I can judge how far supply-side policy can close a negative output gap, separating its effect on potential output, which on its own widens the gap, from its effect on firms' costs and on AD. I can judge whether supply-side policy is a better answer than demand management to stagflation, cost-push inflation or structural unemployment, weighing its long time lags and cost against its ability to improve several objectives at once. I can judge the side effects of supply-side policy: wider inequality from market-based measures, and pollution or job losses from new infrastructure and technology. I can judge each short-run policy against cost-push inflation by its side effects: subsidies and indirect tax cuts on the budget deficit, removing tariffs on domestic producers and jobs, and an incomes policy on industrial relations. I can judge each policy against demand-pull inflation by its cost to other aims: higher direct taxes and cuts in education and health spending on long-run growth, higher interest rates on investment, and a revaluation on exporters. I can judge whether the conflicts between objectives can be avoided by giving each objective its own policy tool, by combining policies, or by relying on supply-side policy in the long run. I can judge whether an excess of injections over withdrawals, or the reverse, helps or hinders each aim, depending on where the economy starts relative to full employment and which injection or withdrawal has changed. I can compare fiscal, monetary, trade and regulatory policies for changing equilibrium national income in an open economy, judging each against the government's aim and its side effects such as retaliation. I can judge how likely government macroeconomic failure is, using how reliable forecasts and estimates of the output gap and the multiplier are, time lags, election pressures and pressure groups. I can judge the practical relevance of a model, such as the one linking a fall in interest rates to GDP, by testing its assumptions against how households, firms and banks actually behave, and asking what policymakers would use instead. I can judge how likely a 0% target is to tip the economy into deflation, given that price indices tend to overstate inflation, central banks miss their targets in both directions and policy works with time lags. I can judge whether households and firms plan much better at 0% inflation than at a low, stable and credible 2%, and how large the menu and shoe leather costs of 2% inflation really are. I can judge whether a 0% target would make it harder for real wages to fall where they need to, given that workers resist cuts in their nominal wages, and what that would mean for unemployment. I can judge who gains and who loses if inflation is brought down to 0%, using what happens to the real value of debts and savings for borrowers, savers and a government with large debts, and whether the fall in inflation was expected. I can judge whether one target suits every country, using why fast-growing economies such as India set higher targets than the 2% of the US, the eurozone and the UK, and how credible each central bank is. I can judge what a 0% target does to the financial account, the exchange rate and the current account, where it leaves interest rates below those abroad and inflation below that of trading partners.
Evaluation toolkit and exam technique
These moves work across every Unit 10 essay. Most Table B marks come from applying one of them to the policy and the economy in the question, and then deciding.
Evaluation (AO3)
Cause first: I can judge a policy by whether it fits the cause of the problem: demand-pull or cost-push inflation, cyclical or structural unemployment, a negative output gap from weak AD or from a supply shock. Starting point: I can judge any policy by where the economy starts: the sign and size of the output gap, how close it is to full employment, and how high interest rates and the national debt already are. Time: I can separate short-run from long-run effects, allow for time lags, and say which policies act quickly and which are slow but lasting. Size: I can judge whether a policy is large enough, using the multiplier and the accelerator, and whether a large change risks overshooting into the opposite problem. Expectations and confidence: I can judge how strongly households, firms, banks and workers will react, using their confidence about the future and their expectations of inflation and of future policy. Schools of thought: I can show where a judgement depends on the Keynesian or the new classical view of aggregate supply and the Phillips curve, and say which view better fits the economy in the question. Side effects and conflicts: I can show how a policy aimed at one objective harms another, say which groups gain and which lose, and judge which effect matters more for this economy now. Financing and cost: I can judge a policy by how it is paid for (borrowing, new money or higher taxes), its effect on the national debt and its opportunity cost. Open economy: I can judge how mobile financial capital, exchange rate movements, other countries' policies, retaliation and trade bloc rules can weaken a policy chosen at home. Mix: I can judge whether a combination of fiscal, monetary and supply-side policy works better than any one, and which should lead in the short run and in the long run. Evidence: I can test a claim against real episodes, such as stagflation in the 1970s, quantitative easing after 2008 or the US tax cuts of the 1980s, while noting that what would have happened otherwise is unknown. Absolute words: I can challenge 'will not', 'can no longer', 'most important' or 'little practical relevance' in a statement with one counter-example, then decide how far the claim holds. Exam technique
Read the question: I can mark the command word and the exact terms (such as stagflation, a negative output gap, the natural rate, an injections and withdrawals graph) and keep every paragraph on them. Levels: for a 20-mark essay I can plan 14 marks of knowledge and analysis (Table A) and 6 of evaluation (Table B), and give the evaluation real time rather than one closing paragraph. Diagrams: when the question asks for one, I can draw the diagram it names, fully labelled, and use its shifts in my analysis, because Table A's top level expects accurate diagrams and some schemes cap answers without one. Developed chains: I can take each policy through every link to the objective in the question, rather than listing several policies with a sentence on each. Stay on the policy named: when the question names one policy, I can analyse that policy and bring in alternatives only as evaluation, because some schemes give alternative policies no credit at all. Developed evaluation: I can explain why each evaluative point matters and under what conditions it holds, rather than writing 'it depends' or listing limitations. Judgement: I can end with a conclusion that answers the exact question (how effective, to what extent, in the short run and the long run) and follows from the points I have made. Both halves: when a question or a statement has two parts (the short run and the long run, inflation and the other aims, explaining and evaluating), I can give each part its due weight.
Model chains and evaluation points for each item are being added. Until then, check yourself against the chapter notes and the mark scheme for each question.