IDK EXAM TECHNIQUE: AQA ECON2 Q4- EVALUATION

Choice of question

1. Choose the question that refers to the performance of the UK economy in general terms rather than any one particular macroeconomic indicator. This allows you to talk about GDP, inflation, unemployment, trade and the budget deficit in your answer, rather than any one of these in isolation.
2. Choose the question that refers to aggregate demand and the demand side of the economy rather than aggregate supply and the supply side. This enables you to talk about different components of aggregate demand (C+I+G+X-M), whereas there is not the same framework for aggregate supply. 

See video for more.

Mark breakdown 

• Follows a "tiered" marking approach, cannot access application marks without demonstrating knowledge, cannot access analysis marks without demonstrating application etc.
• Knowledge: primarily through definitions and use of technical language
• Application: explicit references to the extracts- include at least one per paragraph. 
• Analysis: diagrams and developing a "chain of reasoning"
• Evaluation: what is your argument dependent on? Why might this not happen? Include at least one evaluation point per paragraph from paragraph 2 onwards.

June 2012 Q4

Question paper: http://filestore.aqa.org.uk/subjects/AQA-ECON2-QP-JAN12.PDF
Mark scheme: http://filestore.aqa.org.uk/subjects/AQA-ECON2-W-MS-JAN-12.PDF

Paragraph 1- "introduction"

1. Start with two written definitions and add relevant examples (similar to Q1 or Q3). The mark scheme does not prescribe terms that you must define- you should be able to identify several key terms from within the question, so pick the two most relevant ones. This targets your knowledge and application marks.

2. Add in an explicit reference to the extract, either as an example linked to your definition or as a means of introducing your main argument. In red below.

3. Introduce one side of the argument. Is the policy measure in question good or bad for the performance of the UK economy? Which macro-economic indicator(s) does it affect? In blue below.

Public spending is expenditure by the government and feeds into aggregate demand. This can take the form of current spending- welfare payments and civil servant salaries, in addition to capital expenditure that goes towards long-term projects. A reduction in government spending could take the form of a decrease in pension payments (extract B, line 5) or perhaps scaling back the HS2 rail plans. The level of government spending, minus taxation, determines the budget deficit. In deciding whether or not to change public expenditure, the government will look at this alongside other macroeconomic indicators such as economic growth. A fall in spending will reduce aggregate demand causing a fall in real GDP and a rise in unemployment.

Paragraph 2- "main argument"

1. Flesh out the argument outlined at the end of paragraph one. If talking about aggregate demand, always state the formula. Draw the relevant diagram and explain what this shows. Don't forget you want to be making at least one reference to the extracts per paragraph.

AD=C+I+G+X-M

A cut in government spending is going to cause a fall in AD- (AD1 to AD2) as mentioned in extract B, line 10, which will lead to a fall in the price level (P1 to P2) and a fall in real GDP (Y1 to Y2). This decrease of the level of activity within the economy is likely to raise the level of unemployment.

2. Evaluate this point. Any time you draw the AD-AS diagram, it is valid to compare the full employment case vs the spare capacity case. You could also talk about the significance of the multiplier effect here. 

However, the extent by which GDP, inflation and unemployment changes depends on the starting equilibrium within the economy. If the economy is at full employment (AD1 to AD2), then a fall in aggregate demand will reduce the price level (P1 to P2), but GDP (Y1 to Y2) will remain relatively unaffected. The efficacy of government spending is also dependent on the size of the "multiplier effect". Yet, if there is lots of spare capacity in the economy, then the cut in government spending (AD3 to AD4) will have a pronounced effect on real GDP (Y3 to Y4) but could have no effect on the price level, which remains at P.

 

If the marginal propensity to consume is high, then more of the government spending injection will circulate between households and firms i.e the spending multiplier will be higher. If this is the case, then government expenditure will be more important to growth.

Paragraph 3- "counter-argument"

1. Present the counter-argument to your main argument in paragraph 2. If you've said that the policy measure in question might be bad for one macroeconomic indicator, could it be good for another macroeconomic indicator? Don't forget your line reference.

Though the cut in government spending could be detrimental to the level of economic activity in the UK, it would improve the country’s public finances. A reduction in expenditure would reduce the size of the budget deficit and would reduce the accumulation of debt. If the UK Treasury was able to cut spending to below the level of taxation, the country would operate a surplus and total debt would begin to fall. This would result in a reduction in interest payments (extract C, line 9), leaving the government with more revenue available for other forms of expenditure.

2. Evaluate this point- why might this not happen?

In spite of this, the budget deficit will only improve if taxation is kept at the same level or increased. If the government lowers tax, the net result may be fiscally neutral or even expansionary. The fall in economic activity might result in a fall in tax receipts. Alternatively, the loss of output and subsequent reduction in employment may cause government spending on welfare to rise.

Paragraph 4- "alternative forms of government intervention"

1. What else could the government do to achieve its goals? What are the possible central bank/government reactions to the policy? Evaluation in blue below.

If the government wished the reduce the budget deficit without cutting spending, it could opt to raise taxes instead. Depending on the type of tax ammended, this could have distortive effects. For example, raising corporation tax may lead to decrease in investment whilst an increase in income tax may as as a disincentive to work.   

Alternatively, if the government decided to cut spending, the central bank may support demand if inflation fell below target. Though, the Bank of England operates independently from the Treasury, it may alter policy in response to wider deflationary pressures within the economy (extract B, line 13). This would cause demand to revert back to AD1 following the fall to AD2 that resulted from the cut in spending. Real GDP would revert back to Y1 from Y2 and the price level would be restored to P1 from P2.

Paragraph 5- "concluding remarks" 

• Keep it open ended
• Summarise key points
• Recap evaluative points "government could do this, but it depends on X, Y and Z."
• Include some context on the UK economy and rank the importance of the different macro-economic indicators. Below in blue

Cutting government spending is likely to have a negative impact on the level of economic activity within the UK and a positive effect on the budget deficit. Yet, this is dependent on the level of capacity left within the economy and alternative interventions from both the government and the central bank. The UK has an extremely high public expenditure (extract A) and debt to GDP ratio. Given that the UK is currently one of the best performing developed economies in terms of growth and trends in employment, perhaps the Treasury might wish to prioritise deficit reduction.  

Full mark response: 

Public spending is expenditure by the government and feeds into aggregate demand. This can take the form of current spending- welfare payments and civil servant salaries, in addition to capital expenditure that goes towards long-term projects. A reduction in government spending could take the form of a decrease in pension payments (extract B, line 5) or perhaps scaling back the HS2 rail plans. The level of government spending, minus taxation, determines the budget deficit. In deciding whether or not to change public expenditure, the government will look at this alongside other macroeconomic indicators such as economic growth. A fall in spending will reduce aggregate demand causing a fall in real GDP and a rise in unemployment.

AD=C+I+G+X-M

A cut in government spending is going to cause a fall in AD- (AD1 to AD2) as mentioned in extract B, line 10, which will lead to a fall in the price level (P1 to P2) and a fall in real GDP (Y1 to Y2). This decrease of the level of activity within the economy is likely to raise the level of unemployment.

However, the extent by which GDP, inflation and unemployment changes depends on the starting equilibrium within the economy. If the economy is at full employment (AD1 to AD2), then a fall in aggregate demand will reduce the price level (P1 to P2), but GDP (Y1 to Y2) will remain relatively unaffected. The efficacy of government spending is also dependent on the size of the "multiplier effect". Yet, if there is lots of spare capacity in the economy, then the cut in government spending (AD3 to AD4) will have a pronounced effect on real GDP (Y3 to Y4) but could have no effect on the price level, which remains at P.

If the marginal propensity to consume is high, then more of the government spending injection will circulate between households and firms i.e the spending multiplier will be higher. If this is the case, then government expenditure will be more important to growth.

Though the cut in government spending could be detrimental to the level of economic activity in the UK, it would improve the country’s public finances. A reduction in expenditure would reduce the size of the budget deficit and would reduce the accumulation of debt. If the UK Treasury was able to cut spending to below the level of taxation, the country would operate a surplus and total debt would begin to fall. This would result in a reduction in interest payments (extract C, line 9), leaving the government with more revenue available for other forms of expenditure.

In spite of this, the budget deficit will only improve if taxation is kept at the same level or increased. If the government lowers tax, the net result may be fiscally neutral or even expansionary. The fall in economic activity might result in a fall in tax receipts. Alternatively, the loss of output and subsequent reduction in employment may cause government spending on welfare to rise.

If the government wished the reduce the budget deficit without cutting spending, it could opt to raise taxes instead. Depending on the type of tax ammended, this could have distortive effects. For example, raising corporation tax may lead to decrease in investment whilst an increase in income tax may as as a disincentive to work.   

Alternatively, if the government decided to cut spending, the central bank may support demand if inflation fell below target. Though, the Bank of England operates independently from the Treasury, it may alter policy in response to wider deflationary pressures within the economy (extract B, line 13). This would cause demand to revert back to AD1 following the fall to AD2 that resulted from the cut in spending. Real GDP would revert back to Y1 from Y2 and the price level would be restored to P1 from P2.

Cutting government spending is likely to have a negative impact on the level of economic activity within the UK and a positive effect on the budget deficit. Yet, this is dependent on the level of capacity left within the economy and alternative interventions from both the government and the central bank. The UK has an extremely high public expenditure (extract A) and debt to GDP ratio. Given that the UK is currently one of the best performing developed economies in terms of growth and trends in employment, perhaps the Treasury might wish to prioritise deficit reduction.