Practise Edexcel A-Level Economics demand-side policy evaluation by judging monetary policy effects on AD, inflation, growth and trade-offs.
Sources for use with Section C
The economy of China
Figure 1 Year on year real GDP growth rate by quarter, Q1 2020 to Q2 2022
Figure 2 Youth unemployment rate (16 to 24 year olds), as measured by the International Labour Organization (ILO), January 2022 to June 2022
Extract A Economic growth In the second quarter of 2022 China experienced a low rate of economic growth. This was as a result of domestic demand for goods and services, and exports rising more slowly compared with the previous quarter. Economists estimated that China’s economy would continue to experience a low rate of economic growth until the end 5 of the year. Therefore, the country’s economic growth forecast for 2022 was reduced from 5.5% to 4.3%. This low economic growth rate resulted in a further increase in the already high rate of youth unemployment. China has too many college and university graduates for the economy to employ. In 2022 there was also a mismatch between the jobs that are 10 available and students’ qualifications. For example, at the start of the third quarter of 2022, only 0.70 jobs were available for each graduate. To increase the rate of economic growth the Government implemented a reflationary fiscal policy. It increased spending on infrastructure by over $75 billion and reduced taxes for businesses. It planned to increase science and technology‑related 15 investments by providing 100% tax breaks on research and development spending. The country’s central bank, the People’s Bank of China (PBoC), implemented a reflationary monetary policy to increase the country’s economic growth rate. For example, the PBoC decreased the base rate of interest from 3.7% to 3.65% in August 2022. There was also a reduction in the reserve asset (liquidity) requirements 20 in November 2022. This was in contrast to the policy of central banks in several advanced economies which implemented deflationary monetary policy. One economist stated that “the room for manoeuvre” for a reflationary monetary policy by the PBoC was limited because of rising US interest rates. He also emphasised the risks associated with a fall in the external value of the Chinese 25 currency, the Renminbi.
With reference to the information provided and your own knowledge, discuss the likely effects of a reflationary monetary policy on the economy of China.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance.
The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included.
Other relevant points must also be credited.
Quantitative Skill Assessed
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms
Knowledge, Application and Analysis (8 marks) - indicative content
- Understanding of reflationary monetary policy
- The PBoC decreased the base rate of interest from 3.7\% to 3.65\% in August 2022 - a decrease of 0.05 percentage points
- A decrease in the base interest rate should increase AD as it will:
- increase consumption as it creates an incentive to spend; also consumption increases as cost of borrowing falls and there is a disincentive to save as the return on saving falls
- create positive wealth effects: lower interest rates will reduce cost of borrowing, so individuals will be more likely to borrow to purchase houses - this will contribute to an increase in house prices, raising confidence and consumption
- increase spending as consumers with variable rate loans/mortgages see interest repayments decrease, increasing discretionary incomes
- increase the net trade balance as it will put a downward pressure on the exchange rate, meaning exports become relatively cheaper, and imports become relatively expensive - China's "exports rising more slowly" so the "fall in the external value of the Chinese currency, the Renminbi" will help improve the current account position
- increase investment, as the cost of borrowing to finance investment decreases, reducing firms cost of production
- "A reduction in reserve asset (liquidity) requirements" will increase money supply: more lending by commercial banks could increase consumption and investment as there would be greater access to credit
- AD shifts outwards leading to (may be shown diagrammatically):
- An increase in China's economic growth as the real output rises: "the country's economic growth forecast for 2022 was reduced from 5.5\% to 4.3%." so reflationary policy will increase the economic growth rate
- higher demand-pull inflationary pressure as average price level rises
- fall in unemployment as more output means larger numbers of people are employed - could reduce youth unemployment (use of Figure 2)
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.
Use of generic material or irrelevant information or inappropriate examples. Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Chains of reasoning in terms of cause and/or consequence are evident, but they may not be developed fully, or some stages are omitted.
Level 3
7-8
Demonstrates an accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (6 marks) - indicative content
- Significance of the size of the fall in interest rate: another 0.05 percentage points decrease may not be enough to stimulate economic growth
- Changes in the interest rate usually have an 18 to 24 month time lag before their full effects are filtered through the economy
- Consumption and investment may not rise if both consumer and business confidence is relatively low
- Commercial banks may not pass the lower rates to consumers or businesses, thereby less likely to increase consumption and investment
- Impact on real output will depend on the size and value of the multiplier
- Impact on real output/inflation depends on the elasticity of the LRAS and the level of spare capacity in the economy
- The PBoC may have to reverse its policy decision if the economy begins to experience cost-push inflation - several advanced economies implemented deflationary monetary policy
- Fiscal policy/supply-side policies may be more effective in stimulating the rate of China's economic growth
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-2
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
3-4
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
5-6
Evaluation recognises different viewpoints and/or is critical of the evidence. Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.
Question
Evaluate the view that there will always be conflicts between macroeconomic
objectives.