Pearson Edexcel IAL Economics 2.3.6 Macroeconomic objectives & policies

Practise applying macro objectives and policy tools to data, extracts and country examples, then judging conflicts between aims.

Exam points

evaluate policy trade-offs, including inflation versus unemployment or growth versus emissions
compare fiscal, monetary and supply-side tools using country evidence and stakeholder effects

Covered syllabus points

2.3.6.1a - Economic growth. objectives 2.3.6.1b - Low and stable rate of inflation 2.3.6.1c - Low unemployment 2.3.6.1d - Balance of payments equilibrium on current account 2.3.6.1e - Balanced government budget 2.3.6.1f - Greater income equality 2.3.6.2a - Inflation and unemployment, including the short-run Phillips between curve.2.3.6.2b - Economic growth and protection of the environment. objectives 2.3.6.2c - Inflation and equilibrium on the current account of the balance of payments 2.3.6.2d - Economic growth and income equality 2.3.6.3a - Supply-side policies designed to increase productivity, supply-side competition and 2.3.6.3b - Free market policies: • deregulation of product and labour markets • privatisation •2.3.6.3c - Interventionist policies: • investment in education, training and skills • incentives 2.3.6.3d - Strengths and weaknesses of different supply-side policies 2.3.6.4a - Demand-side policies: demand-side • the distinction between fiscal and monetary policy 2.3.6.4b - Fiscal policy instruments: • government spending and taxation 2.3.6.4c - Monetary policy instruments: • interest rates • asset purchases to increase money 2.3.6.4d - role of central banks in the conduct of monetary policy: • implementation of monetary 2.3.6.4e - Evaluating demand-side policies

[Maximum number: 1]

Which one of the following illustrates the conflict between the macroeconomic objectives of a low rate of inflation and a low rate of unemployment?

A long-run classical AS curve

An AD curve

A short-run Phillips curve

A SRAS curve

[Maximum number: 20]

In 2022 the Government of India introduced new legislation with the aim of reducing pollution. It is predicted that this will cause India's real GDP to increase at a slower rate. Evaluate the view that there will always be conflicts between macroeconomic objectives. Refer to a country of your choice in your answer.

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.

Knowledge, Application and Analysis ( 12 marks) - indicative content

- Understanding of macroeconomic objectives

- Identification of relevant macroeconomic objectives

Conflicts include:

- Economic growth and the protection of the environment: measures to reduce pollution e.g. increased taxes on polluters would increase costs and prices resulting in a fall in real incomes and therefore a slower rate of economic growth (as predicted in India)

- Economic growth and inflation: measures to reduce inflation e.g. deflationary monetary policy would increase cost of borrowing reducing consumption/investment and AD, resulting in a fall in real output and therefore slower rate of economic growth e.g. the UK

Other conflicts:

- Economic growth and income equality

- Economic growth and current account of the balance of payments

- Inflation and unemployment, including the short-run Phillips curve

- Unemployment and the current account of the balance of payments

- Unemployment and the protection of the environment

NB Award a maximum of Level 3 for answers with no reference to a country in their answer

NB Award a maximum of Level 3 for answers that consider only one conflict

Level

Mark Descriptor

0 No rewardable material.

Level 1

1-3

Level 2

4-6

Level 3

7-9

Demonstrates accurate 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.

Analysis is clear and coherent. 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 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate 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 (8 marks) - indicative content

- In developed economies, economic growth could imply employment of green and clean technology; Consumers may increase demand for eco-friendly products so stimulating AD

- Growth may lead to higher government revenues, providing scope to improve public transport and hence reduce pollution

- If it is supply-side growth (rather than demand-side) then the impact will not be inflationary

- Full employment / low unemployment may not be inflationary if AS is rising more quickly than AD

- Significance of the current state of the economy and its implications for elasticity of the LRAS curve/proximity to full employment (full output)

- Initial state and stability of inflation/deflation

- The rate of actual economic growth in comparison to the growth of the productive capacity

- Full employment/low unemployment should not conflict with growth

- Short-run unemployment from introduction of new technology

- Impact on inequality depends on the extent of the effectiveness of the current redistributive policies of the government

- Impact on the environment depends on the extent of the effectiveness of the government's current environmental policies

- Extent to which the economic growth is in tertiary sector or in primary and secondary sectors

- Current account of balance of payments may improve if it is export-led economic growth e.g. Singapore

- Current account of balance of payments may improve if economic growth is generated through increase in productivity (such as through investment) resulting in a shift in LRAS to the right

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

Question

Evaluate possible causes of deflation.

[Maximum number: 20]

Sources for use with Section C

The economy of Kenya

Figure 1 Annual rate of inflation as measured by CPI, June 2023 to June 2024

Extract A Economic challenges

Kenya is one of the strongest economies in East Africa. In 2023, the rate of economic growth was 5.3%. This was mainly caused by increased output in agriculture, services and construction. Nevertheless, the economy still faces challenges.

Agriculture is very important to Kenya. It contributes 30% to the country’s GDP and employs nearly 60% of Kenya’s workforce. Climate change is a big problem. Droughts, floods, landslides and locust infestations have made it harder to grow crops such as tea and coffee that are important exports for the country. However, Kenya is making progress in developing clean energy. Over 75% of its electricity is generated from geothermal, wind and solar power. This makes Kenya one of Africa’s leaders in renewable energy and supports its goal of a green economy by 2030.

The Government is investing in irrigation and drought-resistant crops to help farmers. The Government is also investing in infrastructure to promote the development of manufacturing industries and to encourage urbanisation. However, many workers lack the skills needed for factory or technology jobs, which makes it more difficult for farmers to switch careers.

In 2023, the unemployment rate in Kenya was 5.6%. The World Bank has predicted that this rate will increase to 7.2% in 2025. Many people, especially in rural areas, are either unemployed or experience underemployment. Some jobs are disappearing because of structural unemployment. The Government is trying to help young people by investing in training programmes such as the Youth Development Fund. This fund aims to create job opportunities in areas such as technology and renewable energy.

Extract B Inflation

Another major issue for Kenya has been a relatively high rate of inflation. To control this, the Central Bank of Kenya (CBK) raised the base rate of interest from 9.5% to 10.5% in July 2023. As a result, the rate of inflation fell in 2024. This higher interest rate also contributed to an increase in the value of the Kenyan currency, the Shilling, which rose by approximately 11% from the end of June 2023 to the beginning of June 2024.

(a)

With reference to Extract B and Figure 1, analyse two ways by which an increase in the base rate of interest could reduce the rate of inflation in Kenya.

[ 6 ]

(b)

With reference to the information provided and your own knowledge, discuss supply-side policies that could be used to reduce structural unemployment in Kenya.

[ 14 ]

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 structural unemployment - long-term unemployment that occurs when there is a mismatch between the skills of the labour force and the jobs available in the economy

- Understanding of supply-side policies - policies aimed at increasing the overall productive capacity of an economy

- Shifting outwards of the LRAS curve should create both actual and potential growth in Kenya (this may be illustrated by a Keynesian or classical LRAS curve)

Appropriate policies may include:

Free market policies:

- Deregulation of labour markets - Improving flexibility in Kenya enables workers to move jobs to reduce structural unemployment. Policies include removing minimum wage laws, reducing any trade union power, making it easier to hire and fire, flexible contracts

- Increasing migration - policies aimed at increasing immigration or reducing barriers to immigration into Kenya can help fill any skills shortages

- Tax incentives - reduce taxes for firms that hire workers who have been unemployed for an extended period

Interventionist policies:
- Investing in education and training - such as the Youth
Development Fund
- Providing incentives for workers to relocate from regions with high unemployment to areas with labour shortages. This could
involve government support for housing, transport, or relocation
allowances
- Infrastructure/urbanisation investment - policies aimed at making
it easier for people to move, reducing labour shortages
- Subsidies for firms- to encourage firms to increase employment
in areas with job shortages
- Investment in innovation and technological advancements - Support for industries that are expected to drive future growth, such as technology and renewable energy
NB: Award a maximum of L2 if candidates only refer to one policy

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

- Deregulation of labour markets can lead to exploitation of workers, particularly those in low-skilled, low-wage sectors. This could increase income inequality in Kenya

- Government spending on education/ infrastructure investment projects has an opportunity cost: it may lead to more growth if spent in another sector of the economy, e.g. healthcare etc.

- Investment in innovation and technological advancements may lead to job losses in traditional sectors

- Time lag: in particular, spending on education may take a considerable amount of time to have an effect on the economy

- Supply-side policies are less effective when there are large amounts of spare capacity in an economy: in this case they create potential growth but no actual growth

- The impact will depend on how much money is spent by the Government on interventionist measures

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.

All question bank results loaded

Covered syllabus points

2.3.6 - Macroeconomic objectives and policies question 1

2.3.6 - Macroeconomic objectives and policies question 2

2.3.6 - Macroeconomic objectives and policies question 3

Question (a)

Question (b)