Macroeconomics Model Essays

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  Evaluate the view that the consequences of economic growth are always beneficial for an economy.IB HL · Paper 1, part (b) [15] · Evaluate

  Economic growth, an increase in real GDP, brings clear benefits: higher average incomes and living standards, more government revenue to fund public services without raising tax rates, and lower unemployment as firms expand. But the claim that the consequences are always beneficial is too strong, because growth can widen inequality, generate negative externalities such as pollution and resource depletion, and may not be sustainable.

  Economic growth is an increase in the real output of an economy over time, usually measured by the percentage change in real GDP. It is worth separating two kinds. Actual growth is a rise in real output from using existing capacity more fully, shown as a rightward shift of aggregate demand towards the vertical long-run aggregate supply curve. Potential growth is a rise in productive capacity itself, shown as a rightward shift of that LRAS at potential output. The claim to be evaluated is that the consequences of growth are always beneficial. The benefits are real and worth stating plainly: higher average incomes lift material living standards; expanding firms hire more workers, so unemployment tends to fall; and a larger tax base gives government more revenue to fund health, education and infrastructure without raising tax rates. Yet the word always is doing a lot of work in the claim, and this is where a top-band answer earns its marks. Growth can widen the gap between rich and poor if its gains accrue mainly to capital owners and skilled workers...

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  Discuss the limitations of fiscal policy as a means of managing aggregate demand.IB HL · Paper 1, part (b) [15] · Discuss

  Fiscal policy, the use of government spending and taxation to manage aggregate demand, has real strengths, including the ability to target particular sectors and a powerful effect in a deep recession. But it runs into serious limitations: long time lags between recognising a problem and the spending taking effect, the risk of crowding out private investment when borrowing pushes up interest rates, political pressure that biases it towards spending, and the constraint of sustainable government debt.

  Fiscal policy is the use of government spending and taxation to influence aggregate demand and so pursue the macroeconomic objectives of low inflation, low unemployment and steady growth. Expansionary fiscal policy raises spending or cuts taxes to shift aggregate demand to the right; contractionary fiscal policy does the reverse. The question asks us to discuss its limitations, which means weighing them against fiscal policy's real strengths rather than simply cataloguing its faults. Those strengths are worth conceding first. Fiscal policy can be targeted at particular regions, sectors or income groups in a way that a blunt interest-rate change cannot, and in a deep recession, when monetary policy has run out of room near the zero lower bound, government spending can be the only tool with traction. Automatic stabilisers, such as progressive taxes and unemployment benefits, also cushion the cycle without any deliberate decision. Against these strengths, however, stand four serious limitations. The first is time lags. There is a recognition lag while the downturn shows up in the data, a decision lag while the budget passes through the legislature, and an implementation lag while projects are actually built, so the stimulus...

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