5 Government

macro intervention

Ideas for answers to Progress

Questions
1 There is no one correct answer to this question as it depends both on your
economy and on your view of the policies. In this sense it is a normative question.
The answer should:
u Explain what is meant by fiscal policy and how it works to control an
economy. Do not forget to draw and explain an appropriate diagram.
u Explain what is meant by monetary policy and how it works to control an
economy. Do not forget to draw and explain an appropriate diagram.
u Address what is meant by “effective”. This is where you introduce your
country’s economy because effective will depend on the level of inflation,
unemployment, economic growth etc. This is not an exhaustive list.
What you choose will depend on the economy.
u Provide a supported conclusion based on your explanations making clear
references to your country’s economy and “effective”.
2 There is no one correct answer to this. This question can cover a very wide
range of material so it needs to be selective. It should:
u Explain that a disequilibrium may come about because of problems in
different sections of the balance of payments
u Explain how raising interest rates would work in terms of both reducing
AD thus reducing inflation, and also its effect on the exchange rate
u Explain which areas of the balance of payments this could affect noting
that some affects will be positive, but others negative
u Provide a supported conclusion in which the ability or otherwise of a rise in
interest rates to affect a balance of payments disequilibrium are made clear.
A possible follow-up activity would be to share the different approaches used
to answer the question.

Ideas for answers to Case Study

Questions
Fiscal policy in UAE
1 The answer should:
u Contain an AD/AS diagram to show how expansionary fiscal policy
would shift the AD curve to the right leading to economic growth and a
rising price level
u Explain the diagram.

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2 The answer should:
uuExplain what is meant by “crowding out”
uuExplain what is meant by a “high public sector share” making reference to
the figures in the case study
uuExplain how this might/might not hinder private sector investment
(learners could distinguish between Abu Dhabi and Dubai or use their
own knowledge)
uuProvide a supported conclusion based on the explanations. This is likely
to be that it may well do so, but could depend on the degree of public
sector investment.
3 The answers should:
uuExplain what is meant by high public sector debt
uuExplain three possible effects, e.g. inflation, crowding out, high taxation
etc. The best answers will mention that the effects may depend on
whether the debt is owed internally or externally.

Singapore’s exchange rate policy

1 It is an index calculated using weights showing the relative importance of
trade between the country and its trade partners.
2 The answer should:
uuContain a diagram or diagrams to show how if, for example, the rate rose
because of high demand then the government would increase the supply
of the currency
uuExplain what the diagram(s) show(s).
3 The answer should:
uuExplain the advantages of using a managed exchange rate policy
uuExplain the disadvantages of using a managed exchange rate policy
uuProvide a supported conclusion in terms of your country using the
explanations supplied.
Note that the question says “for your country”, so reference must be made to
your own country preferably or at least a definite country.

Supply-side policies and India

1 The answer should either use the two mentioned in the text (industrial
growth and increased agricultural productivity) or may provide other reasons
based on you own knowledge/research. Whichever is used, or a combination,
they must be explained and not just stated.
2 The answer should explain two or three ways that improving infrastructure
can increase economic growth, e.g. better/faster transport links for industry/
employees; exports/imports are able to get to their destination quicker
lowering costs; stimulates other expenditure in the economy etc. It is the
depth of the explanation which is important not the number of effects.
3 The answer should:
uuExplain how monetary policies can control inflation
uuExplain how supply-side policies can control inflation

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 uuExplain that monetary policies can deal with today’s inflation whereas
supply-side policies take time to have an effect
uuProvide a supported conclusion. In this case, the answer may conclude
that monetary policy is best for immediate action but may not cure the
root cause, while supply-side policies may have more lasting effects.

Exchange controls
1 It is when the flow of money both into and out of a country is regulated by
the central bank.
2 For example, prevent wild fluctuations, perhaps caused by speculation; reduce
imports; prevent capital outflows etc.
3 For example, restricts ability of both importers and exporters to freely access
markets; leads to an artificial value which can have both internal and external
effects including retaliation by other countries etc.

Exchange control in South Africa

1 The answer could mention: to correct a balance of payments disequilibrium;
to prevent a capital outflow due to fears of a depreciation; to encourage
multinational firms to reinvest profits in South Africa etc.
2 The answer should:
uuExplain how these exchange controls affect the different parts of the
balance of payments including trade in goods and services; investment;
capital movements etc.
uuProvide a supported conclusion as to which effects are more important
giving reasons for the answer.

Ideas for answers to Exam-Style

Questions
1 a The answer should:
uuDefine fiscal policy as the use of government revenue and expenditure
to control the economy
uuContain a diagram, e.g. similar to Figure 5.1, and explain how cutting
tax and/or increasing expenditure leads to increased employment and
output and thus GDP.
Note, there is no need to do both explosion and contraction.
b The answer should:
uuDecide on three polices, e.g. fiscal, monetary, prices and income
uuExplain how each policy would control inflation, e.g. fiscal by cutting
expenditure and raising taxes
uuDiscuss which policies the government should use – could be just
one or two or all three, and why those and not any you have rejected.
Where appropriate, reference should be made to short term and
longer term, especially if supply-side policy has been one of the three.
Discussion must be supported by evidence from the explanations.

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2 a The answer should:
uuExplain what is meant by supply-side policy noting that there are
several policies grouped together under supply side.
uuContain a diagram similar to, e.g., Figures 5.4 or 5.7 and explain how
supply-side works probably by using expansionary supply-side policy.
Note, there is no need to do both explosion and contraction.
b Note that the question says “most effective” so the answer should consider
probably two other policies, e.g. exchange rate policy and fiscal policy.
It should:
uuBriefly explain what is meant by a “balance of payments
disequilibrium”. (Note, this could be either positive or negative.)
uuExplain how supply-side policies could correct, e.g. a balance of
payments deficit
uuExplain how two other policies could work
uuDiscuss whether supply-side policies would be most effective.
Note, there is no correct answer. What is being looked for is good use of the
explanation to support the conclusion.
3 a The answer should explain clearly what is meant by inflation and explain
clearly what is meant by deflation.
b This is really the reverse of question 1b. The answer should:
uuDecide on three polices, e.g. fiscal, monetary, supply side
uuExplain how each policy would deal with deflation, e.g. fiscal by
increasing expenditure and cutting taxes
uuDiscuss which policies the government should use – could be just
one or two or all three, and why those and not any you have rejected.
Where appropriate, reference should be made to short term and
longer term, especially if supply-side policy has been one of the three.
Discussion must be supported by evidence from the explanations.
4 a The answer should explain what is meant by a free trade area and explain
what is meant by a customs union.
b The answer should:
uuExplain the advantages of protectionism
uuExplain the disadvantages of protectionism/advantages of free trade
uuDiscuss whether countries should or should not use protectionist
measures based on your explanations. The discussion must be
supported by the evidence from your explanations.
5 The answer is B. Answer A depends on the relative increases, and as this is
not known it cannot address “most likely”. If they both increase at the same
rate then there will be no effect. Answer D would lead to inflation or no
effect. Answer C would result in either inflation (if both AD and AS sloped
upwards) or in no change (if AD was horizontal). Answer B is correct because
increased productivity would shift AS to the right.
6 The answer is A. Answers B, C and D all lead to a deterioration in the terms
of trade. Only Answer A would lead to an improvement as
Index of export prices × 100
Terms of trade =
Index of import prices
4

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