In the last blogpost I covered some example evaluation points for an AQA-style microeconomics essay. There was also some guidance on one possible way to evaluate. To see that article, please click the link here:
For more evaluation guidance, see the link here:
Example Question
Today I cover evaluation for an AQA-style macroeconomics essay. Consider the following as a possible 25-mark question:
“Evaluate the effectiveness of an increase in government spending”.
In this blogpost I will only cover the evaluation, with only brief mentions of the analysis points. In your actual essays you should expand a lot more on the analysis of course with data from the real economy.
Point 1
Take a possible first point: an increase in government spending increases aggregate demand (AD), so AD shifts right. This means that real GDP and the price level increase, according to an aggregate demand-aggregate supply diagram. It could lead to higher economic growth.
Evaluation:
- This depends on the level of spare capacity. If there is high spare capacity, then according to the Keynesian long-run aggregate supply curve, a rightward shift in aggregate demand can lead to a larger increase in real GDP and no change in the price level. So increased government spending may be more effective in a downturn but less effective in a boom period, in which case there is little effect on real GDP and a significant rise in the price level. In the UK unemployment is low (4.2% in the three months to October 2021), signalling little spare capacity and so increasing government spending would only lead to higher inflation.
Commentary: The spare capacity point is a very standard evaluation point for any demand-side policy (monetary policy or fiscal policy). Note you can find the latest data on the UK economy online, for example on the Trading Economics website here. I have drawn the Keynesian long-run aggregate supply curve below:
The shift from AD to AD1 shows an increase in government spending when there is high spare capacity. However the shift from AD2 to AD3 shows an increase in government spending where there is no spare capacity – in this case, there is no effect on real GDP but the price level rises significantly. You could embed this graph into the analysis or evaluation for this paragraph if you wish.
Point 2
A possible second analysis point is: if the government spends on a training scheme, it may increase the productivity in the economy. This can shift the long-run aggregate supply (LRAS) to the right, leading to even greater economic growth.
Evaluation:
- This depends on where the government spends the money. Alternatively if the government spent the money on welfare payments, it may disincentivise people from working, leading to workers leaving the labour force. This would decrease the productive potential of the economy so the LRAS would shift left. The UK Government spent nearly £70 billion (according to the latest figures here) on increasing welfare payments through the furlough scheme during the Covid-19 pandemic. Such spending may not help the productivity of the economy, not least because the government essentially paid workers in furlough not to work, when they could be needed in sectors with higher demand such as delivery or nursing. In this case increasing government spending may not increase the productive potential of the economy.
Commentary: Again this evaluation point uses statistics to support its point. Even if you do not remember particular statistics, simply having an awareness of the furlough scheme would help here. Note there are other reasons not mentioned in this point as to why the furlough scheme may be desirable, for example protecting living standards and helping firms re-employ their workers more easily when activity returns. The evaluation point offers just one point of view on the topic, which may be part of the reason why the US Government did not have a furlough scheme.
Point 3
Either tax revenue or government borrowing could fund government spending increases. Higher government borrowing means higher government debt, leading to higher debt interest payments. These may have an opportunity cost. Instead of spending money on debt interest, the government could spend money on healthcare for example.
Evaluation:
- This depends on the interest rate on government debt. Currently interest rates in the UK economy are low, with Bank rate at 0.25% in December 2021. If the interest rate is low and remains low, then debt interest payments will be low, reducing the opportunity cost and the risk of the government having to default. Governments will also not need to raise taxes as much in the future to cover the cost of borrowing today, meaning less harm to future economic growth or future generations. So government spending, if borrowing funds it, comes at a lesser cost if interest rates are low.
Commentary: the level of interest rates is a common point for monetary or fiscal policy. Here we are also using data about the real economy (or even if you only knew that Bank rate was low but not the specific rate, that could work too). This helps to pick a side of the argument. Note that not only today’s interest rate but also future interest rates can matter, when it comes to the level of debt interest payments.
Other Possible Factors
Other possible evaluation “depends on” factors could include, but are not limited to:
- Size of the multiplier.
- Short run or long run using the classical LRAS.
- Which school of thought is being considered: Classical vs Keynesian.
- Size of the government’s budget surplus or deficit.
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