1. Role of the state in the macroeconomy: macroeconomic policies
Microeconomics Topic 1: The Economic Problem
Role of the state in the macroeconomy: macroeconomic policies

2. Microeconomics Topic 1: The Economic Problem
4.5.3 Unit content
Students should be able to:
Distinguish between fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls in different counties with reference to the impact of: measures to reduce fiscal deficits and national debts; measures to reduce poverty and inequality; changes in interest rates and the supply of money; measures to increase international competitiveness
Assess the use and impact of macroeconomic policies to respond to external shocks to the global economy
Evaluate measures to control global companies (transnationals) operations: regulation of transfer pricing; limits to government ability to control global companies
Assess the problems facing policymakers when applying policies: inaccurate information; risks and uncertainties; inability to control external shocks

3. Microeconomics Topic 1: The Economic Problem
(a) Fiscal policy
Microeconomics Topic 1: The Economic Problem
What is fiscal policy?
Give examples of macroeconomic objectives

4. Microeconomics Topic 1: The Economic Problem
(a) Demand management
Microeconomics Topic 1: The Economic Problem
What is demand management?
What is the link between a larger budget deficit (or a smaller budget surplus) and the circular flow?
What is deflationary (contractionary) fiscal policy?

5. (a) Problems with using macroeconomic policies
Microeconomics Topic 1: The Economic Problem
(a) Problems with using macroeconomic policies
“Often national macroeconomic problems have global causes, and therefore, there are limits to national macroeconomic policies in correcting these problems.” when could you use this sentence in an exam?
What happened in the 1930s and why would it be different now?
Today, any reduction in export earnings or investment would have less impact because?

6. (a) Fiscal policy: automatic stabilisers v discretionary policy
Microeconomics Topic 1: The Economic Problem
(a) Fiscal policy: automatic stabilisers v discretionary policy
The financial crisis of 2008 resulted in many countries using fiscal policy as a Keynesian tool to stimulate the economy.
What is the distinction between automatic stabilisers and discretionary fiscal policy?
• Automatic stabilisers:
• Discretionary fiscal policy:

7. Microeconomics Topic 1: The Economic Problem
(a) Monetary policy
What is monetary policy?
Why is it difficult for a central bank to control inflation in its own country?

8. (a) Supply side policies
Microeconomics Topic 1: The Economic Problem
(a) Supply side policies
What are supply-side policies designed to do?
Complete the examples and explanations below:
Improving education so that
Improving _________ so that life expectancy increases
Teaching entrepreneurship so that
Reducing discrimination to

9. Microeconomics Topic 1: The Economic Problem
(a) Direct controls
Direct controls are forms of ___________ which work outside the ____________ system.
They include: maximum ________ controls (e.g. used in _____________ countries to control the price of food), minimum _____________ prices (including national minimum wages) and wage controls
control, developing, guaranteed, market, price

10. (a) Measures to reduce fiscal deficits and national debts
Microeconomics Topic 1: The Economic Problem
(a) Measures to reduce fiscal deficits and national debts
Following the 2007/8 financial crisis, most developed countries faced increased fiscal deficits and national debts. If developed countries have a fiscal deficit greater than 3% of GDP it will lead to a growing national debt that becomes difficult to sustain (UK %!) e.g. Greece 7.5% in How could the government reduce fiscal deficits and national debts?
Fiscal austerity (see 4.5.3):
Do nothing and wait for the automatic stabilisers to work. This only works if the deficit is?

11. (a) Examples of countries and their attempts to reduce fiscal deficits
Microeconomics Topic 1: The Economic Problem
__________, __________, __________ had structural problems before the recession and so had no choice but to use fiscal austerity (enforced by their lenders).
_________ and the _________ used automatic stabilisers and the rise in GDP to correct their deficits. This worked in the US but was less successful in France as they had low growth after the recession
The ________ originally didn’t use austerity ( ) as the economy recovered well, but in 2010 a new government reversed policies and cut spending and increased taxes. This led to slower growth.
France Greece, Portugal, Spain, UK, US

12. (a) Measures to reduce national debts
Microeconomics Topic 1: The Economic Problem
(a) Measures to reduce national debts

13. (a) measures to reduce poverty and inequality
Microeconomics Topic 1: The Economic Problem
(a) measures to reduce poverty and inequality
How could the government reduce poverty and inequality?

14. (a) Measures to increase international competitiveness
Microeconomics Topic 1: The Economic Problem
(a) Measures to increase international competitiveness
List measures to increase international competitiveness:

15. (Q2) Recap fiscal policy data response UK to increase VAT
Microeconomics Topic 1: The Economic Problem
(Q2) Recap fiscal policy data response UK to increase VAT
‘Chancellor George Osborne's 2.5% VAT rise is to help balance Britain's books, but many shoppers at Europe's biggest urban retail centre are not convinced it is a price worth paying. The increase in VAT from 17.5% to 20% from 4 January 2011 received a mixed reaction from people at Westfield in west London. As news of the biggest package of tax increases and spending cuts in a generation filtered down to the streets, some were incensed, others unsurprised. Kelly Byrne, a senior sales assistant at a clothing store, said the VAT rise was unfair on ordinary people "in basic jobs, on basic wages".’
Source: adapted from

16. (Q2) Recap fiscal policy data response UK to increase VAT
Microeconomics Topic 1: The Economic Problem
(Q2) Recap fiscal policy data response UK to increase VAT
a. Explain how the 2011 rise in VAT will affect aggregate demand. Include a diagram in your answer.
b. Given the likely effects of such a tax increase, explain why the higher VAT rate may be required in the UK economy.
c. How else might the Chancellor be able to utilise fiscal policy to ‘balance Britain’s books’?
Source: adapted from

17. (Q3) Data response Romanian Healthcare Expenditure
Microeconomics Topic 1: The Economic Problem
(Q3) Data response Romanian Healthcare Expenditure
Source: adapted from

18. (Q3) Data response Romanian Healthcare Expenditure
Microeconomics Topic 1: The Economic Problem
(Q3) Data response Romanian Healthcare Expenditure
a. Explain how the short and long-run effects of the and 2012 changes could be shown on an AS/AD diagram.
b. How might such expenditure plans be financed? Provide at least 2 methods.
c. What are some of the general problems in using fiscal policy to achieve an economy’s macro objectives?
Source: adapted from

19. (b) External shocks to the global economy
Microeconomics Topic 1: The Economic Problem
(b) External shocks to the global economy
Give examples of possible external shocks to the global economy:

20. (c) Measures to control the operations of global companies
Microeconomics Topic 1: The Economic Problem
(c) Measures to control the operations of global companies
List measures to control the operations of global companies:
A requirement that:

21. Microeconomics Topic 1: The Economic Problem
(c) Transfer pricing
What is transfer pricing?
This refers to the ______ policies adopted by groups of companies for transactions between companies in the group, such as the ______ of goods or the provision of services. As corporate _______ rates varying from country to country, there is the potential for _________ companies to ____________ their global tax bill by manipulating the prices charged on intra-group transactions.
Measures to regulate transfer pricing are more difficult for __________ powerful countries.
global, less, pricing, reduce, sale, tax

22. (c) Limits to government ability to control global TNCs
Microeconomics Topic 1: The Economic Problem
(c) Limits to government ability to control global TNCs
TNCs are often ‘footloose’, i.e. they may be able to move to another country easily and with little cost.
International agreements such as TRIMS (Trade Related Investment Measures) introduced by the WTO There are rules that restrict preference of domestic firms and thereby enable international firms to operate more easily within foreign markets. Policies such as local content requirements and trade balancing rules that have traditionally been used to both promote the interests of domestic industries and combat restrictive business practices are now banned.
Source: adapted from

23. (d) Problems facing policy makers when applying policies
Microeconomics Topic 1: The Economic Problem
(d) Problems facing policy makers when applying policies
Inaccurate/out-of-date information on
Risks and uncertainties: difficult to predict the impact of
Inability to control external shocks: increasingly
Source: adapted from