Government and the Macroeconomy · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 13% of your exam marks.
Listing and defining macroeconomic aims, plus conflicts between them, appear on virtually every paper; usually 4 to 8 marks.
Achieving one aim often makes another harder. A typical 4-mark "conflicts" question rewards two clearly distinct conflicts, each explained.
The most common conflict. When the government uses expansionary fiscal or monetary policy (cutting taxes, raising public spending, cutting interest rates) to lift growth, rises. If demand rises faster than the economy's productive capacity can match, the result is demand-pull .
So pursuing growth in the short run typically pushes the inflation rate up.
The describes a short-run trade-off: pushing unemployment below the natural rate creates wage and price inflation.
The mechanism: when unemployment is very low, firms compete for the small pool of available workers and bid wages up. Higher wages raise firms' costs, which they pass on as higher prices. Inflation rises.
So a government that pushes unemployment too low in the short run accepts a faster inflation rate as a side-effect.
When incomes rise, consumers buy more imported goods (cars, electronics, foreign holidays). Imports are income-elastic in most countries.
So as growth raises incomes, imports rise faster than exports, and the current account deficit widens. Pursuing growth in this sense worsens the BoP position.
Growth raises average incomes but does not always raise everyone's income equally. Returns on capital, high-skilled wages, and ownership of property often grow faster than low-skilled wages. The result can be rising inequality alongside rising GDP.
So pursuing growth without redistributive policies may worsen the income-distribution aim.
Faster output usually means more production, more energy use and more transport, which raise pollution and carbon emissions and use up finite resources more quickly. Chasing rapid growth can therefore damage the environment, while strict environmental protection (pollution taxes, emissions limits) can raise firms' costs and slow growth in the short run.
So the growth aim and the sustainability aim often pull against each other: more output now can mean greater environmental cost later.
Analyse how economic growth and balance-of-payments stability may conflict (Analyse, 6 marks)
What comes up: "Analyse how the macroeconomic aims of economic growth and balance-of-payments stability may conflict."
Write: build a chain of two or three distinct mechanisms, each earning up to two marks. Core chains: (1) growth raises incomes → consumers buy more imports → current-account deficit widens; (2) growth-related inflation makes domestic goods less price-competitive → exports fall and imports rise → deficit worsens; (3) to expand output, firms import more raw materials and capital equipment → import bill rises → deficit widens. Counter-direction: if growth is export-led, export revenue rises and the current account may actually improve.
Watch out: a 6-mark "Analyse" question at Cambridge requires a developed chain, not just a list. "Growth increases imports (1) causes a deficit (1)" is only two marks. Add the intermediate step ("because higher incomes raise demand for foreign goods") to secure the third mark in each chain.
Not every policy creates conflict. Supply-side policies that raise the productive capacity of the economy (better education and training, infrastructure, R&D, deregulation) can lift growth without pushing inflation up, because they shift aggregate supply rather than aggregate demand. Long-run supply-side improvement is the cleanest way out of the growth-inflation trade-off.