Explain what effect an increase in interest rates might have on unemployment.

Evaluate the effectiveness of fiscal policy as a tool to reduce unemployment.

Answers may include:

• definitions of interest rates, unemployment and types of unemployment
• an AD/AS diagram or labour market diagram to show the impact of an increase in interest rates on unemployment
• an explanation of how increased interest rates raise the cost of borrowing causing a fall in investment and consumption spending, and therefore leading to lower aggregate demand and higher unemployment
• examples of where this may have occurred.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of fiscal policy, unemployment
• diagrams to show the impact of fiscal policy using the AD/AS model, different views of AS (Keynesian AS or LRAS)
• explanation of the possible impacts of fiscal policy on unemployment. An explanation of the Keynesian and monetarist/new classical perspectives
• examples of where such policies have been applied
• synthesis or evaluation.

N.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.

Evaluation may include: the relative merits of fiscal policy. The emphasis should be on fiscal policy though it is valid to consider alternatives in a manner that identifies the relative merits or demerits of fiscal policy.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.

This was the most popular question in the paper and it produced some very effective answers. The highest achieving responses had accurate definitions of interest rates and unemployment and clearly explained how a rise in interest rates often leads to a fall in aggregate demand and economic growth which in turn causes demand-deficient unemployment. Good answers were supported with an aggregate demand and supply diagram and a real-world example.

This question seemed to produce the highest achieving responses in the paper. Candidates seemed comfortable with the clear direction of the question and the way it lends itself to synthesis and evaluation. The highest achieving answers clearly explained how an expansionary fiscal policy leads to a rise in aggregate which in turn creates jobs and supported this with an effective aggregate demand and supply diagram. High achieving responses used effective synthesis and evaluation on this question by considering some of the issues relating to expansionary fiscal policy to reduce unemployment such as financing the policy, inflationary pressures and the problems of increasing aggregate demand in a recession.