Explain how aggregate demand in an economy might be affected by a rise in the exchange rate and a decrease in the income of major trading partners.

To what extent is expansionary fiscal policy the best policy to achieve a reduction in the rate of unemployment?

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

Answers may include:

• definition of aggregate demand (AD), exchange rate
• diagram to show AD shifting to the left
• explanation of the linkages between a rise in the exchange rate and a decrease in the income of major trading partners on a country’s AD
• examples of economies which have experienced a rise in the exchange rate and/or a decrease in the income of major trading partners.

NB if only one factor of the two factors mentioned above are considered, a maximum of Level 2 should be awarded.

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

Answers may include:

• definition of fiscal policy, expansionary fiscal policy, rate of unemployment
• diagram to show aggregate demand (AD) being shifted to the right and/or a labour market diagram
• explanation of the use of expansionary fiscal policy, higher government spending/lower taxation, which may increase GDP, increase the demand for labour and reduce demand-deficient unemployment
• examples of fiscal policy being used to increase AD in relation to a particular economy
• synthesis and evaluation (to what extent?).

Evaluation may include: inappropriateness of using policies to increase AD against structural, frictional and seasonal unemployment, consideration of the use of supply-side policies to tackle structural, frictional and seasonal unemployment, consideration of the use of monetary policy, problems associated with the use of expansionary fiscal
policy, consideration of the words “best”.

NB where no alternative policies are considered a maximum of Level 3 should be awarded.

Most candidates seemed to be familiar with AD/AS analysis and could use a diagram with relative ease. Most understood how a rise in the exchange rate caused exports to be more expensive, but few related it to an increase in the demand for imports, both of which would decrease AD. Few candidates were able to provide specific examples of economies that had experienced the situations mentioned in the question.

Most candidates had a fairly good understanding of what fiscal policy is and how expansionary fiscal policy is achieved, but many were unable to explain specifically how it reduces unemployment. Many could diagram how AD shifts rightwards, causing economic growth, but were not able to explain how this growth leads to a decline in unemployment. Many could evaluate fiscal policy in general, but not specifically as it relates to a reduction in unemployment. Often there was no comparison between fiscal policy and other policies to determine which was the best policy to reduce unemployment. In a minority of cases, there was confusion between fiscal policy and monetary policy.