Edexcel A-Level Economics A (9EC0) · Theme 2
Specification points
- Macroeconomic objectives: growth, low inflation, low unemployment, balance of payments equilibrium, and others (equity, environment, sound public finances).
- Demand-side policies: fiscal and monetary policy.
- Supply-side policies: market-based and interventionist.
- Conflicts and trade-offs between objectives.
Objectives
Governments pursue strong sustainable growth, low and stable inflation (~2%), low unemployment and a satisfactory balance of payments, alongside fairer income distribution, environmental protection and sound public finances.
Demand-side policies
- Fiscal policy — government spending and taxation. Expansionary (higher G, lower T) raises AD; contractionary reduces it. Affects the budget balance and national debt.
- Monetary policy — set by the central bank via interest rates and quantitative easing. Lower rates raise AD; higher rates reduce inflation.
Supply-side policies
- Market-based — tax cuts, deregulation, privatisation, reduced union power, flexible labour markets.
- Interventionist — government spending on education, training, infrastructure and research.
Supply-side policies raise LRAS, potentially improving several objectives at once, but are slow and costly.
Key definitions
| Term | Definition |
|---|---|
| Fiscal policy | Using government spending and taxation to influence AD. |
| Monetary policy | Using interest rates and the money supply to influence AD. |
| Supply-side policy | Measures to raise productivity and productive capacity (LRAS). |
Conflicts between objectives
Cutting unemployment can raise inflation (the short-run Phillips curve trade-off); faster growth can worsen the current account and the environment; reducing a budget deficit can slow growth.
Worked example
To fight a recession, the central bank cuts interest rates and the government raises infrastructure spending (expansionary demand-side policy). AD rises, cutting unemployment. But if the economy nears capacity, inflation rises and imports increase, worsening the current account — a classic objectives conflict the government must weigh.
Common exam mistakes
- Confusing fiscal (government) with monetary (central bank) policy.
- Treating supply-side effects as instant.
- Ignoring policy conflicts in evaluation.
Exam technique
Match the policy to the problem, trace it through AD/AS, then evaluate using time lags, the state of the economy and objective conflicts.
Quick revision
- Demand-side: fiscal (spending/tax) and monetary (interest rates/QE).
- Supply-side: market-based and interventionist → raise LRAS.
- Objectives conflict: unemployment vs inflation, growth vs current account/environment.