On Your Marks

Unit 5: Government and the macroeconomy

This activity will help you to analyse examination-style questions and answers. You will
look at one question in this worksheet.

 You will look at the question and see a teacher’s comments about how to answer it.
The coloured highlighting in the comments refers back to the coloured highlighting
in the question.
 You will then look at a model answer with further teacher comments that will help
you to improve your skills. The coloured highlighting in the comments refers back to
the coloured highlighting in the model answer.

Paper 2 of IGCSE Economics consists of five structured questions. One question is

compulsory. You must then answer three questions from a choice of four.

Marks are awarded for knowledge with understanding, analysis and evaluation.

The questions, example answers, marks awarded and/or comments that appear here were
written by the author(s). In examination, the way marks would be awarded to answers like
these may be different.

© Oxford University Press 2018

1
Question 1
Discuss whether fiscal policies, monetary
policies or supply-side policies would be
most effective in reducing the rate of
unemployment in a country.
(10 marks)
© Oxford University Press 2018
Comments
It is important that you pay close attention to
the ‘command’ or ‘directive’ word that is
being used in a question. In this case, the
command word is ‘discuss’. You must
therefore not simply describe these different
policies to try to reduce unemployment, but
consider their relative advantages and
disadvantages before coming to an
appropriate conclusion.
You need to demonstrate that you understand
what is meant by the term ‘fiscal’, i.e. that it is
concerned with the balance between public
revenue and public expenditure, leading to a
‘budget deficit’, a ‘budget surplus’ or a
‘balanced budget’.
You need to demonstrate that you understand
what is meant by the term ‘monetary’, i.e. that
it is concerned with the price of money or the
interest rate and/or the quantity of money in
an economy.
Whereas fiscal and monetary policies are
mainly concerned with the demand side, these
policies are concerned with the supply side,
i.e. policies which could help to improve the
efficiency of production in an economy.
This is where answers need to go beyond pure
description. In this ‘discuss’ question, you will
need to come to a judgement as to which of
these policies would be most appropriate in
terms of their effectiveness in reducing the
rate of unemployment in a country.
Your answer needs to be specifically in the
context of reducing the rate of unemployment
in a country, i.e. the percentage of a country’s
labour force that is out of work at any
particular time, not simply about fiscal,
monetary and supply-side policies in general.
2
Study the answer: Read the answer below. Then read the comments regarding the
highlighted sections to see the teacher’s comments.

There are different policies that can be used in an economy to achieve certain objectives. One aim of
government policy is full employment and, to achieve this, a government will try to reduce the rate of
unemployment to as low a rate as possible.

Fiscal policies are concerned with government revenue and government expenditure and the balance
between them. A budget deficit is where revenue is greater than expenditure and a budget surplus is
where expenditure is greater than revenue. A government should aim to increase the level of demand
in an economy in order to create more jobs, so expenditure needs to be greater than revenue.

Monetary policies are concerned with the price of money and/or the amount of money in an
economy. The price of money refers to the rate of interest that is charged on money that is borrowed.
If a government reduces the rate of interest in an economy, this should encourage people to borrow
more money. This should lead to an increase in spending, leading to the creation of more jobs. In
addition, the government could increase the money supply in an economy, as this should also
increase the level of aggregate demand.

Supply-side policies, as the name suggests, looks at reducing the rate of unemployment in an
economy by influencing supply, rather than demand. If supply can be increased, more workers will be
needed to make this possible, reducing the rate of unemployment in the economy.

Governments can, therefore, choose a mixture of these three policies to reduce the rate of
unemployment in an economy. They can each be effective in different ways.

Marks

Knowledge and understanding: 1 out of 2 marks

Analysis: 2 out of 3.5 marks

Evaluation: 2 out of 4.5 marks

Total: 5 out of 10 marks

© Oxford University Press 2018

3
 Comments

This is a good introductory paragraph that clearly links the different possible policies to the
achievement of certain economic objectives; in this case, the reduction of the rate of
unemployment in a country. However, although the student refers to the rate of unemployment
throughout the answer, at no point is this actually defined.

The student has got these round the wrong way. A budget deficit is where expenditure is greater
than revenue and a budget surplus is where revenue is greater than expenditure.

The student recognises that an increase in the level of demand in an economy should create
more jobs, but in a ‘discuss’ question it is important to consider both the advantages and the
disadvantages of particular policies. In this case, the student recognises the potential usefulness
of government expenditure in reducing unemployment, but there is no consideration of the
implications of a government running a budget deficit for a period of time. For example, the
student has not considered the possible need to borrow funds to cover this deficit, or to raise the
level of taxation to bring in more revenue. If taxation was raised, this would conflict with the
original objective of raising demand. It would also have been useful if the student had included
some appropriate examples of public expenditure, such as housing or road construction.

Again, this is a valid point for the student to have made, but there could have been reference to
the possibility that this increase in spending could have contributed to an increase in the rate of
inflation in the economy if supply was unable to match the increase in demand. This would have
demonstrated an understanding that there are sometimes conflicts between government aims.

The student makes an attempt to distinguish supply-side policies from fiscal and monetary
policies, but gives no examples to indicate an understanding of the distinctiveness of this
approach. Examples could have included schemes to improve the training and skills of workers,
making them more productive, a process of privatisation, making markets more competitive and,
therefore, more efficient and laws or regulations to reduce the powers of trade unions, which
could make it easier to employ more workers.

A ‘discuss’ question should always end with a conclusion, and this is what the student has
attempted to do in the final paragraph. The conclusion, however, is rather limited. A better
approach would have been to have considered the policies in relation to different types of
unemployment. For example, if the unemployment is demand-deficient (also known as cyclical
unemployment), then the fiscal and monetary policies would be appropriate as a way of
increasing the level of aggregate demand in the economy. If, however, the unemployment is
structural or technological, it would be more appropriate to adopt supply-side policies to
improve the skills of workers and so make them more employable in other industries, i.e. the
supply-side policies could help to improve the occupational (and also the geographical) mobility
of labour.

The key to the conclusion should really have been that the question of which would be the most
effective policy or policies to reduce the rate of unemployment in an economy would depend on
the type of unemployment in existence in the economy.

© Oxford University Press 2018

4