Fiscal, monetary and supply-side policy
Fiscal policy = government spending and taxation. Expansionary (more spending or lower taxes) raises AD (aggregate demand); contractionary reverses it. Monetary policy = the interest rate. Lower rates cut borrowing costs, lifting spending and raising AD; higher rates dampen inflation. Supply-side policies raise productive capacity (education, training, deregulation, privatisation), shifting LRAS (long-run aggregate supply) right, not acting on AD.
Objectives conflict — trade-offs
Four objectives: (1) economic growth — rising real GDP (gross domestic product); (2) low, stable inflation (around 2%); (3) low unemployment; (4) a stable BoP (balance of payments) current account. They conflict: expansionary policy that cuts unemployment and raises growth can raise inflation; raising interest rates to curb inflation slows growth and raises unemployment. Identify which objective a policy targets before judging it.
Direct/indirect and progressive taxes
Direct taxes fall on income or profit and cannot be shifted — income tax, corporation tax. Indirect taxes fall on spending (VAT, excise duties), passed to consumers in higher prices. A progressive tax takes a higher % of income as income rises; a proportional tax takes the same % at all incomes; a regressive tax takes a higher % from lower earners (a flat fuel duty). In calculations, always include the £bn unit or lose a mark.
Drawn from real examiner reports.
Explain needs a chain, not a definition
Weak answers define a policy ('progressive tax charges high earners more') and stop. Full marks need the chain: policy → effect (more disposable income for low earners) → consequence (consumption raises AD (aggregate demand)) → objective (less poverty, growth). Inserting extract data unused is not application. Definitions inside Explain answers earn no marks.
June 2024 Paper 2, Q2(e): no marks available for definitions inside Explain questions — credit goes to chains of reasoning.
One-sided lists cap Assess at Level 1
On a 9-mark Assess (e.g. subsidies), listing advantages or disadvantages with no analysis sits at Level 1. Reach Level 3 with developed chains on both sides — job-creation benefits versus the opportunity cost of the subsidy — each linked to an objective. Copying extract data without explaining it is penalised. A 9-mark answer needs no formal conclusion.
June 2024 Paper 2, Q2(g): listing impacts without economic theory capped responses at Level 1 — two-sided, developed analysis needed for Level 3.
Answer the impact, not the cause
Asked for the impact of a recession on inflation, many explained why the recession happened. Same trap: asked how higher rates cut inflation, some explain why inflation was high. The logic must run policy → mechanism → effect on the objective. Nuance: cutting rates to lift a weak economy can itself cause demand-pull inflation — a valid counter-argument.
June 2024 Paper 2, Q3(e): many candidates explained causes of a recession rather than its impact on inflation — a consistent misreading of direction of causality.
Fiscal policy is not the interest rate
A frequent slip is calling an interest-rate change 'fiscal policy'. Interest rates are monetary policy, set by the central bank. Fiscal policy is the government changing taxes and spending. Both influence AD (aggregate demand), but they are different instruments run by different bodies — name the right one, or the application marks go.
Progressive is not proportional
'Progressive' means the tax rate rises as income rises, so higher earners pay a larger share. 'Proportional' means the same flat rate at every income. 'Regressive' means the rate falls as income rises, hitting low earners hardest. Judge by the percentage of income paid, not the cash amount — a rich person can pay more in pounds yet face a lower rate.
Supply-side shifts LRAS, not AD
Supply-side policies (education, training, deregulation, privatisation) raise productive capacity, shifting LRAS (long-run aggregate supply) right — they do not act on the demand curve. Treating them as a way to boost AD (aggregate demand) confuses the two sides. Their effects are also slow, unlike a quick fiscal or monetary change.
DEED: define, effect, evaluate, direction
On 9- and 12-mark policy questions use DEED: Define in one line; Effect — the full chain (policy → effect → objective); Evaluate — a counter-argument (conflict, time lag, side-effect); Direction — a supported judgement (needed at 12 marks, not 9).
Direct-tax total: units and which taxes
For a direct-tax total, add only taxes on income or profit (income tax, corporation tax) — leave out VAT, excise and customs, which are indirect. Show the addition and always write the £bn (or stated) unit: a correct number with no unit still loses a mark.
State the transmission chain in order
Write chains as a sequence: policy → first effect → knock-on → objective. E.g. lower rates → cheaper borrowing → more spending → AD (aggregate demand) up → firms hire → unemployment falls. Each arrow is a mark; skipping to the outcome loses the middle ones.
Name the objective a policy targets
Before assessing a policy, say which objective it targets — growth, inflation, unemployment or the balance of payments. This anchors analysis and sets up evaluation: most policies help one objective while risking another (a trade-off).
Governments pursue four main macroeconomic objectives simultaneously:
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