C10 M039 Trading Economics
After the current UK government came into power in 2010, its Chancellor George Osborne announced an austerity programme, a series of government spending cuts aimed at reducing the UK’s budget deficit immediately and consequently reducing the public debt/GDP ratio from the financial year 2015/16.
This policy was initially greeted by the International Monetary Fund (IMF), although it did mention risks as well (BBC 2010). Three years on, in January 2013, the IMF’s Chief Economist Olivier Blanchard suggests “taking stock” and considering slowing down the austerity measures (BBC 2013).
You are asked to analyse the current economic situation in the UK, the potential effect of the austerity measures, and provide a recommendation to the UK government.
Task details and marking grid
1. By way of introduction, provide a short overview of the government’s austerity programme. Mention in particular the levels of economic growth and public debt at the time in 2010. (5)
2. Shortly describe, using diagrams, equations and text, the equilibrium level of national income in the Keynesian Cross, the IS/LM model and the AD/AS model. (10)
3. Shortly describe, with reference to the Keynesian Cross, the multiplier effect. (5)
4. Describe which conditions in the IS/LM model and the AD/AS model must be met for the multiplier effect to take full effect. (5)
5. Making extensive use of academic literature, explain how the size of the multiplier effect could be determined by factors both in the goods and the financial market. (10)
6. Making extensive use of academic literature, explain how the size of the multiplier effect could differ across fiscal measures, i.e. different tax- or spending measures. (10)
7. Using above descriptions and explanations, discuss the effects of expenditure- and austerity programmes on economic growth, and hence unemployment. Take into account that governments are faced with high...
References: BBC (2010) ‘IMF backs coalition spending cuts’ BBC [online] 27 September 2010. Available from [25 January 2013]
BBC (2013) ‘IMF 's Olivier Blanchard: Time for UK to consider Plan B’ BBC [online] 24 January 2013. Available from [25 January 2013]
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