Evaluation for Economic Exams

Some general tips on evaluation

Readers Question: can you just write a paragraph on anything you like which is an example of your best evaluation (L4 AS standard) please. I would like to see your structure and technique and subsequently compare it to mine.

Alternatively could you list ways to evaluate?

 

Which Questions need evaluation?

Questions which require evaluation usually have these words a the start:

  • Evaluate
  • Assess
  • To what extent
  • Discuss

 

What is Evaluation?

Evaluation means to look at a question from a critical distance. It involves:

  • Looking at what other factors may affect the outcome.
  • Time lags involved.
  • How it might depend on other issues, e.g. elasticity of demand
  • Why the original statement may be incorrect.
  • How significant is a factor?

For example, suppose we have a question –

Discuss impact of the MPC cu;tting interest rates from 5% to 4.5%?

Explanation and analysis involves:

Lower interest rates make it cheaper to borrow, and therefore encourage consumer spending. Cheaper borrowing also encourages firms to invest. With an increase in C + I, we see a rise in Aggregate Demand and therefore we can expect higher economic growth and higher inflation.

growth

Examples of Evaluation of this question.

  1. In theory lower interest rates will increase spending. However, commercial banks may not pass the base rate cut onto consumers. This happened during the credit crisis because there was a shortage of cash. Therefore, banks were reluctant to lend – they needed to improve their balance sheets.  Therefore, even though the MPC  cut base rates in 2008-09, consumers may not notice lower interest rates  and therefore, there was little if any increase in consumer spending. This explains why the interest rate cut of 2009, failed to cause a strong economic recovery.
  2. Lower interest rates may not increase economic growth because other aspects of the economy are doing badly. For example, falling house prices are causing a decline in consumer wealth and confidence. Therefore, despite lower interest rates, falls in house prices are offsetting the potential boost to spending from lower rates. Also, in 2009-11, we experienced a global recession. The recession in the Eurozone caused lower exports and therefore the cut in rates could be insufficient given the fact other aspects of AD are being reduced.
  3. The cut is only very small. 0.25% is probably insufficient to have much effect especially given problems already mentioned. However, you could argue UK is sensitive to interest rates because of the number of variable mortgages. Even a 0.25% cut in rates can increase disposable income for people with large mortgages. (this is what you might call double evaluation, evaluation of the evaluation)
  4. The cut will take time. A cut in interest rates will not boost spending immediately. For example, It will not effect people on fixed rate mortgages for about 2 years. Therefore, after a cut in interest rate, we may not see the boost to spending for upto 18 months; this makes monetary policy much more difficult.

Related

2 thoughts on “Evaluation for Economic Exams

Leave a Reply

Your email address will not be published. Required fields are marked *