Business and Law

Assignment Brief

Module Title Intermediate Macroeconomics
Assignment Number 1
Module Code ECON2542 Assignment Title Assessment 1

Assignment Release Date: 30/01/2023
Submission Date/Time: 06/03/2023: 12:00 (noon)

Assessment Information – What you need to do

This assignment is an individual assignment.

a) Compare and contrast the inflation development and contribution factors in 1970 and recently (2022) in the UK, (350 words) (30 marks)

b) Discuss and show graphically the role of oil prices in the development of the inflation in 1970 and recently (2022) in the UK using the labour market model and Philips’s curve (300 words) (35marks)

c) illustrate graphically the Bank of England’s policies to reduce inflation in 1970 using the Philips curve and aggregate demand (3-equation model). Furthermore, discuss the impact on unemployment and growth (350 words) (35marks)

Criteria for Assessment – How you will be marked

a.) A clear discussion of factor that contribute to inflation, chart showing the inflation
b.) A clear demonstration of impact of oil price using the model we studied in the course.
c.) show the model of central bank, Philips’s curve and also aggregate demand and analysis the interaction

Further information on University mark descriptors can be found here.

This assignment is designed to assess the following learning outcomes:
1. Be able to apply the macroeconomics models to the analysis of contemporary macroeconomic problems.
2. Explain the problems facing by policymakers in using macroeconomic policies.

Assessment Details

The word count is 1000.

There will be a penalty of a deduction of 10% of the mark for work exceeding the word limit by 10% or more.
The word limit includes tables, figures, quotations and citations, but excludes the references list and appendices

How to Submit your Assessment

The assessment must be submitted by 12:00 noon (GMT/BST) on 06/03/2023. No paper copies are required. You can access the submission link through the module web.

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a) Inflation is a sustained increase in the general price level of goods and services over time. In 1970, the UK experienced high inflation, with prices increasing by more than 20% per year. This was caused by a combination of factors, including high government spending, high levels of union power, and international events such as the oil crisis.

In contrast, in recent years, inflation in the UK has been relatively low, averaging around 2% per year. The factors contributing to this include increased competition in the market, improvements in technology leading to more efficient production processes, and low levels of unemployment leading to less upward pressure on wages.

Another significant difference is the approach taken by policymakers in dealing with inflation. In the 1970s, policymakers initially tried to control inflation through price and wage controls, which were largely unsuccessful. In contrast, in recent years, the Bank of England has used interest rate policy to control inflation, with the goal of keeping inflation at around 2%.

b) Oil prices play a significant role in the development of inflation in the UK, both in 1970 and recently. The labor market model and the Philips curve can help explain this relationship.

The Philips curve shows the inverse relationship between unemployment and inflation. When unemployment is low, wages and prices tend to rise, leading to higher inflation. When unemployment is high, wages and prices tend to fall, leading to lower inflation.

The oil crisis of the 1970s caused oil prices to increase significantly, leading to higher production costs and ultimately higher prices for consumers. This led to a shift in the Philips curve, with higher unemployment rates being required to achieve lower inflation rates.

In recent years, rising oil prices have also led to higher production costs, but the impact on inflation has been relatively muted. This is due in part to the increased competition in the market and improvements in technology, which have allowed firms to absorb some of the increased costs without passing them on to consumers.

c) In 1970, the Bank of England used a combination of policies to reduce inflation. The Philips curve and aggregate demand (3-equation model) can be used to illustrate these policies graphically. The Philips curve shows the trade-off between inflation and unemployment, while the aggregate demand model shows the relationship between output and inflation.

To reduce inflation, policymakers needed to increase unemployment. This could be achieved by reducing aggregate demand through tighter monetary policy or fiscal policy, or through wage and price controls. The goal was to shift the Philips curve to the left, reducing inflation at any given level of unemployment.

However, reducing inflation had a negative impact on growth and employment, leading to higher unemployment and lower output. This trade-off between inflation and unemployment is known as the sacrifice ratio.

Overall, the Bank of England’s policies in the 1970s were successful in reducing inflation, but at the cost of higher unemployment and lower growth. In recent years, the Bank of England has continued to use interest rate policy to control inflation, but with a greater emphasis on supporting growth and employment.