a level economics monetary policy essay

Monetary Policy Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory

Monetary Policy Definition: – Monetary policy occurs when the government uses interest rates or money supply to change the level of aggregate demand (AD) and national income (GDP) in the economy. – Interest rates is the monetary gain from lending money, and also the monetary cost of borrowing money. – Money supply is the total amount of money circulating an economy, generally referring to cash and bank deposits/balances.

Monetary Policy Examples & Explanation: Monetary policy is a type of demand-side policy, as it helps the government achieves its macroeconomic objectives by changing AD. A decrease in interest rates is a common response to a negative economic shock or downturn, for example during the 2008 Financial Crisis and the recent Coronavirus Epidemic . This is because a fall in interest rates leads to a lower cost to borrow for businesses and individuals. This incentivises them to increase their borrowing for investment or consumption, and as a result will increase AD, stimulating the economy. Although this works in theory, it can be hard to imagine a Hawaiian pizza place securing a loan to open up a second store during the pandemic. Another issue with lowering interest rates is they may not be able to be lowered even further (e.g. imagine if interest rates are already at 0.1% to start with). As a result, governments may implement quantitative easing which affects the money supply of the economy instead.

Monetary Policy Economics Notes with Diagrams

There are considerations of having a negative or zero interest rates when the economy is depressed. UK small businesses are offered loans with zero interest during the pandemic, and this is mainly for them to meet their costs and survive. When interest rate turns negative, it means that banks charge depositors (lenders) and pay borrowers. This will incentivise savers in the economy to consume, and increase borrowing, but put more pressure on banks like in Japan.

Monetary Policy Video Explanation – EconPlusDal

The left video explains monetary policy, the right evaluates the advantages and disadvantages of the policy.

Receive News on our Free Economics Classes, Notes/Questions Updates, and more

Monetary policy multiple choice & essay questions (a-level), monetary policy in the news, related a-level, ib economics resources.

Follow us on Facebook , TES and SlideShare for resource updates.

You may also like

Monopoly Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | […]

Types of Business Objectives Notes & Questions (A-Level, IB Economics)

Subsidies Notes & Questions (A-Level, IB Economics)

Supply-Side Policy Notes & Questions (A-Level, IB)

Leave a comment cancel reply.

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

Save my name, email, and website in this browser for the next time I comment.

AQA A-Level Economics | Every 25 Mark Essay

Y13 microeconomics.

Use the extracts and your knowledge of economics to assess whether the benefits outweigh the costs when the Government privatises organisations such as Royal Mail and opens up the market to competition. (June 2017)

Use the extracts and your knowledge of economics to evaluate the policies that government might use to reduce the gender pay gap. (June 2017)

Evaluate the view that government regulation of monopolistically competitive markets is unnecessary, and that polices to encourage competition and prevent the abuse of monopoly power should focus entirely on oligopolies and monopolies. (June 2017)

To what extent can the problem of poverty in the UK be solved through the operation of market forces? Justify your answer. (June 2017)

Evaluate the view that imposing a tax is the most effective government policy for reducing the market failures arising from overconsumption of unhealthy food and drink. (June 2017)

Use the extracts and your knowledge of economics to assess the view that the government should intervene further in the banking sector to promote greater competition. (June 2018)

Use the extracts and your own knowledge of economics to evaluate whether governments should allow markets to respond freely to the opportunities and challenges presented by technological progress, without any state intervention. (June 2018)

Assess the view that regulation is a better policy for dealing with the problem of air pollution than the allocation of property rights or taxation. (June 2018)

Assess the view that, in the UK, the consequences of wealth inequality are more damaging than the consequences of income inequality. (June 2018)

Evaluate the view that a firm making low profits must be inefficiently managed. (June 2018)

Use the extracts and your knowledge of economics to assess the view that the increasing scarcity of sand is a problem best solved by market forces, rather than through government intervention. (June 2019)

Use the extracts and your knowledge of economics to evaluate the case for renationalising railways in the UK. (June 2019)

Using examples to illustrate your answer, assess the usefulness of behavioural economic theory compared to traditional economic policies in helping governments to correct market failures (June 2019)

Discuss the validity of the traditional economic assumption that the main objective of firms is to maximise profits. (June 2019)

Discuss the view that a national minimum wage is beneficial for an economy. (June 2019)

Using the extracts and your knowledge of economics, evaluate policies, if any, that governments in developed countries should pursue to reduce waste and encourage the recycling of waste products. (June 2020)

Using the extracts and your knowledge of economics, assess policies that might be used to improve the provision of social care in the UK. (June 2020)

Discuss whether governments should consider increasing the regulation and taxation of technology firms which have acquired significant global monopoly power. (June 2020)

Evaluate the view that government intervention to reduce inequality will lead to an improvement in economic welfare. (June 2020)

Assess the view that price discrimination is always damaging. (June 2020)

Using the extracts and your knowledge of economics, assess the view that the market structure of the pharmaceutical industry is damaging for consumers. (November 2021)

Using the extracts and your knowledge of economics, evaluate possible government policies to reduce the ethnic pay gap. (November 2021)

Evaluate the view that technological change tends to bring industries closer to the market structure of perfect competition. (November 2021)

Discuss the view that individual economic agents will always act as rational decision makers so as to maximise their utility. (November 2021)

Discuss how the divorce of ownership from control may affect both the conduct and performance of firms. (November 2021)

Assess the view that government intervention in the UK labour market is necessary to protect the interests of people who are working in the gig economy. (June 2022)

Evaluate the view that the supermarket sector is serving customers' interests well.

Assess the view that high-speed Internet connection is a necessity for modern life and should be provided by the government, free of charge, to all households. (June 2022)

Evaluate the view that government failure means that government intervention in markets will rarely lead to an improvement in economic welfare. (June 2022)

Evaluate whether the best way to reduce inequality in disposable income is to reduce differences in pre-tax incomes rather than through taxes and welfare benefits. (June 2022)

Using the data in the extracts and your economic knowledge, assess whether you agree that fixing a maximum price for energy that is sold to households is the best way of dealing with market failure in the UK energy industry? (Specimen)

Using the data in the extracts and your economic knowledge, assess the view that inequality is ‘good for us all.’ (Specimen)

Discuss the view that price discrimination only benefits suppliers, such as Apple. (Specimen)

The Government would like to improve the well-being of the population by encouraging people to adopt a healthy diet. Using your knowledge of both traditional economic theory and behavioural economics, assess alternative policies that the Government might adopt to try to achieve its objective. (Specimen)

Assess the view that a system of road-pricing is the best way to tackle the problem of worsening traffic congestion in the UK. (Specimen)

Y13 Macroeconomics

Using the data in the extracts and your knowledge of economics, evaluate the view that greater use of market-based strategies is the best way to improve the economic development of India.

Using the data in the extracts and your knowledge of economics, evaluate the view that monetary policy is the most effective way of tackling deflation in developed economies such as the UK and Japan (June 2017)

Discuss the view that falling unemployment will inevitably lead to trade-offs with other macroeconomic policy objectives. (June 2017)

Evaluate the measures that might be taken to reduce a deficit on the current account of the UK’s balance of payments. (June 2017)

Evaluate the economic consequences for the UK economy of a significant shift in the burden of taxation from direct taxes to indirect taxes. (June 2017)

Using the data in the extracts and your knowledge of economics, assess the impact of a persistent current account deficit on the macroeconomic performance of the UK economy. (June 2018)

Using the data in the extracts and your knowledge of economics, evaluate the view that maintaining low interest rates for a sustained period of time may be damaging to the UK’s macroeconomic stability. (June 2018)

Evaluate the view that MNCs play a positive role in the development of LEDCs. (June 2018)

Evaluate whether achieving a budget surplus is a desirable objective of economic policy (June 2018)

Assess the view that falling unemployment will inevitably lead to an improvement in the standard of living for people in the UK. (June 2018)

Using the data in the extracts and your knowledge of economics, assess the view that to improve the living standards of their citizens, governments across the world should prioritise achieving economic growth. (June 2019)

Using the data in the extracts and your knowledge of economics, evaluate the view that there is a strong case for significant increases in UK income tax rates (June 2019)

Assess the view that a depreciation of the pound against other currencies is likely to improve the UK’s macroeconomic performance. (June 2019)

Evaluate the view that strict rules and regulations on financial markets are essential to help create a more stable economy. (June 2019)

Evaluate the view that inflation is always preferable to deflation. (June 2019)

Using the data in the extracts and your knowledge of economics, evaluate the view that free market supply-side reforms to labour markets are beneficial to the UK economy. (June 2020)

Using the data in the extracts and your knowledge of economics, assess the view that developing economies, such as Brazil and China, should pursue protectionist policies to achieve greater economic development. (June 2020)

To what extent do you agree that reducing the budget deficit is more important to the UK’s macroeconomic performance than reducing the current account deficit on its balance of payments? Justify your answer. (June 2020)

Evaluate the view that the main objectives of UK government macroeconomic policy can be achieved without conflicting with each other. (June 2020)

Evaluate the costs and benefits for a country of joining a currency union, such as the eurozone. (June 2020)

Using the data in the extracts and your knowledge of economics, evaluate the view that an increase in a country’s national debt is damaging for its economy (November 2021)

Using the data in the extracts and your knowledge of economics, evaluate policies which could be used to boost South Korea’s exports and increase its trade surplus. (November 2021)

Evaluate the possible impact on the cost of living and the standard of living in the UK of a sustained rise in the value of the pound sterling against other currencies, such as the euro and the US dollar. (November 2021)

To what extent do you agree that a fall in savings is beneficial for the UK economy? Justify your answer. (November 2021)

Assess policies which can be used to reduce cyclical instability in the UK. (November 2021)

You might also like...

Privatisation | aqa a-level economics model essay, financial market failure | a-level economics model essay, wage differentials | a-level economics model essay, gender pay gap | aqa a-level economics model essay, edexcel a-level economics | every 25 marker.

Macro Economic Essays

These are a collection of essays written for my economic blogs.

Exchange Rate Essays

• Effects of a falling Dollar
• Why Dollar keeps falling
• Discuss Policies to Stop the Dollar Falling
• Does Devaluation Cause Inflation?
• Benefits and Costs of Falling Dollar
• Reasons for Falling Dollar
• The Dollar as the World’s Reserve Currency

Economic Growth Essays

• Evaluate Benefits of Economic Growth
• Essays on Recessions
• Causes of Recessions
• Problems of Recovering from a Recession
• What can Increase Long-Run Economic Growth?
• Discuss Effect of a fall in the Savings Ratio

Inflation Essays

• Discuss the Difficulties of Controlling Inflation
• Should the aim of the Government be to Attain Low Inflation?
• Explain What Can Cause a Sustained Increase in the Rate of Inflation
• Reasons for low inflation in the UK
• Inflation Explained
• Difficulties of Inflation targeting
• Hyperinflation

Unemployment Essays

• Explain what is meant by Natural Rate of Unemployment?
• Should the Main Macro Economic Aim of the Government be Full Employment?
• The True Level of Unemployment in the UK
• What explains low inflation and low unemployment in the UK?

Demand Side Policies

• Discuss effect of Expansionary demand-side policies on Balance of Payments and Environment
• Effects of a Falling Stock Market
• How do Mortgage Defaults affect and Economy?
• Discuss the effect of increased Government spending on education
• Phillips Curve – Trade-off between Inflation and Unemployment

Development Economics

• Why Growth may not benefit developing countries
• Does Aid Increase Economic Welfare?
• Problems of Free Trade for Developing Economies

Fiscal Policy

• Will US Economy benefit from Tax Cuts?
• Can Fiscal Policy solve Unemployment?
• Explain Reasons for UK Current Account Deficit
• Benefits of Globalisation for Developing and Developed Countries

Monetary Policy

• Discuss Effects of an Increase in Interest Rates
• How MPC set Interest Rates
• Benefits of High-Interest Rates (and recessions)
• Who Sets interest rates – Markets or Bank of England?

Economic History

• Economics of the 1920s
• What Caused Wall Street Crash of 1929?
• UK economy under Mrs Thatcher
• Economy of the 1970s
• Lawson Boom of the 1980s
• UK recession of 1991
• The great recession 2008-13

General Economic Essays

• The Dismal Science
• Difference Between Economists and Non Economists
• War and Recessions
• The Economics of Fear
• The Economics of Happiness
• Can UK and US avoid Recession?
• 3 Of the Worst Economic Policies
• Overvalued Housing Markets
• What Went Wrong with US Economy?
• Problem with Bailing out financial sector
• Problems of Personal Debt
• Problem of Inflation
• National Debt in the UK
• How To Survive a Recession
• Can A recession be a good thing?

Chinese Economy

• Problems of Chinese Economic Growth
• Should we worry about a strong China
• Chinese Growth and Costs of Growth
• Chinese Interest Rates and Economic Growth

Model essays

• A2 model essays
• AS model essays
• Top 10 Reasons For Studying Economics
• Inflation explained by Victor Borge
• Funny Exam Answers
• Humorous look at Subprime crisis

Book a free consultation now

• Revision notes >
• A-Level Economics Revision Notes >
• Macroeconomics

Conflict: Macroeconomic Policy - A-Level Economics

Conflicts between macroeconomic policies.

The use of one macroeconomic policy can outweigh the effect of another, and therefore conflict arises between different policies:

Fiscal and Supply-­‐Side Policies

Expansionary fiscal policy involves increased government spending, and much of this spending is directed to the health and education sectors. Also, there might be reduced taxation, which is also a supply-­‐side policy. Therefore, fiscal and supply-­‐side policies are effectively working in tandem. Moreover, the supply-­‐side effects shifts out the LRAS curve, which partly cancels out any inflationary pressures the rise in economic growth might  bring.

However, the effect of fiscal policy on AD tends to be more immediate than the effect on LRAS, so expansionary policy is likely to have inflationary effects in the short run but deflationary effects in the long term due to the impact on LRAS.

In contrast, contractionary fiscal policy involves slowing economic growth in order to lower/ control the inflation rate. However, the impact of reduced spending and increased tax might lead to the LRAS shifting inwards, which can lead to a rise in price-­‐ the opposite of what is intended.

Fiscal and Monetary Policies

Fiscal policy has implications for the interest rate and therefore circumstances arise in which fiscal and monetary policy may come into conflict. This means that a way must be found of coordinating fiscal and monetary policy. However, this is often difficult to do because the MPC is intended to act independently of the government in conducting monetary policy in order to meet the inflation target.

Expansionary fiscal policy causes growth but has inflationary pressures. Contractionary fiscal policy slows growth but has deflationary pressures.

Monetary and Supply-­‐Side Policies

A tight monetary policy means that interest rates are high to control inflation. However, the high interest rates increase costs for firms if they are borrowing money, which may lead to an inward shift in LRAS and hence potential inflationary effects.

However, these two policies can also work in tandem. Higher interest rates should lead to higher exchange rates (due to the influx of ‘hot money’), which will reduce the cost of imported raw materials, reducing production costs. This effect is especially strong because UK firms import most of their raw materials. The fall in production costs will shift the LRAS out. Therefore, a tight monetary policy can improve the supply side. Although, higher exchange rates are not guaranteed and they harm firms trying to export.

In contrast, loose monetary policy reduces borrowing costs for firms but increases the cost of imported raw materials (assuming that exchange rates fall). However, firms will also gain international competitiveness.

In summary:

Tight monetary policy (high interest rates).

• Increase in borrowing costs for firms = LRAS falls
• Higher ER 🡪 Reduction in imported raw material costs = LRAS rises
• Higher ER 🡪 Reduction in international competitiveness = LRAS falls Loose Monetary Policy (low interest rates)
• Decrease in borrowing costs for firms = LRAS rises
• Lower ER 🡪 Increase in imported raw material costs = LRAS falls
• Lower ER 🡪 Increase in international competitiveness = LRAS rises

Monetary Policy and Distribution of Income

A rise in interest rates worsens income distribution because it hurts borrowers (e.g. people paying off a mortgage), and helps savers. Savers are more likely to be the wealthier people in the economy, who have a higher marginal propensity to save (MPS), so they will benefit. Therefore,  there  is  a  re-­‐distribution  of  income  from  borrowers  to  savers,  and  from  the middle class to the wealthy-­‐ income distribution worsens.

Monetary Policy and Current Account

This point is based on the same theory as described in the conflict between Monetary Policy and supply side policies. A higher interest rate leads to a higher exchange rate, which leads to cheaper imports and dearer exports, which leads to a worsening of the current account of the Balance of Payments.

General Evaluation for Conflicts

• Difficulty in measuring the conflicts and effects-­‐ unreliable or missing information
• Prioritization of certain policies
• Short Run vs. Long Run
• Many of the conflicts depend on the position of the economy on the LRAS curve (is the LRAS elastic or inelastic?)

Macroeconomic policy refers to the actions taken by governments or central banks to influence the performance of the economy as a whole. This includes policies related to inflation, unemployment, and economic growth.

Examples of macroeconomic policies include monetary policy (e.g. setting interest rates), fiscal policy (e.g. government spending and taxation), and exchange rate policy (e.g. manipulating the value of a currency relative to other currencies).

There can be conflicts between different macroeconomic policy objectives. For example, policies that promote economic growth may lead to higher inflation, while policies that aim to control inflation may limit economic growth. There can also be conflicts between short-term and long-term objectives, as well as conflicts between the interests of different groups in society.

The Phillips curve is a graph that shows the relationship between unemployment and inflation. It suggests that when unemployment is low, inflation tends to be high, and vice versa. This relationship can be used to inform macroeconomic policy decisions.

The natural rate of unemployment is the rate of unemployment that exists when the economy is in equilibrium and inflation is stable. It is also known as the non-accelerating inflation rate of unemployment (NAIRU).

Policymakers use macroeconomic models to simulate the effects of different policy options on the economy. These models take into account factors such as interest rates, government spending, and inflation to help policymakers make informed decisions.

The central bank plays a key role in macroeconomic policy, particularly in the area of monetary policy. It is responsible for setting interest rates and controlling the money supply in the economy to achieve specific policy objectives, such as controlling inflation.

International factors, such as exchange rates and trade policies, can have a significant impact on macroeconomic policy decisions. For example, changes in exchange rates can affect the competitiveness of a country’s exports, while trade policies can affect the flow of goods and services across borders.

There are a number of potential limitations of macroeconomic policy, including the fact that policies may not be implemented effectively or may have unintended consequences. Additionally, some factors that affect the economy, such as technological changes, may be outside the control of policymakers.

Still got a question? Leave a comment

Leave a comment, cancel reply.

Save my name, email, and website in this browser for the next time I comment.

Let's get acquainted ? What is your name?

Nice to meet you, {{name}} what is your preferred e-mail address, nice to meet you, {{name}} what is your preferred phone number, what is your preferred phone number, just to check, what are you interested in, when should we call you.

It would be great to have a 15m chat to discuss a personalised plan and answer any questions

What time works best for you? (UK Time)

Pick a time-slot that works best for you ?

How many hours of 1-1 tutoring are you looking for?

My whatsapp number is..., for our safeguarding policy, please confirm....

Please provide the mobile number of a guardian/parent

Which online course are you interested in?

What is your query, you can apply for a bursary by clicking this link, sure, what is your query, thank you for your response. we will aim to get back to you within 12-24 hours., lock in a 2 hour 1-1 tutoring lesson now.

If you're ready and keen to get started click the button below to book your first 2 hour 1-1 tutoring lesson with us. Connect with a tutor from a university of your choice in minutes. (Use FAST5 to get 5% Off!)

Final dates! Join the tutor2u subject teams in London for a day of exam technique and revision at the cinema. Learn more →

Reference Library

Collections

• See what's new
• All Resources
• Student Resources
• Assessment Resources
• Teaching Resources
• CPD Courses
• Livestreams

Study notes, videos, interactive activities and more!

Economics news, insights and enrichment

Currated collections of free resources

Browse resources by topic

• All Economics Resources

Resource Selections

Currated lists of resources

Economics Revision Essay Plans

Last updated 17 Dec 2019

• Share on Facebook
• Share on Twitter
• Share by Email

This series of resources provides revision essay plans for a wide variety of essay topics, including synoptic questions.

For the 2019 papers check out our collection of videos on building A* evaluation into your answers

Have you tried our series of more than 50 Quizlet revision activities? Click here to access!

Essay Plan: Limits on Monopoly Power

Topic Videos

Chains of Reasoning and Evaluation: Fuel Prices in the UK

Exam Support

EU Customs Union Membership (Revision Essay Plan)

Practice Exam Questions

Market for Electric Vehicles (Revision Essay Plan)

Mergers and consumer welfare (revision essay plan), air pollution and policies to control (revision essay plan), policies to improve competitiveness (revision essay plan), economic effects of higher interest rates (revision essay plan), current account deficit & policies (revision essay plan), unemployment and policy trade-offs (revision essay plan), case for cutting the national debt (revision essay plan), micro-finance (2019 revision update), essay on advertising and economic welfare, essay on oligopoly and collusion, policies to control inflation.

Study Notes

Why is high inflation a problem?

Revision essay: exchange rate depreciation and macroeconomic objectives, to what extent should full-employment be the main macro policy objective, housing supply (revision essay plan), minimum alcohol pricing (revision essay plan), oligopoly and collusion (revision essay plan), building confidence in writing synoptic 25 mark essays (edexcel), behavioural and neo-classical economics (revision essay plan), barriers to entry and economic profit (revision essay plan), micro and macro impact of a plastic tax (revision essay plan), edge revision webinar: market failure and government intervention, farm subsidies (revision essay plan), competitiveness of the uk motor industry (revision essay plan), labour migration (revision essay plan), financial market failure (revision essay plan), tariff on chinese steel (revision essay plan), policies to improve food affordability (revision essay plan), reducing a trade deficit (revision essay plan), museums and government subsidy (revision essay plan), fiscal policy and inequality (revision essay plan), globalisation and inequality (revision essay plan), economic inactivity (revision essay plan), competition and consumer welfare (essay technique video), essay plan: is the euro the main cause of the crisis in greece and italy, china: successes and failures essay plan, our subjects.

• › Criminology
• › Economics
• › Geography
• › Health & Social Care
• › Psychology
• › Sociology
• › Teaching & learning resources
• › Student revision workshops
• › Online student courses
• › CPD for teachers
• › Livestreams
• › Teaching jobs

Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885

• › Contact us
• › Terms of use
• › Privacy & cookies

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.

Real Wage Growth at the Micro Level

This article investigates patterns in real wage growth in 2022 to determine whether wages have kept up with rising price levels and how this differs among labor market participants. Using the consumer price index for wages and imputing expenditure data from the Consumer Expenditure Survey, we separately measure nominal wage growth and inflation rates at the micro level. We find that there is more heterogeneity in the former, meaning that when we combine them, an individual's real wage growth is primarily driven by their nominal wage growth. In 2022, 57 percent of individuals experienced negative real wage growth, with older and less-educated workers, as well as job stayers, being hit the hardest. Conversely, younger and highly educated workers, as well as job switchers, had higher real wage growth.

Victoria Gregory is an economist and Elisabeth Harding is a research associate at the Federal Reserve Bank of St. Louis.

INTRODUCTION

Until the beginning of 2021, the past decade saw consistent positive year-over-year real wage growth, showing that wage growth outpaced the rising cost of living. However, in the past two years, the U.S. has experienced high inflation combined with strong wage growth. With aggregate inflation reaching a high of 9 percent in June 2022 and average nominal wage growth soaring to 6.4 percent in 2022, most households experienced both rising wages and rising cost of living. The difference between these two values determines real wage growth. However, the contributions of these components may differ across individuals or households. The unequal impact of inflation across age, education, household size, and income is of great interest to policymakers. 

To illustrate these trends, Figure 1 depicts median real wage growth in the United States over the past decade. The figure shows that while workers saw increases in real wage growth in 2015 and 2020, it typically ranged from 1 percent to 3 percent until 2021. However, more recently, median real wage growth has hovered around –2 percent, indicating a notable shift in economic conditions.

In this article, we explore the heterogeneity behind the negative values shown in Figure 1 by analyzing the distribution of real wage growth in 2022 across households. Specifically, we examine nominal wage growth and inflation rates at the individual level to determine the real wage growth rates for each worker in our sample. However, measuring real wage growth at the individual level presents a challenge. To calculate individual real wages, we must observe both wage and consumption for each individual, but there are no current microdata that cover both consumption and nominal wage growth. 

We overcome this challenge by combining consumption data from the Consumer Expenditure Survey (CEX) and wage growth data from the Current Population Survey (CPS). We begin by pinpointing individuals in the CPS for whom we can observe wages 12 months apart. The CPS records wage information for individuals as they rotate out of the survey. We then follow the methodology of the Federal Reserve Bank of Atlanta's Wage Growth Tracker to measure median nominal wage growth, finding that the distribution of nominal wage growth has a wide range, with most values between –50 percent and 50 percent. 

Rather than use the Bureau of Labor Statistics's (BLS) measure of average inflation, we calculate individual inflation rates that account for differences in consumption patterns of different demographic groups. We impute consumption information from the CEX to the CPS based on demographic characteristics: age, education, income, and household size. This imputation estimates consumption baskets for our sample of individuals in the CPS, thus providing us with a data set of observed wage and imputed consumption. To measure inflation, we match the consumer price index (CPI) inflation series to our 19 CEX expenditure categories to calculate individual inflation rates based on the estimated consumption baskets. Unlike that of nominal wage growth, the distribution of inflation rates has a narrow range, from 7 percent to 13 percent for most individuals. 

Last, we calculate individual real wage growth as the difference between an individual's nominal wage growth and inflation rate and analyze real wage growth across demographic groups. Our results highlight three important features of real wage growth in 2022. First, 57 percent of individuals experienced negative real wage growth, 10 to 15 percentage points higher than in typical years. Second, real wage growth varies significantly across demographic groups. Younger workers as well as individuals who switched jobs experienced the highest real wage growth. The wage of workers older than 55 and individuals with children in the household were least likely to keep up with their rising cost of living. Third, the distributions of nominal wage growth and inflation suggest that variations in real wage growth are driven by variations in nominal wage growth. This observation stems from the fact that we find a lot more heterogeneity in nominal wage growth compared with inflation across households.

This article contributes to several aspects of existing literature. Similar to Argente and Lee (2021) and Kaplan and Schulhofer-Wohl (2017), we study differences in the cost of living across households. While these papers incorporate more sources of these differences that we cannot account for here (such as differences in shopping behavior and quality of items consumed), we explore the connection with wage growth. In addition, they also use the Nielsen Consumer Panel and Retail Scanner data sets, which focus primarily on grocery stores and drug stores. In contrast, we incorporate a much larger set of goods and services using the CEX. 

Accordingly, we also borrow some techniques from other papers that use the CEX micro data to study household consumption baskets. For instance, Hobijn and Lagakos (2003) examine inflation inequality across the U.S. from 1987 to 2001 using consumption data from the CEX and aggregating expenditures into 19 categories to best match the CPI series, as we do here. Cravino, Lan, and Levchenko (2018) also use the CEX to document the relative prices of goods consumed across households, but they aggregate households into income percentiles and examine the distributional effects of monetary policy shocks on those consumption baskets. Several other papers also perform related, but different, imputation techniques to link consumption data with other micro data sources, such as Blunder, Pistaferri, and Preston (2008) and Pretnar (2022). 

Finally, our work relates to studies examining the characteristics of the income growth distribution, such as Guvenen et al. (2015). We find that the distributions we recover in this  article exhibit similar properties.

Read the full article .

Cite this article

Subscribe to Our Newsletter

Stay current with brief essays, scholarly articles, data news, and other information about the economy from the Research Division of the St. Louis Fed.

SUBSCRIBE TO THE RESEARCH DIVISION NEWSLETTER

Research division.

• Legal and Privacy

One Federal Reserve Bank Plaza St. Louis, MO 63102

Information for Visitors

• International
• Schools directory
• Resources Jobs Schools directory News Search

A Level Economics essay plans

Last updated

1 August 2020

• Share through email
• Share through twitter
• Share through linkedin
• Share through facebook
• Share through pinterest

Resources included (11)

Monetary policy- A Level Economics

Fiscal policy and financial markets- A Level Economics

Measuring macroeconomic performance- A Level Economics

How the macroeconomy works- A Level Economics

Economic performance- A Level Economics

Poverty and inequality- A Level Economics

Market failure and government intervention- A Level Economics

Price determination - A Level Economics

Market structures- A Level Economics

Production, costs and revenue- A Level Economics

The labour market- A Level Economics

Over 125 pages of essay plans on the following A Level Economics topics:

• Price determination in a competitive market
• Production, costs and revenue
• Market structures (perfect competition, imperfectly competitive markets and monopoly)
• The labour market
• The distribution of income and wealth: poverty and inequality
• The market mechanism, market failure and government intervention in markets
• How the macroeconomy works : the circular flow of income, AD/AS analysis, and related concepts
• Economic performance
• Fiscal policy and financial markets
• Monetary policy

Written specifically for AQA but suitable for any exam board.

Tes paid licence How can I reuse this?

Your rating is required to reflect your happiness.

It's good to leave some feedback.

Something went wrong, please try again later.

This resource hasn't been reviewed yet

To ensure quality for our reviews, only customers who have purchased this resource can review it

Report this resource to let us know if it violates our terms and conditions. Our customer service team will review your report and will be in touch.

Not quite what you were looking for? Search by keyword to find the right resource:

Advertisement

Supported by

3 Facts That Help Explain a Confusing Economic Moment

The path to a “soft landing” doesn’t seem as smooth as it did four months ago. But the expectations of a year ago have been surpassed.

By Ben Casselman

The economic news of the past two weeks has been enough to leave even seasoned observers feeling whipsawed. The unemployment rate fell. Inflation rose. The stock market plunged, then rebounded, then dropped again.

Take a step back, however, and the picture comes into sharper focus.

Compared with the outlook in December, when the economy seemed to be on a glide path to a surprisingly smooth “soft landing,” the recent news has been disappointing . Inflation has proved more stubborn than hoped. Interest rates are likely to stay at their current level, the highest in decades, at least into the summer, if not into next year.

Shift the comparison point back just a bit, however, to the beginning of last year, and the story changes. Back then, forecasters were widely predicting a recession, convinced that the Federal Reserve’s efforts to control inflation would inevitably result in job losses, bankruptcies and foreclosures. And yet inflation, even accounting for its recent hiccups, has cooled significantly, while the rest of the economy has so far escaped significant damage.

“It seems churlish to complain about where we are right now,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “This has been a really remarkably painless slowdown given what we all worried about.”

The monthly gyrations in consumer prices, job growth and other indicators matter intensely to investors, for whom every hundredth of a percentage point in Treasury yields can affect billions of dollars in trades.

But for pretty much everyone else, what matters is the somewhat longer run. And from that perspective, the economic outlook has shifted in some subtle but important ways.

Inflation is stubborn, not surging.

Inflation, as measured by the 12-month change in the Consumer Price Index, peaked at just over 9 percent in the summer of 2022. The rate then fell sharply for a year, before stalling out at about 3.5 percent in recent months. An alternative measure that is preferred by the Fed shows lower inflation — 2.5 percent in the latest data, from February — but a similar overall trend.

In other words: Progress has slowed, but it hasn’t reversed.

On a monthly basis, inflation has picked up a bit since the end of last year. And prices continue to rise quickly in specific categories and for specific consumers. Car owners, for example, are being hit by a triple whammy of higher gas prices, higher repair costs and, most notably, higher insurance rates , which are up 22 percent over the past year.

But in many other areas, inflation continues to recede. Grocery prices have been flat for two months, and are up just 1.2 percent over the past year. Prices for furniture, household appliances and many other durable goods have been falling. Rent increases have moderated or even reversed in many markets, although that has been slow to show up in official inflation data.

“Inflation is still too high, but inflation is much less broad than it was in 2022,” said Ernie Tedeschi, a research scholar at Yale Law School who recently left a post in the Biden administration.

The rest of the economy is doing well.

The recent leveling-off in inflation would be a big concern if it were accompanied by rising unemployment or other signs of economic trouble. That would put policymakers in a bind: Try to prop up the recovery and they could risk adding more fuel to the inflationary fire; keep trying to tamp down inflation and they could tip the economy into a recession.

But that isn’t what is happening. Outside of inflation, most of the recent economic news has been reassuring, if not outright rosy.

The labor market continues to smash expectations. Employers added more than 300,000 jobs in March, and have added nearly three million in the past year. The unemployment rate has been below 4 percent for more than two years, the longest such stretch since the 1960s, and layoffs, despite cuts at a few high-profile companies, remain historically low.

Wages are still rising — no longer at the breakneck pace of earlier in the recovery, but at a rate that is closer to what economists consider sustainable and, crucially, that is faster than inflation.

Rising earnings have allowed Americans to keep spending even as the savings they built up during the pandemic have dwindled. Restaurants and hotels are still full. Retailers are coming off a record-setting holiday season, and many are forecasting growth this year as well. Consumer spending helped fuel an acceleration in overall economic growth in the second half of last year and appears to have continued to grow in the first quarter of 2024, albeit more slowly.

At the same time, sectors of the economy that struggled last year are showing signs of a rebound. Single-family home construction has picked up in recent months. Manufacturers are reporting more new orders, and factory construction has soared, partly because of federal investments in the semiconductor industry.

Interest rates are going to stay high for a while.

So inflation is too high, unemployment is low and growth is solid. With that set of ingredients, the standard policymaking cookbook offers up a simple recipe: high interest rates.

Sure enough, Fed officials have signaled that interest rate cuts, which investors once expected early this year, are now likely to wait at least until the summer. Michelle Bowman, a Fed governor, has even suggested that the central bank’s next move could be to raise rates, not cut them.

Investors’ expectation of lower rates was a big factor in the run-up in stock prices in late 2023 and early 2024. That rally has lost steam as the outlook for rate cuts has grown murkier, and further delays could spell trouble for stock investors. Major stock indexes fell sharply on Wednesday after the unexpectedly hot Consumer Price Index report; the S&P 500 ended the week down 1.6 percent, its worst week of the year .

Borrowers, meanwhile, will have to wait for any relief from high rates. Mortgage rates fell late last year in anticipation of rate cuts but have since crept back up, exacerbating the existing crisis in housing affordability. Interest rates on credit card and auto loans are at the highest levels in decades, which is particularly hard on lower-income Americans, who are more likely to rely on such loans.

There are signs that higher borrowing costs are beginning to take a toll: Delinquency rates have risen, particularly for younger borrowers.

“There are reasons to be worried,” said Karen Dynan, a Harvard economist who was a Treasury official under President Barack Obama. “We can see that there are parts of the population that are for one reason or another coming under strain.”

In the aggregate, however, the economy has withstood the harsh medicine of higher rates. Consumer bankruptcies and foreclosures haven’t soared. Nor have business failures. The financial system hasn’t buckled as some people feared.

“What should keep us up at night is if we see the economy slowing but the inflation numbers not slowing,” Ms. Edelberg of the Hamilton Project said. So far, though, that isn’t what has happened. “We still just have really strong demand, and we just need monetary policy to stay tighter for longer.”

Ben Casselman writes about economics with a particular focus on stories involving data. He has covered the economy for nearly 20 years, and his recent work has focused on how trends in labor, politics, technology and demographics have shaped the way we live and work. More about Ben Casselman

• Share full article

• Work & Careers
• Life & Arts

Become an FT subscriber

Try unlimited access Only $1 for 4 weeks

Then $75 per month. Complete digital access to quality FT journalism on any device. Cancel anytime during your trial.

• Global news & analysis
• Expert opinion
• Special features
• FirstFT newsletter
• Videos & Podcasts
• Android & iOS app
• FT Edit app
• 10 gift articles per month

Explore more offers.

Standard digital.

• FT Digital Edition

Premium Digital

Print + premium digital, digital standard + weekend, digital premium + weekend.

Today's FT newspaper for easy reading on any device. This does not include ft.com or FT App access.

• 10 additional gift articles per month
• Global news & analysis
• Exclusive FT analysis
• Videos & Podcasts
• FT App on Android & iOS
• Everything in Standard Digital
• Premium newsletters
• Weekday Print Edition
• FT Weekend newspaper delivered Saturday plus standard digital access
• FT Weekend Print edition
• FT Weekend Digital edition
• FT Weekend newspaper delivered Saturday plus complete digital access
• Everything in Preimum Digital

Essential digital access to quality FT journalism on any device. Pay a year upfront and save 20%.

• Everything in Print
• Everything in Premium Digital

Complete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.

Terms & Conditions apply

Explore our full range of subscriptions.

Why the ft.

See why over a million readers pay to read the Financial Times.

International Edition