Macroeconomics - real world examples for IB students
As an IB Economics student, you know the value of having real world examples of economic concepts to refer to when answering questions. However, it can often be challenging to find good examples. In this series our IB Economics author, George Graves, presents examples from the ongoing Covid-19 pandemic for you to examine further and use in your study of IB Economics. In addition to the macroeconomic examples presented below, the series also includes Microeconomics - real world examples for IB students, International Trade - real world examples for IB students, and Development - real world examples for IB students.
This series is particularly relevant for IB students who will be taking their final exams in May 2022, where paper 1 requires the use of real world examples. These examples are also useful for those sitting exams in 2021.
Macroeconomics and Covid-19
The current pandemic has had a major impact on the global economy with countries experiencing different degrees of (mainly) negative effects. The overriding impact has been on GDP and growth with most countries predicted to record relatively large negative growth rates for both 2020 and the first two quarters of 2021. This recession is significantly deeper than that which followed the financial crisis of 2008/9 and has had wider and more unpredictable effects. This is partly because of the unique nature of the current crisis. Historically, such intense crises have been the result of either demand shocks (2008/9) or supply shocks (1973-OPEC). The current crisis is the result of a combined demand and supply shock of unusual intensity making it somewhat unprecedented and difficult to manage effectively. It has consequently led to some interesting developments and policy reassessments.
Example 1: Monetary policy
Following the financial crisis, traditional monetary policy of cutting interest rates to boost aggregate demand was seen to be of limited effectiveness and with interest rates at or close to zero there was very little scope for further stimulus via interest rate cuts. This led to the gradual adoption of Quantitative Easing (QE) which constituted a new stimulus approach involving large scale central bank purchases of government bonds aimed at injecting greater liquidity into financial markets. Essentially QE entails printing money to increase the ability of financial institutions to maintain their liquidity ratios and extend credit. The EU was the last economic group to adopt QE reluctantly following the lead of the USA, the UK and Japan. The main European opposition was from the conservative central banks of Germany and Holland reflecting their unwillingness to depart from traditional monetary tools fearing that QE would lead to inflation problems.
Since the introduction of QE no major economy has experienced problems of inflation over the past decade and in fact deflation has been a greater threat (especially for Japan). This has therefore made the conservative central banks more willing to endorse QE as a policy measure to face the current crisis. What is interesting about the current brand of QE is that the emphasis is not confined to increasing liquidity of financial institutions, but is being used to directly finance government stimulus packages. In other words new money is being printed to finance government spending aimed at stimulating demand in the economy. This has given rise to the appearance of a somewhat revolutionary Modern Monetary Theory (MMT) a major exponent of which is Stephanie Kelton (The Deficit Myth_Modern Monetary Theory and the Birth of the People’s Economy, 2020).
Example 2: Fiscal policy
MMT has also led to a major change in policy initiatives with most major economies instituting deficit financed expansionary fiscal policies. This represents a significant departure from the conventional policy mix which since the 1980s has adopted the neo-classical/monetarist approach which represented a rejection of Keynesian demand management.
Not only has Keynesianism been resurrected and reinstated but MMT has combined monetary policy with fiscal policy by using the former to finance the latter. The fact that even Germany which is the most anti deficit supporter of fiscal austerity has agreed to relax EU budget regulation which limit the size of deficits shows the extent of the policy reversal. This is not only an example of a major policy change but also represents a wider policy vision with significant implications.
Printing money to finance welfare payments, sometimes referred to as ‘helicopter money’ is not a new idea, what is new is its acceptance as a valid policy measure. By acknowledging the need to embark on a huge fiscal stimulus package in order to reduce the extent of the recession, governments were not only adopting Keynesian demand management policies, but were implicitly rejecting the validity of the neo-classical model as well as the monetarist belief that printing money to finance spending will necessarily lead to inflation. According to the neo-classical model, the macro economy is self-correcting through adjustments in prices and wages and will return to long run full employment equilibrium without the need to stimulate aggregate demand. It seems however, that no government is willing to sit back and wait for this mechanism to operate according to the neo-classical theory. The USA has implemented 2 stimulus packages to try to deal with the deflationary effects of the pandemic. The first in March 2020 was to the value of $2 trillion and the most recent (December 2020) amounted to $900 billion which represents 18% of 2019 GDP in total. Although extremely large in absolute terms the US package is smaller as a proportion of GDP than for other developed countries. (See table from Statista below)
https://www.statista.com/chart/21496/stimulus-packages-coronavirus-selected-countries/
According to a study presented by CNBC on Germany’s coronavirus stimulus spending:
“Germany is going ahead with 236 billion euros ($256 billion) in direct fiscal impulse measures, which include 100 billion euros to recapitalize and buy stakes in corporates affected by the virus, as well as 50 billion euros in direct grants to smaller businesses.
Berlin has committed 500 billion euros in tax deferrals and 1.32 trillion euros in other liquidity and guarantee measures.
Across the Atlantic, the United States is deploying $1.17 trillion in immediate stimulus, $561 billion in deferrals, and $877 billion in other liquidity and guarantee measures, according to Bruegel’s study.”
Further Investigation
This article is a starting point for your continued investigation of real world examples of macroeconomics. As you move forward with your IB studies, it is advisable to find a way of keeping track of the examples you discover. You could start a spreadsheet, bookmark links in your web browser, or keep a folder of printed articles organised by concept. Whatever method you chose, be sure to stay organised and revisit the examples you collect throughout your study process. Having a system will make your IB exam preparation much easier when it comes time to focus on your revision.
For more IB Economics resources, don’t forget to bookmark our IB Economics subject page where we regularly post helpful articles and advice to help you with your exam revision. The page is also home to our IB Economics study guides, which offer a thorough review of the Economics syllabus, expert guidance on how to approach your IB Economics revision, and lots of practice questions to make sure you are exam ready.
