AS Macro: Managing the Economy

  • 1,749 views
Uploaded on

One of the most significant roles of a modern government is to ensure that the economy performs to its full capacity. …

One of the most significant roles of a modern government is to ensure that the economy performs to its full capacity.
The government has to consider the performance indicators like inflation, unemployment and economic growth and devise policies to achieve their aims. In this session we will consider the options that fall into the fiscal and monetary policy
portfolio.

More in: Business , Career
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
1,749
On Slideshare
0
From Embeds
0
Number of Embeds
6

Actions

Shares
Downloads
96
Comments
0
Likes
2

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. MANAGING THE ECONOMY GEOFF RILEY ETON COLLEGE Session 3 10:06:11 PM
  • 2. 10/04/2014
  • 3. Define Fiscal and Monetary Policy You have 1 minute Changes in taxation, government spending and borrowing to achieve macroeconomic objectives The manipulation of interest rates, money supply and exchange rates to achieve macroeconomic objectives. 10:06:15 PM AD = C + I + G + X - M
  • 4. Building levels of response • Knowledge and understanding – what are fiscal and monetary policy? • Application – how and when might active use of these policies be helpful? • Analysis – how do the policies work? How do changes to policy lead to effects? • Evaluation – do the policies always work well? What might undermine their effectiveness? 10:06:19 PM
  • 5. Application: Engine Failure The UK economy is recovering from a deep recession, mainly caused by falling aggregate demand 10:10:45 PM
  • 6. 10/04/2014
  • 7. Identify 2 reasons for falling AD from the graph on the right Investment Private Consumption 10:10:55 PM
  • 8. Can you be an analysis machine? Clearly show the examiner how causes can lead to effects 10:11:09 PM
  • 9. Explain how expansionary fiscal policy affects aggregate demand You have 3 minutes 10:11:22 PM
  • 10. Increase in Consumption • A reduction in direct or indirect taxation can leave households with higher levels of disposable income. This could translate into additional purchases. • Lower taxation could also generate additional employment opportunities. 10:11:44 PM
  • 11. Increase in Investment • Lower taxation might prompt firms to invest in expansion • Lower taxation can reduce leakages from the circular flow of income, increasing the size of investment multiplier effects 10:12:02 PM UK corporation tax cut from 23% to 21% in April 2014
  • 12. Increase in Government Spending • Higher government spending directly contributes to AD • Government spending also has supply-side effects! 10:12:21 PM
  • 13. Increase in Net Trade • Government support for exporters might help boost their performance • Lower corporation tax might attract FDI from businesses who then export from the UK 10:12:24 PM
  • 14. Building up to a strong finish • Knowledge and understanding – what is fiscal policy? • Application – how and when might active use of fiscal policy be helpful? • Analysis – how does the policy work? How do causes (changes to policy) lead to effects? • Evaluation – does the policy always work well? What might undermine its effectiveness? 10:12:35 PM
  • 15. To what extent is fiscal policy always effective at achieving improved macroeconomic performance? You have 3 minutes 10:15:21 PM
  • 16. Limits to the government’s fiscal choices 10:15:24 PM
  • 17. 10/04/2014 Net Govt debt expected to peak at more than 80% of GDP in 2016-17 Government spends more than £1bn per week in debt interest
  • 18. Time Lags 10:15:27 PM
  • 19. Increased inequality 10:15:29 PM
  • 20. Impact on Confidence and Expectations 10:15:31 PM
  • 21. Policy can be affected by external events 10:15:33 PM
  • 22. 10/04/2014 Since 1923, no country has lost as much wealth as Greece has during last five years: - 27% of GDP has been lost
  • 23. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 24. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 25. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 26. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 27. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 28. Evaluation: Taxation and Aggregate Supply Work incentives / active labour supply Inward migration of key workers Capital investment e.g. FDI projects Enterprise / Entrepreneurship Human capital spending Tariffs affect import costs
  • 29. Monetary Policy 10:16:14 PM
  • 30. Policy Interest Rates in the UK 10/04/2014
  • 31. Interest Rates on Loans A rise in interest rates increases the cost of paying back loans taken out by consumers and businesses In recent years the average mortgage interest rate on home loans has fallen, but the interest rate on overdrafts and credit cards has actually increased towards 20%
  • 32. Analyse the effects of tighter monetary policy You have 3 minutes 10:16:34 PM
  • 33. Impact on Consumption and Investment • Higher interest rates are likely to increase saving and reduce borrowing, leading to lower levels of consumption overall. • Higher rates of saving might reduce multiplier effects from injections elsewhere – like business investment. • Higher interest rates are a disincentive to invest, since much investment is financed through borrowing. 10:16:55 PM
  • 34. Impact on Net Trade • The tightening effect of higher interest rates tends to reduce import demand. • ‘Tighter’ money (less QE, higher interest rates) might increase demand for the £££. If the value of the £££ rises, that should mean lower exports and more imports, reducing AD. 10:16:57 PM
  • 35. Building up to a strong finish • Knowledge and understanding – what is monetary policy? • Application – how and when might active use of monetary policy be helpful? • Analysis – how does the policy work? How do causes (changes to policy) lead to effects? • Evaluation – does the policy always work well? What might undermine its effectiveness? 10:17:59 PM
  • 36. To what extent is monetary policy always effective at achieving improved performance in the UK economy? You have 3 minutes 10:18:17 PM
  • 37. What really determines the level of saving? 10:18:18 PM
  • 38. Do interest rates strongly influence business investment? 10:18:30 PM
  • 39. Are higher interest rates enough to slow house price increases, and higher levels of consumption? 10:18:38 PM
  • 40. House Prices 10/04/2014 House prices in London have risen by 18% in the last year
  • 41. Do interest rate changes have a significant effect on the value of the £££? Furthermore, do changes in the £££ significantly influence net trade? 10:19:03 PM
  • 42. Sterling Exchange Rate 10/04/2014
  • 43. And what impact do changes to AD have on the economy anyway? There’s a balancing act here: does the economy want, or need more AD? What impact will more or less AD have on the broader economy? The effect depends on the supply side 10:19:03 PM
  • 44. Interest Rates and the Distribution of Income Incomes of savers • If the interest on savings is less than inflation, savers will see a reduction in their real incomes Incomes of home-owners with mortgages • If interest rates fall, the income of home-owners who have variable-rate mortgages will increase Interest rates on unsecured debt • Lower interest rates on loans such as credit cards and bank loans will fall When interest rates fall, there is a re-distribution of income away from lenders and savers towards borrowers with loans / debt
  • 45. Some of the Recent Changes to UK Monetary Policy • Quantitative Easing (QE) 2009 – buying bonds to increase deposits and lending by the banking industry – worth £375bn • Funding for Lending Scheme (2012) – joint policy between Treasury and the BoE which provides cheaper funding to banks that increase their loans to households and businesses • Forward Guidance (2013-14) - under forward guidance, the Bank’s policy rate will remain at 0.5% at least until unemployment falls to 7% or until there are clear signs that the amount of spare capacity in the economy has reached normal levels
  • 46. Show your Awareness in the Exam! 10/04/2014 Main BoE policy interest rate 0.5% Quantitative easing £375bn Household debt 155% of GDP House prices rose 8% in 2013 Govt borrowing £108bn in 2014-15 VAT remains at 20% Corporation tax cut to 21% Lower employment taxes for businesses
  • 47. 10/04/2014 Twitter: @tutor2u_econ