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9The Economy andBusiness Activity
Macroeconomic Objectives• Microeconomics and macroeconomics• The major macroeconomic issues  – economic growth  – unemploy...
The Circular Flow of Income• The inner flow
The circular flow of income                         Firms           Consumption of Factor      domesticallypayments   prod...
The Circular Flow of Income• Withdrawals  – net saving (S)  – net taxes (T)  – import expenditure (M)• Injections  – inves...
The circular flow of income                                              INJECTIONS                                       ...
The Circular Flow of Income• The relationship between withdrawals  and injections  – the links between them  – planned inj...
The circular flow of income                                              INJECTIONS                                       ...
The Circular Flow of Income• The relationship between withdrawals  and injections  – the links between them  – planned inj...
The Determination of Business Activity • The importance of aggregate demand   – effects of J > W   – effects of W > J • Id...
Equilibrium GDPCd, E, W, J (£bn)                                      GDP = Cd + W             45°       O                ...
The Determination of Business Activity • The importance of aggregate demand   – effects of J > W   – effects of W > J • Id...
Equilibrium GDPCd, E, W, J (£bn)                                      GDP = Cd + W                                        ...
The Determination of Business Activity • The importance of aggregate demand   – effects of J > W   – effects of W > J • Id...
Equilibrium GDPCd, E, W, J (£bn)                                       GDP = Cd + W                                  c    ...
The Determination of Business Activity • The importance of aggregate demand   – effects of J > W   – effects of W > J • Id...
Equilibrium GDPCd, E, W, J (£bn)                                           GDP = Cd + W                                   ...
The Determination of Business Activity • The multiplier   – the multiplier process   – definition of the multiplier     ∀ ...
The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn)                                                     GDP  ...
The Determination of Business Activity • The multiplier   – the multiplier process   – definition of the multiplier     ∀ ...
The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn)                                                    GDP   ...
The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle  – fluctuations in actual ...
The business cycle                                                 Potential outputNational output                        ...
The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle  – fluctuations in actual ...
The business cycle                                           Potential output                                             ...
The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle  – fluctuations in actual ...
The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle  – fluctuations in actual ...
The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle  – fluctuations in actual ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
Growth rates in selected industrial countries                         10                         9                        ...
The Business Cycle• Causes of cyclical fluctuations  – Why does AD change in the first place?  – Why do booms and recessio...
Money, Interest Rates and Business Activity  • The meaning of money     – narrow definitions of money (M0 in the UK)     –...
Credit creation: Banks original balance sheet
Credit creation: Effect of a new deposit of £10bn
Credit creation: Full effect of a new deposit of £10bn
Money, Interest Rates and Business Activity  • The meaning of money     – narrow definitions of money (M0 in the UK)     –...
Money, Interest Rates and Business Activity  • The meaning of money     – narrow definitions of money (M0 in the UK)     –...
Money, Interest Rates and Business Activity  • The meaning of money     – narrow definitions of money (M0 in the UK)     –...
Money, Interest Rates and Business Activity  • The meaning of money     – narrow definitions of money (M0 in the UK)     –...
Money, Interest Rates and Business Activity  • Causes of increases in money supply     – increased demand for money       ...
Money, Interest Rates and Business Activity  • The demand for money     – reasons for holding money       • transactions a...
Money, Interest Rates and Business Activity   • Equilibrium rate of interest     – where demand for money equals supply
Equilibrium in the money market                                   MSRate of interest                   re                 ...
Money, Interest Rates and Business Activity   • Equilibrium rate of interest     – where demand for money equals supply   ...
Equilibrium in the money market                                   MSRate of interest                   re                 ...
Money, Interest Rates and Business Activity   • Effects of changes in money supply on     national income     – rise in mo...
Unemployment• Measuring unemployment  – defining the unemployment rate  – claimant unemployment    • do claimant statistic...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour
Aggregate demand and supply of labour                                                       ASLAverage (real) wage rate   ...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the model
Aggregate demand and supply of labour                                                        ASLAverage (real) wage rate  ...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the mode...
Disequilibrium unemployment                                                     ASLAverage (real) wage rate               ...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the mode...
Equilibrium unemployment                                                 ASLAverage (real) wage rate                      ...
Equilibrium unemployment                                                   ASL NAverage (real) wage rate                  ...
Equilibrium and disequilibrium unemployment                                                      ASLAverage (real) wage ra...
Equilibrium and disequilibrium unemployment                                                       ASLAverage (real) wage r...
Equilibrium and disequilibrium unemployment                                                       ASL                     ...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the mode...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the mode...
Unemployment• Unemployment and the labour market  – the aggregate demand and supply of labour    • equilibrium in the mode...
Unemployment rates in selected industrial countries                         14                   UKAnnual growth rate (%) ...
Unemployment rates in selected industrial countries                         14                   UKAnnual growth rate (%) ...
Unemployment rates in selected industrial countries                         14                   UK                       ...
Unemployment rates in selected industrial countries                         14                   UK                       ...
Unemployment rates in selected industrial countries                         14                   UK            USA        ...
Unemployment rates in selected industrial countries                         14                   UK            USA        ...
Unemployment rates in selected industrial countries                         14                   UK            USA        ...
Unemployment rates in selected industrial countries                         14                   UK            USA        ...
Unemployment• Equilibrium unemployment  – frictional (search) unemployment  – structural unemployment    • changing patter...
Inflation• Defining inflation  – consumer price inflation  – other categories of inflation• Inflation in historical perspe...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation rates in selected industrial countries                         26                         24                    ...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve
Price level       Aggregate demand and aggregate supply                                                 AD              O ...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards      – lower ...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards       – lower...
Aggregate demand and aggregate supply                                            ASPrice level                            ...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards       – lower...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards       – lower...
Aggregate demand and aggregate supply                                             ASPrice level              Pe           ...
Aggregate demand and aggregate supply                                              ASPrice level              Pe          ...
Inflation• Aggregate demand & supply and prices  – aggregate demand curve    • why AD curves slope downwards       – lower...
Inflation• Causes of inflation  – demand pull
Demand-pull inflation                                     ASPrice level              P1                                   ...
Demand-pull inflation                                     ASPrice level              P1                                   ...
Demand-pull inflation                                     ASPrice level              P2              P1                   ...
Inflation• Causes of inflation  – demand pull  – cost push    • wage push    • profit push    • import-price push
Cost-push inflation                                   AS1Price level              P1                                      ...
Cost-push inflation                             AS2                                   AS1Price level              P1      ...
Cost-push inflation                               AS2                                     AS1Price level              P2  ...
Inflation• Causes of inflation  – demand pull  – cost push    • wage push    • profit push    • import-price push  – the i...
The interaction of demand-pull and cost-push inflation                                    AS1Price level              P1  ...
The interaction of demand-pull and cost-push inflation                               AS2                                  ...
The interaction of demand-pull and cost-push inflation                           AS3 AS                                   ...
Inflation• Causes of inflation  – demand pull  – cost push    • wage push    • profit push    • import-price push  – expec...
Inflation• Causes of inflation  – demand pull  – cost push     • wage push     • profit push     • import-price push  – ex...
Inflation• Causes of inflation  – demand pull  – cost push     • wage push     • profit push     • import-price push  – ex...
Inflation• Causes of inflation  – demand pull  – cost push     • wage push     • profit push     • import-price push  – ex...
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Busactivity

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Busactivity

  1. 1. 9The Economy andBusiness Activity
  2. 2. Macroeconomic Objectives• Microeconomics and macroeconomics• The major macroeconomic issues – economic growth – unemployment – inflation – balance of payments and exchange rates• Government macroeconomic policy – controlling various intermediate variables • interest rates, money supply, taxes, government expenditure, etc.
  3. 3. The Circular Flow of Income• The inner flow
  4. 4. The circular flow of income Firms Consumption of Factor domesticallypayments produced goods and services (Cd) Households
  5. 5. The Circular Flow of Income• Withdrawals – net saving (S) – net taxes (T) – import expenditure (M)• Injections – investment (I) – government expenditure (G) – export expenditure (X)
  6. 6. The circular flow of income INJECTIONS Export expenditure (X) Investment (I) Government Consumption of expenditure (G) Factor domestically BANKS, etc GOV. ABROADpayments produced goods and services (Cd) Import Net expenditure (M) Net taxes (T) saving (S) WITHDRAWALS
  7. 7. The Circular Flow of Income• The relationship between withdrawals and injections – the links between them – planned injections may not equal planned withdrawals • effect of J > W • effect of W > J – equilibrium in the circular flow
  8. 8. The circular flow of income INJECTIONS Export expenditure (X) Investment (I) Government Consumption of expenditure (G) Factor domestically BANKS, etc GOV. ABROADpayments produced goods and services (Cd) Import Net expenditure (M) Net taxes (T) saving (S) WITHDRAWALS
  9. 9. The Circular Flow of Income• The relationship between withdrawals and injections – the links between them – planned injections may not equal planned withdrawals • effect of J > W • effect of W > J – equilibrium in the circular flow• The circular flow and the four macroeconomic objectives
  10. 10. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram
  11. 11. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W 45° O GDP (£bn)
  12. 12. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines
  13. 13. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W E = Cd + J Cd J 45° O GDP (£bn)
  14. 14. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines • effects of E > GDP • effects of GDP > E
  15. 15. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W c E = Cd + J d Cd a b 45° O GDP1 GDP2 GDP (£bn)
  16. 16. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines • effects of GDP > E • effects of E > GDP – finding the equilibrium point
  17. 17. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W c E = Cd + J d Cd e a b 45° O GDP1 GDPe GDP2 GDP (£bn)
  18. 18. The Determination of Business Activity • The multiplier – the multiplier process – definition of the multiplier ∀ ∆GDP / ∆J – the marginal propensity to consume domestic goods and services • mpcd = ∆Cd / ∆GDP
  19. 19. The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn) GDP Multiplier = ∆GDP / ∆ J E2 = 60/20 = 3 E1 160∆GDP Cd 120∆J 100 ∆Cd = 40 O 100 160 GDP (£bn) ∆GDP = 60
  20. 20. The Determination of Business Activity • The multiplier – the multiplier process – definition of the multiplier ∀ ∆GDP / ∆J – the marginal propensity to consume domestic goods and services • mpcd = ∆Cd / ∆GDP – formula for the multiplier • 1 / (1–mpcd)
  21. 21. The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn) GDP Multiplier = ∆GDP / ∆ E E2 = 60/20 = 3 E1 160∆GDP Cd 120∆J 100 ∆Cd = 40 O 100 160 GDP (£bn) ∆GDP = 60
  22. 22. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession
  23. 23. The business cycle Potential outputNational output 3 4 2 Actual 3 output 4 2 1 1 O Time
  24. 24. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend
  25. 25. The business cycle Potential output TrendNational output output Actual output O Time
  26. 26. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice
  27. 27. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice • the length of the phases
  28. 28. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice • the length of the phases • the magnitude of the phases
  29. 29. Growth rates in selected industrial countries 10 9 UK 8Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  30. 30. Growth rates in selected industrial countries 10 9 UK 8Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  31. 31. Growth rates in selected industrial countries 10 9 UK 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  32. 32. Growth rates in selected industrial countries 10 9 UK 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  33. 33. Growth rates in selected industrial countries 10 9 UK USA 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  34. 34. Growth rates in selected industrial countries 10 9 UK USA 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  35. 35. Growth rates in selected industrial countries 10 9 UK USA 8 EU15 JapanAnnual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  36. 36. Growth rates in selected industrial countries 10 9 UK USA 8 EU15 JapanAnnual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
  37. 37. The Business Cycle• Causes of cyclical fluctuations – Why does AD change in the first place? – Why do booms and recessions persist? • time lags • bandwagon effects – the accelerator – Why do booms and recessions end? • ceilings and floors • echo effects • the accelerator • random shocks • changes in government policy
  38. 38. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration
  39. 39. Credit creation: Banks original balance sheet
  40. 40. Credit creation: Effect of a new deposit of £10bn
  41. 41. Credit creation: Full effect of a new deposit of £10bn
  42. 42. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier
  43. 43. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world
  44. 44. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world • banks liquidity ratio may vary
  45. 45. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world • banks liquidity ratio may vary • banks respond to the demand for money
  46. 46. Money, Interest Rates and Business Activity • Causes of increases in money supply – increased demand for money • banks reduce liquidity ratio – inflow of funds from abroad – a public-sector deficit (PSNCR) • depends on how it is financed – from banking sector: money supply expands – from outside the banking sector: money supply does not expand
  47. 47. Money, Interest Rates and Business Activity • The demand for money – reasons for holding money • transactions and precautionary motive • assets or speculative motive – determinants of demand for money • money national income • speculation about future return on assets • rate of interest
  48. 48. Money, Interest Rates and Business Activity • Equilibrium rate of interest – where demand for money equals supply
  49. 49. Equilibrium in the money market MSRate of interest re Md O Money
  50. 50. Money, Interest Rates and Business Activity • Equilibrium rate of interest – where demand for money equals supply – if supply of money rises or demand for money falls, the rate of interest will fall
  51. 51. Equilibrium in the money market MSRate of interest re Md O Money
  52. 52. Money, Interest Rates and Business Activity • Effects of changes in money supply on national income – rise in money supply causes interest rate to fall – fall in interest rate causes investment to rise – rise in investment causes GDP to rise • Determinants of the size of these effects
  53. 53. Unemployment• Measuring unemployment – defining the unemployment rate – claimant unemployment • do claimant statistics give a true picture of unemployment? – standardised unemployment (ILO/OECD) • use of labour force surveys
  54. 54. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour
  55. 55. Aggregate demand and supply of labour ASLAverage (real) wage rate ADL O No. of workers
  56. 56. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model
  57. 57. Aggregate demand and supply of labour ASLAverage (real) wage rate We ADL O Qe No. of workers
  58. 58. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment
  59. 59. Disequilibrium unemployment ASLAverage (real) wage rate B A W2 We ADL O Q2 Q1 No. of workers
  60. 60. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment
  61. 61. Equilibrium unemployment ASLAverage (real) wage rate e We ADL O Qe No. of workers
  62. 62. Equilibrium unemployment ASL NAverage (real) wage rate e d We ADL O Qe Q2 No. of workers
  63. 63. Equilibrium and disequilibrium unemployment ASLAverage (real) wage rate e We ADL O Qe No. of workers
  64. 64. Equilibrium and disequilibrium unemployment ASLAverage (real) wage rate Disequilibrium unemployment b a W2 e We ADL O No. of workers
  65. 65. Equilibrium and disequilibrium unemployment ASL NAverage (real) wage rate Disequilibrium unemployment b a c W2 e We Equilibrium unemployment ADL O No. of workers
  66. 66. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment
  67. 67. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment – real-wage unemployment
  68. 68. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment – real-wage unemployment – demand-deficient (cyclical) unemployment
  69. 69. Unemployment rates in selected industrial countries 14 UKAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  70. 70. Unemployment rates in selected industrial countries 14 UKAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  71. 71. Unemployment rates in selected industrial countries 14 UK EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  72. 72. Unemployment rates in selected industrial countries 14 UK EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  73. 73. Unemployment rates in selected industrial countries 14 UK USA EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  74. 74. Unemployment rates in selected industrial countries 14 UK USA EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  75. 75. Unemployment rates in selected industrial countries 14 UK USA EU15 JapanAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  76. 76. Unemployment rates in selected industrial countries 14 UK USA EU15 JapanAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
  77. 77. Unemployment• Equilibrium unemployment – frictional (search) unemployment – structural unemployment • changing pattern of demand • technological unemployment • regional unemployment – seasonal unemployment
  78. 78. Inflation• Defining inflation – consumer price inflation – other categories of inflation• Inflation in historical perspective – low inflation in 1950s and 60s – high inflation in 1970s and 80s – low inflation since mid 1990s • most developed countries gear monetary policy to achieving a low target rate of inflation
  79. 79. Inflation rates in selected industrial countries 26 24 UK 22Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  80. 80. Inflation rates in selected industrial countries 26 24 UK 22Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  81. 81. Inflation rates in selected industrial countries 26 24 UK 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  82. 82. Inflation rates in selected industrial countries 26 24 UK 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  83. 83. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  84. 84. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  85. 85. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15 JapanAnnual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  86. 86. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15 JapanAnnual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
  87. 87. Inflation• Aggregate demand & supply and prices – aggregate demand curve
  88. 88. Price level Aggregate demand and aggregate supply AD O National output
  89. 89. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards
  90. 90. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings
  91. 91. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve
  92. 92. Aggregate demand and aggregate supply ASPrice level AD O National output
  93. 93. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards
  94. 94. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards – equilibrium
  95. 95. Aggregate demand and aggregate supply ASPrice level Pe AD O National output
  96. 96. Aggregate demand and aggregate supply ASPrice level Pe b a P2 AD O National output
  97. 97. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards – equilibrium – shifts in AD and AS curves
  98. 98. Inflation• Causes of inflation – demand pull
  99. 99. Demand-pull inflation ASPrice level P1 AD1 O Q1 National output
  100. 100. Demand-pull inflation ASPrice level P1 AD2 AD1 O Q1 National output
  101. 101. Demand-pull inflation ASPrice level P2 P1 AD2 AD1 O Q1 Q2 National output
  102. 102. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push
  103. 103. Cost-push inflation AS1Price level P1 AD O Q1 National output
  104. 104. Cost-push inflation AS2 AS1Price level P1 AD O Q1 National output
  105. 105. Cost-push inflation AS2 AS1Price level P2 P1 AD O Q2 Q1 National output
  106. 106. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – the interaction of demand-pull and cost- push inflation
  107. 107. The interaction of demand-pull and cost-push inflation AS1Price level P1 AD1 O National output
  108. 108. The interaction of demand-pull and cost-push inflation AS2 AS1Price level P2 P1 AD2 AD1 O National output
  109. 109. The interaction of demand-pull and cost-push inflation AS3 AS 2 AS1 P3Price level P2 P1 AD3 AD2 AD1 O National output
  110. 110. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation
  111. 111. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation
  112. 112. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation – demand-side policies
  113. 113. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation – demand-side policies – supply-side policies

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