Government Macroeconomic Policy Chapter 14 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
Aggregate Demand and Supply <ul><li>The aggregate demand (AD) curve shows aggregate expenditure on goods and services at d...
The Aggregate Demand Curve  EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Value of  Goods and...
Aggregate Supply Curve P P 1 A Y 1 B C AS Y 3 P 2 P 3 D P 4 Y F Y 2 E EDWARD BAHAW - Economic Principles and Their Applica...
Aggregate Supply Curve <ul><li>Horizontal portion - output can be expanded without prices increasing.  </li></ul><ul><li>U...
Aggregate Demand and Supply EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y P P 1 A AD 2 Y 1 ...
The Trade/Business Cycle EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Time Economic Contract...
The four main macroeconomic targets <ul><li>The attainment of a sustainable level of economic growth </li></ul><ul><li>The...
Demand Management Policy <ul><li>Fiscal policy </li></ul><ul><li>Monetary policy </li></ul><ul><li>Both shift the aggregat...
Expansionary or Reflationary Fiscal Policy <ul><li>Increase in government spending </li></ul><ul><li>Decrease in Taxes </l...
Expansionary or Reflationary Monetary Policy <ul><li>Decrease in interest rate </li></ul><ul><li>Increase in investment </...
Deflationary or Contractionary Fiscal Policy <ul><li>Decrease in government spending </li></ul><ul><li>Increase in Taxes <...
Deflationary or Contractionary Monetary Policy <ul><li>Increase in interest rate </li></ul><ul><li>Decrease in investment ...
Macroeconomic Problems and Monetary Policy Solution. EDWARD BAHAW - Economic Principles and Their Application to Business ...
Macroeconomic Problems and Fiscal Policy Solution EDWARD BAHAW - Economic Principles and Their Application to Business (AB...
Effectiveness of monetary policy <ul><li>  The response of investment to a change in the interest rate  </li></ul><ul><li>...
Effectiveness of fiscal policy <ul><li>Crowding Out Effect  – an increase in government spending may result in a decrease ...
Supply-Side Policy <ul><li>Supply-side policies  shifts the aggregate supply curve </li></ul><ul><li>Government initiative...
Supply – Side Policy Y P AD AS 2 Y 1 AS 1 Y 2 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) P 1
June 2008 <ul><li>Using aggregate demand (AD) and aggregate supply (AS) analysis, explain how the equilibrium position of ...
Dec 2008 <ul><li>Q7 (a) Explain, using an Aggregate Supply (AS) and Aggregate Demand (AD) diagram, what is meant by the ‘e...
June 2007 <ul><li>Q4 (a) Explain what is meant by an expansionary fiscal and monetary policy. (5 marks) </li></ul><ul><li>...
June 2010 <ul><li>(c) Identify and explain the factors that determine the effectiveness of monetary policy. (15 marks) </l...
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Topic 10

  1. 1. Government Macroeconomic Policy Chapter 14 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  2. 2. Aggregate Demand and Supply <ul><li>The aggregate demand (AD) curve shows aggregate expenditure on goods and services at different price level </li></ul><ul><li>The aggregate supply (AS) shows the total output of goods and services produced at different price levels </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  3. 3. The Aggregate Demand Curve EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Value of Goods and Services (Y) Price Level (P) AD AD = C + I + G + X – M Y 1 Y 2 P 1 P 2 A B
  4. 4. Aggregate Supply Curve P P 1 A Y 1 B C AS Y 3 P 2 P 3 D P 4 Y F Y 2 E EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Value of Goods and Services (Y)
  5. 5. Aggregate Supply Curve <ul><li>Horizontal portion - output can be expanded without prices increasing. </li></ul><ul><li>Upward sloping portion - as output increases, the price level begins to rise. </li></ul><ul><li>Vertical portion - output has reached its maximum (Y F ) and cannot be increased any further. </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  6. 6. Aggregate Demand and Supply EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y P P 1 A AD 2 Y 1 B AD 1 AD 3 C AD 4 AS Y 3 P 2 P 3 D P 4 Y F Y 2 AD 5 E
  7. 7. The Trade/Business Cycle EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Time Economic Contraction or Recession Economic Growth or Boom National Income National Income
  8. 8. The four main macroeconomic targets <ul><li>The attainment of a sustainable level of economic growth </li></ul><ul><li>The elimination of unemployment </li></ul><ul><li>The combat of inflation </li></ul><ul><li>A favourable external position </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  9. 9. Demand Management Policy <ul><li>Fiscal policy </li></ul><ul><li>Monetary policy </li></ul><ul><li>Both shift the aggregate demand curve </li></ul><ul><li>Known as demand management policies </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  10. 10. Expansionary or Reflationary Fiscal Policy <ul><li>Increase in government spending </li></ul><ul><li>Decrease in Taxes </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 F G AE 0 Y Y 1 Y F
  11. 11. Expansionary or Reflationary Monetary Policy <ul><li>Decrease in interest rate </li></ul><ul><li>Increase in investment </li></ul><ul><li>Increase in consumption </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 F G AE 0 Y Y 1 Y F
  12. 12. Deflationary or Contractionary Fiscal Policy <ul><li>Decrease in government spending </li></ul><ul><li>Increase in Taxes </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 Y Y 1 Y F 0 AE
  13. 13. Deflationary or Contractionary Monetary Policy <ul><li>Increase in interest rate </li></ul><ul><li>Decrease in investment </li></ul><ul><li>Decrease in consumption </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 Y Y 1 Y F 0 AE
  14. 14. Macroeconomic Problems and Monetary Policy Solution. EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Macro-Economic Problem Monetary Policy Solution Economic Recession Expansionary Unemployment Expansionary Inflation Contractionary Current Account Deficit Contractionary Current Account Surplus Expansionary
  15. 15. Macroeconomic Problems and Fiscal Policy Solution EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Macro-Economic Problem Fiscal Policy Solution Economic Recession Expansionary Cyclical Unemployment Expansionary Demand – Pull Inflation Contractionary Current Account Deficit Contractionary Current Account Surplus Expansionary
  16. 16. Effectiveness of monetary policy <ul><li>  The response of investment to a change in the interest rate </li></ul><ul><li>Commercial banks may keep excess reserves </li></ul><ul><li>An increase in the money supply may not reduce the rate of interest - Liquidity Trap </li></ul><ul><li>Time lags </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  17. 17. Effectiveness of fiscal policy <ul><li>Crowding Out Effect – an increase in government spending may result in a decrease in private sector investment </li></ul><ul><li>Time lags </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  18. 18. Supply-Side Policy <ul><li>Supply-side policies shifts the aggregate supply curve </li></ul><ul><li>Government initiatives which increase the productive capacity of the economy </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  19. 19. Supply – Side Policy Y P AD AS 2 Y 1 AS 1 Y 2 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) P 1
  20. 20. June 2008 <ul><li>Using aggregate demand (AD) and aggregate supply (AS) analysis, explain how the equilibrium position of an economy would be affected by each of the following: </li></ul><ul><li>(a) a decrease in government expenditure; (5 marks) </li></ul><ul><li>(b) an increase in the price of oil (assume the economy is an oil importer); (10 marks) </li></ul><ul><li>(c) an increase in the domestic rate of interest. (10 marks) (Total 25 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  21. 21. Dec 2008 <ul><li>Q7 (a) Explain, using an Aggregate Supply (AS) and Aggregate Demand (AD) diagram, what is meant by the ‘equilibrium level of national income’. (5 marks) </li></ul><ul><li>(b) Examine how differences in the slope of the AS curve influence the effectiveness of an expansionary policy. (10 marks) </li></ul><ul><li>(c) Explain why an expansionary fiscal policy is made more effective when monetary policy is also expansionary. (10 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  22. 22. June 2007 <ul><li>Q4 (a) Explain what is meant by an expansionary fiscal and monetary policy. (5 marks) </li></ul><ul><li>(b) Explain why ‘crowding out’ can reduce the </li></ul><ul><li>effectiveness of an expansionary fiscal policy. (7 marks) </li></ul><ul><li>(c) Explain why use of an expansionary monetary policy can solve the problem of ‘crowding out’. (8 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
  23. 23. June 2010 <ul><li>(c) Identify and explain the factors that determine the effectiveness of monetary policy. (15 marks) </li></ul>EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)

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