This document provides an overview of modern macroeconomic practices, including key theories such as the IS-LM model, Phillips Curve, and monetary and fiscal policy frameworks. It discusses concepts like the IS curve, monetary policy reaction functions, inflation targeting, fiscal rules, and transmission mechanisms. It also analyzes recent economic performance and developments in different countries/regions, monetary policies, debt levels, inflationary pressures, and global imbalances. Looking ahead, it notes risks from global imbalances but broad growth if issues are addressed, and need for reforms in China to balance risks of sudden adjustment.
This document provides an introduction to macroeconomics by outlining key topics and issues addressed in macroeconomics. It discusses what macroeconomics studies, including long-run economic growth, business cycles, unemployment, inflation, and the effects of international trade. It also examines macroeconomic theories like classical and Keynesian approaches. Government macroeconomic policies, including fiscal and monetary policies, are introduced as tools that can potentially influence economic performance.
Bba 2 be ii u 1.1 introduction to macro economicsRai University
This document provides an introduction to macroeconomics. It discusses that macroeconomics examines the structure and performance of national economies and the policies that governments use to affect economic outcomes. It addresses what determines economic growth, causes of economic fluctuations and unemployment, inflation, the effects of globalization, and whether government policies can improve the economy. It also discusses different economic theories and approaches, such as classical and Keynesian, and how the field has evolved over time to incorporate elements of both.
This document provides an introduction to macroeconomics by outlining key topics and issues addressed in macroeconomics. It discusses what macroeconomics studies, including long-run economic growth, business cycles, unemployment, inflation, and the effects of international trade. It also examines macroeconomic theories like classical and Keynesian approaches. Government macroeconomic policies, including fiscal and monetary policies, are introduced as tools that can potentially influence economic performance.
Bsc agri 2 pae u-3.2 introduction to macro economicsRai University
This document provides an introduction to macroeconomics. It defines macroeconomics as the study of national economies and the policies that governments use to affect economic performance. It discusses key issues macroeconomists address such as economic growth, business cycles, unemployment, inflation, international trade, and macroeconomic policies. It also outlines different macroeconomic theories including classical, Keynesian, and unified approaches.
Ready for the next recession? Assessing the UK’s macroeconomic frameworkResolutionFoundation
The UK economy is facing its highest risk of recession since 2007, as Brexit uncertainty and global instability loom large. When the next downturn will arrive is impossible to say, but now is a good time to ensure that we are ready to respond. Crucially the world has moved on since we last prepared our framework – the tools we used to fight the last recession won’t necessarily work for the next one.
How severe are the constraints of near zero interest rates on monetary policy? What is the potential for Quantitative Easing to replay its major financial crisis role? And while there is a generally accepted case for a wider role for fiscal policy, are we ready to deploy it as effectively as possible?
The Resolution Foundation is setting up a new Macroeconomic Policy Unit to get to the bottom of these big economic questions and more. To mark its launch, the Foundation hosted an event that brought together leading macroeconomists and policy makers. The launch included the publishing of a comprehensive assessment of the UK’s current macroeconomic policy framework. Speakers included MPC Member Gertjan Vlieghe and Head of Bloomberg Economics Stephanie Flanders.
Speakers:
Gertjan Vlieghe, Member of the Monetary Policy Committee
Stephanie Flanders, Head of Bloomberg Economics
Kate Barker, Former MPC member
Rupert Harrison, Portfolio Manager at Blackrock
James Smith, Research Director at the Resolution Foundation
Torsten Bell, Chief Executive of the Resolution Foundation (Chair)
Monetary and fiscal policy response and recent developmentsClaro Ganac
The document discusses recent global and domestic developments in the banking industry and their impact on monetary and fiscal policy. It outlines how the 1997 Asian financial crisis, 2008 global financial crisis, and other events have shaped government policies. Domestically, the Philippines' strong economic growth and improving financial markets are noted, alongside the Bangko Sentral ng Pilipinas' moves to tighten monetary policy like raising reserve requirements to manage inflation risks.
The document provides details about an intermediate macroeconomics course final project completed by Te Lai. It includes an introduction to Te Lai and their background/interests. The document then outlines the course schedule and problem sets completed over the term which covered topics like economic growth models, rational expectations theory, and a field trip to a stablecoin company. It concludes with reflections on skills learned and how the course improved the understanding of macroeconomics.
1
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ Introduction; Scarcity and choice, market system,
positive and normative, alternative systems
1: F (9/01)
■ Introduction: the PPC, benefits of trade
■ Introduction; Four key macroeconomic variables;
definitions; policy goals;
2: F 9/08
■ The circular flow of income; injections and
withdrawals
■ Measuring National Income 3: F 9/15
■The limits of growth, resource constraints
■ The business cycle 4: F 9/22
■ Introduction to Demand and Supply
■ First In-class TEST Receive 1st take-home
assignment
■Unemployment – measures causes and types 5: F 9/29
■ Unemployment II – measures causes and types
28
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ Aggregate Demand and Aggregate Supply II –
what drives National Income?
6: F 10/06
■ Aggregate Demand, Supply and Inflation I
■ Aggregate Demand, Supply and Inflation II 7: F 10/13
■ Inflation – more on inflation
■ Fiscal Policy 8: F 10/20
■ Fiscal Policy
■ Second In-Class Test Receive 2nd take-home
assignment
■ The importance of money. Monetary Policy 9: F 10/27
■ The banking system and interest rates
■ More on monetary policy 10: F 11/03
■ NO CLASS F 11/10
■ Supply-side policy I
■ More on supply side, and productivity II
■ Key Supply-side policy choices
11: F 11/17
29
2nd
Assignment
Due
1st As’mt
Due
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ NO CLASS 11/24
■ Third In-class TEST Receive 3rd take-home
assignment
13: F 12/01
■ International Trade - Reasons for Trade
■ Evaluating Trade and Trade Policy
■ Balance of Payments
■ Exchange rates
■ Exchange rates and macroeconomic policy
■ Examining policy choices
14: F 12/08
■ FINAL EXAM 9:30AM F 12/15
30
■ Tutorial map
l I reserve the right to change this schedule at any time. I will
need to get used to the pace of the class. I may include or
exclude topics depending upon how we are progressing
l IN THE EVENT OF A CONFLICT BETWEEN THE SCHEDULE
HERE AND THE SYLLABUS, THE MOST RECENT SLIDE PACK
TAKES PRECEDENT
3rd Assignment
Due
Macroeconomics
LECTURES 3 & 4
2
Macroeconomics
■ Last time
l The role of government in managing the economy and
alternative economic systems
l Introduction to the 4 key economic variables
l The Economic Cycle and Circular Flow of Income
l Injections and withdrawals
l An overview of the relationship between the four key
Macroeconomic objectives
l Measuring National Income – real vs. nominal
■ Today – National Income Accounts
l Why growth?
l Measuring National Income
l The limits of growth, resource constraints
l The business cycle
165
Macroeconomics
Assignment:
Read McC & B Ch 7 for National Income Accounting
(read all of the chapter now if you like. We will deal
with the shortcomings of GDP as a measure next time)
165
ANY QUESTIONS ON THE
READING OR THE SLIDES FROM
LAST LESSON?
Macroeconomics
■ The first of the four key economic goals: Economic growth
l Usual ...
This document provides an introduction to macroeconomics by outlining key topics and issues addressed in macroeconomics. It discusses what macroeconomics studies, including long-run economic growth, business cycles, unemployment, inflation, and the effects of international trade. It also examines macroeconomic theories like classical and Keynesian approaches. Government macroeconomic policies, including fiscal and monetary policies, are introduced as tools that can potentially influence economic performance.
Bba 2 be ii u 1.1 introduction to macro economicsRai University
This document provides an introduction to macroeconomics. It discusses that macroeconomics examines the structure and performance of national economies and the policies that governments use to affect economic outcomes. It addresses what determines economic growth, causes of economic fluctuations and unemployment, inflation, the effects of globalization, and whether government policies can improve the economy. It also discusses different economic theories and approaches, such as classical and Keynesian, and how the field has evolved over time to incorporate elements of both.
This document provides an introduction to macroeconomics by outlining key topics and issues addressed in macroeconomics. It discusses what macroeconomics studies, including long-run economic growth, business cycles, unemployment, inflation, and the effects of international trade. It also examines macroeconomic theories like classical and Keynesian approaches. Government macroeconomic policies, including fiscal and monetary policies, are introduced as tools that can potentially influence economic performance.
Bsc agri 2 pae u-3.2 introduction to macro economicsRai University
This document provides an introduction to macroeconomics. It defines macroeconomics as the study of national economies and the policies that governments use to affect economic performance. It discusses key issues macroeconomists address such as economic growth, business cycles, unemployment, inflation, international trade, and macroeconomic policies. It also outlines different macroeconomic theories including classical, Keynesian, and unified approaches.
Ready for the next recession? Assessing the UK’s macroeconomic frameworkResolutionFoundation
The UK economy is facing its highest risk of recession since 2007, as Brexit uncertainty and global instability loom large. When the next downturn will arrive is impossible to say, but now is a good time to ensure that we are ready to respond. Crucially the world has moved on since we last prepared our framework – the tools we used to fight the last recession won’t necessarily work for the next one.
How severe are the constraints of near zero interest rates on monetary policy? What is the potential for Quantitative Easing to replay its major financial crisis role? And while there is a generally accepted case for a wider role for fiscal policy, are we ready to deploy it as effectively as possible?
The Resolution Foundation is setting up a new Macroeconomic Policy Unit to get to the bottom of these big economic questions and more. To mark its launch, the Foundation hosted an event that brought together leading macroeconomists and policy makers. The launch included the publishing of a comprehensive assessment of the UK’s current macroeconomic policy framework. Speakers included MPC Member Gertjan Vlieghe and Head of Bloomberg Economics Stephanie Flanders.
Speakers:
Gertjan Vlieghe, Member of the Monetary Policy Committee
Stephanie Flanders, Head of Bloomberg Economics
Kate Barker, Former MPC member
Rupert Harrison, Portfolio Manager at Blackrock
James Smith, Research Director at the Resolution Foundation
Torsten Bell, Chief Executive of the Resolution Foundation (Chair)
Monetary and fiscal policy response and recent developmentsClaro Ganac
The document discusses recent global and domestic developments in the banking industry and their impact on monetary and fiscal policy. It outlines how the 1997 Asian financial crisis, 2008 global financial crisis, and other events have shaped government policies. Domestically, the Philippines' strong economic growth and improving financial markets are noted, alongside the Bangko Sentral ng Pilipinas' moves to tighten monetary policy like raising reserve requirements to manage inflation risks.
The document provides details about an intermediate macroeconomics course final project completed by Te Lai. It includes an introduction to Te Lai and their background/interests. The document then outlines the course schedule and problem sets completed over the term which covered topics like economic growth models, rational expectations theory, and a field trip to a stablecoin company. It concludes with reflections on skills learned and how the course improved the understanding of macroeconomics.
1
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ Introduction; Scarcity and choice, market system,
positive and normative, alternative systems
1: F (9/01)
■ Introduction: the PPC, benefits of trade
■ Introduction; Four key macroeconomic variables;
definitions; policy goals;
2: F 9/08
■ The circular flow of income; injections and
withdrawals
■ Measuring National Income 3: F 9/15
■The limits of growth, resource constraints
■ The business cycle 4: F 9/22
■ Introduction to Demand and Supply
■ First In-class TEST Receive 1st take-home
assignment
■Unemployment – measures causes and types 5: F 9/29
■ Unemployment II – measures causes and types
28
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ Aggregate Demand and Aggregate Supply II –
what drives National Income?
6: F 10/06
■ Aggregate Demand, Supply and Inflation I
■ Aggregate Demand, Supply and Inflation II 7: F 10/13
■ Inflation – more on inflation
■ Fiscal Policy 8: F 10/20
■ Fiscal Policy
■ Second In-Class Test Receive 2nd take-home
assignment
■ The importance of money. Monetary Policy 9: F 10/27
■ The banking system and interest rates
■ More on monetary policy 10: F 11/03
■ NO CLASS F 11/10
■ Supply-side policy I
■ More on supply side, and productivity II
■ Key Supply-side policy choices
11: F 11/17
29
2nd
Assignment
Due
1st As’mt
Due
Macroeconomics Tutorial Map (provisional)
Topics Lecture (date)
■ NO CLASS 11/24
■ Third In-class TEST Receive 3rd take-home
assignment
13: F 12/01
■ International Trade - Reasons for Trade
■ Evaluating Trade and Trade Policy
■ Balance of Payments
■ Exchange rates
■ Exchange rates and macroeconomic policy
■ Examining policy choices
14: F 12/08
■ FINAL EXAM 9:30AM F 12/15
30
■ Tutorial map
l I reserve the right to change this schedule at any time. I will
need to get used to the pace of the class. I may include or
exclude topics depending upon how we are progressing
l IN THE EVENT OF A CONFLICT BETWEEN THE SCHEDULE
HERE AND THE SYLLABUS, THE MOST RECENT SLIDE PACK
TAKES PRECEDENT
3rd Assignment
Due
Macroeconomics
LECTURES 3 & 4
2
Macroeconomics
■ Last time
l The role of government in managing the economy and
alternative economic systems
l Introduction to the 4 key economic variables
l The Economic Cycle and Circular Flow of Income
l Injections and withdrawals
l An overview of the relationship between the four key
Macroeconomic objectives
l Measuring National Income – real vs. nominal
■ Today – National Income Accounts
l Why growth?
l Measuring National Income
l The limits of growth, resource constraints
l The business cycle
165
Macroeconomics
Assignment:
Read McC & B Ch 7 for National Income Accounting
(read all of the chapter now if you like. We will deal
with the shortcomings of GDP as a measure next time)
165
ANY QUESTIONS ON THE
READING OR THE SLIDES FROM
LAST LESSON?
Macroeconomics
■ The first of the four key economic goals: Economic growth
l Usual ...
This document summarizes a presentation about the relationship between growth and inflation. It discusses theories like demand-pull inflation, cost-push inflation, the Phillips curve, and the financial accelerator model. It explains concepts such as NAIRU and how recessions are caused by factors like supply shocks, high wages, and financial crises. The document argues that the synthesis view fits well with a central banker's role in using monetary policy to stabilize the economy while preventing inflation.
John Maynard Keynes developed his theory of income and employment to explain recessions and offer policy solutions. Key aspects of Keynesian theory include: aggregate demand can fluctuate unexpectedly and lead to unemployment if below potential output; sticky wages and prices can prolong recessions; expansionary fiscal policy can boost aggregate demand to address recessions, while contractionary policy can reduce inflation above potential output. Keynes argued for active but limited government intervention to maintain sufficient aggregate demand.
This document provides an overview of macroeconomics. It defines macroeconomics as the study of aggregate economic quantities, such as national income, output, consumption, investment, unemployment and price indices. It outlines the development of macroeconomics from classical economists to Keynes and modern macroeconomic schools of thought. It describes key macroeconomic concepts like equilibrium, stocks and flows. It also explains important macroeconomic goals like full employment and price stability. Finally, it discusses macroeconomic policies like fiscal and monetary policy and their tools, as well as the circular flow of income in closed, open and two-sector economies.
Fiscal Policy of nation and its impact on economyErVinayakCS
This document discusses fiscal policy and its objectives, channels, and limitations. It defines fiscal policy as government decisions about taxation and spending levels, which can significantly impact the economy. The objectives of fiscal policy include maintaining macroeconomic balance, providing countercyclical measures, and supporting investment. Fiscal policy works by influencing aggregate demand through government spending and taxation. While effective in some cases, fiscal policy faces limitations such as crowding out private spending, Ricardian equivalence effects, and implementation lags.
This document provides an overview of monetary policy frameworks and operating procedures. It discusses key concepts like monetary policy transmission mechanisms, inflation targeting, central bank independence, and the evolution of monetary policy in India. The document outlines the objectives, instruments, and transmission channels of monetary policy. It also covers unconventional monetary policy tools used in recent times like quantitative easing and forward guidance. Charts are included showing inflation trends in major economies and changes in policy rates in advanced and emerging market economies.
This document discusses macroeconomic concepts related to monetary policy, fiscal policy, and their influence on aggregate demand. It covers topics such as:
- How monetary policy influences aggregate demand through interest rate changes affecting consumption, investment, and net exports.
- How fiscal policy influences aggregate demand through changes in government spending and taxes, which can have multiplier or crowding out effects on the economy.
- Arguments for and against active use of policy tools to stabilize the economy in response to fluctuations in aggregate demand. The document also discusses automatic stabilizers as a less active alternative.
Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
The document provides an overview of macroeconomic policies and concepts including:
1) It discusses the business cycle and macroeconomic equilibrium and how disturbances can cause instability.
2) Keynes argued that government intervention is necessary to address inherent instability in free markets. Fiscal and monetary policies can be used to stimulate aggregate demand.
3) Supply-side policies aim to shift aggregate supply curves by incentivizing production. Both demand and supply factors influence macroeconomic outcomes like growth, unemployment and inflation.
This document provides an overview of macroeconomics topics including:
1) The factors that determine national income and employment, and how fiscal and monetary policy can be used by governments to affect the macroeconomy.
2) The circular flow of income and macroeconomic models used to explain consumption, investment, and aggregate demand.
3) Causes of economic fluctuations and the use of fiscal and monetary policy for macroeconomic stabilization.
4) Declines in the use of discretionary fiscal policy and concerns about rising government debt levels.
The document discusses six debates around macroeconomic policy:
1) Whether policymakers should try to stabilize the economy through monetary and fiscal policy interventions.
2) Whether the government should fight recessions through spending hikes rather than tax cuts.
3) Whether monetary policy should be rules-based rather than discretionary.
4) Whether central banks should aim for zero inflation.
5) Whether governments should balance their budgets.
6) Whether tax laws should be reformed to encourage more saving.
Irving Fisher was first economist to make use of concept MEC
in 1920.
He gave it a name Rate of return over cost.
Simply MEC means “expected rate of profitability of new investment”.
It’s calculation depends upon two factors mainly
amount of profit
cost of capital asset
Macroeconomics studies aggregate economic quantities such as growth, inflation, and unemployment across entire markets and national economies. The document outlines several key aspects of macroeconomics including its focus on economy-wide phenomena, its main areas of research, major schools of thought, differences from microeconomics, features such as giving an overall view of the national economy, and examining important macroeconomic issues like employment, inflation, and economic growth.
This document defines inflation and discusses its types, causes, measurement, economic impacts, and measures to control it. It defines inflation as a sustained increase in the general price level over time. The three main types of inflation discussed are creeping inflation (under 5%), running inflation (8-10%), and hyperinflation (double or triple digit increases). The causes of inflation discussed include demand-pull factors like excess money supply, and cost-push factors like increases in production costs. Inflation is typically measured using wholesale price indices and consumer price indices. The economic impacts discussed include effects on income distribution and wealth, and changes to production patterns. Measures to control inflation discussed include monetary policies like interest rate increases and fiscal policies like tax
This document defines inflation and discusses its types, causes, measurement, economic impacts, and measures to control it. It defines inflation as a sustained increase in the general price level over time. The three main types of inflation discussed are creeping inflation (under 5%), running inflation (8-10%), and hyperinflation (double or triple digit increases). The causes of inflation discussed include demand-pull factors like excess money supply, and cost-push factors like increases in production costs. Inflation is typically measured using wholesale price indices and consumer price indices. The economic impacts discussed include effects on income distribution and wealth, and changes to production patterns. Measures to control inflation discussed include monetary policies like interest rate increases and fiscal policies like tax
This document summarizes key macroeconomic concepts taught in introductory economics courses. It discusses the short-run tradeoff between inflation and unemployment depicted by the Phillips Curve and how this relationship breaks down in the long-run. The natural rate of unemployment and expectations-augmented Phillips curve are introduced to explain why monetary policy cannot permanently reduce unemployment below its natural rate without causing increasing inflation. Several historical examples are provided to illustrate these concepts, including the breakdown of the original Phillips Curve in the 1970s and disinflation policies in the United States during the 1980s.
Fiscal policy involves government spending, taxation, and borrowing to influence economic activity. There are three main views on fiscal policy: Keynesian, New Classical, and Supply-Side. Keynesians support using deficits during recessions and surpluses during booms. New Classical economists argue deficits only affect tax timing. Supply-Siders emphasize reducing marginal tax rates to boost labor and investment. Automatic stabilizers and difficulties with proper timing make discretionary policy challenging with both benefits and risks.
This chapter discusses debates around stabilization policy. It considers whether policy should be active or passive in response to economic fluctuations, and whether policy should be set by rule or allow discretion. Arguments for active policy include reducing economic hardship, while arguments for passive policy cite lags in policy effects. Rules are argued to increase credibility and avoid time inconsistency, while discretion allows flexibility. Overall there is no clear consensus from history on the best approach.
This chapter introduces macroeconomics and the key topics studied by macroeconomists. It discusses what macroeconomics involves, including analyzing factors that influence long-term economic growth, fluctuations in economic activity, unemployment, inflation, and the effects of globalization. It also explores macroeconomic policies governments can use to impact the economy and different schools of macroeconomic thought, such as classical and Keynesian approaches. The chapter provides an overview of macroeconomics as a field of study.
This chapter introduces macroeconomics and the key topics studied by macroeconomists. It discusses what macroeconomics involves, including analyzing factors that influence long-term economic growth, fluctuations in economic activity, unemployment, inflation, and the effects of globalization. It also explores macroeconomic policies governments can use to impact the economy and different schools of macroeconomic thought, such as classical and Keynesian approaches. The chapter provides an overview of macroeconomics as a field of study.
The document discusses key aspects of the economic environment that influence business performance. It covers economic resources like land, labor, capital and entrepreneurship that are inputs for production. It also describes different economic systems such as capitalist, socialist, and mixed economies. Additionally, it discusses economic conditions in countries based on factors like per capita income. Economic output and business cycles, inflation, unemployment, and important economic policies that impact businesses are also summarized.
This document discusses the nature, scope, and objectives of business. It defines business and outlines the business system/process, which includes entrepreneurial activity, production, and marketing. It also categorizes businesses into those that produce goods, services, distribute goods, facilitate distribution, and deal in finance. Industries are classified based on their nature of activity and competitive structure, including monopoly, oligopoly, monopolistic competition, and perfect competition.
This document summarizes a presentation about the relationship between growth and inflation. It discusses theories like demand-pull inflation, cost-push inflation, the Phillips curve, and the financial accelerator model. It explains concepts such as NAIRU and how recessions are caused by factors like supply shocks, high wages, and financial crises. The document argues that the synthesis view fits well with a central banker's role in using monetary policy to stabilize the economy while preventing inflation.
John Maynard Keynes developed his theory of income and employment to explain recessions and offer policy solutions. Key aspects of Keynesian theory include: aggregate demand can fluctuate unexpectedly and lead to unemployment if below potential output; sticky wages and prices can prolong recessions; expansionary fiscal policy can boost aggregate demand to address recessions, while contractionary policy can reduce inflation above potential output. Keynes argued for active but limited government intervention to maintain sufficient aggregate demand.
This document provides an overview of macroeconomics. It defines macroeconomics as the study of aggregate economic quantities, such as national income, output, consumption, investment, unemployment and price indices. It outlines the development of macroeconomics from classical economists to Keynes and modern macroeconomic schools of thought. It describes key macroeconomic concepts like equilibrium, stocks and flows. It also explains important macroeconomic goals like full employment and price stability. Finally, it discusses macroeconomic policies like fiscal and monetary policy and their tools, as well as the circular flow of income in closed, open and two-sector economies.
Fiscal Policy of nation and its impact on economyErVinayakCS
This document discusses fiscal policy and its objectives, channels, and limitations. It defines fiscal policy as government decisions about taxation and spending levels, which can significantly impact the economy. The objectives of fiscal policy include maintaining macroeconomic balance, providing countercyclical measures, and supporting investment. Fiscal policy works by influencing aggregate demand through government spending and taxation. While effective in some cases, fiscal policy faces limitations such as crowding out private spending, Ricardian equivalence effects, and implementation lags.
This document provides an overview of monetary policy frameworks and operating procedures. It discusses key concepts like monetary policy transmission mechanisms, inflation targeting, central bank independence, and the evolution of monetary policy in India. The document outlines the objectives, instruments, and transmission channels of monetary policy. It also covers unconventional monetary policy tools used in recent times like quantitative easing and forward guidance. Charts are included showing inflation trends in major economies and changes in policy rates in advanced and emerging market economies.
This document discusses macroeconomic concepts related to monetary policy, fiscal policy, and their influence on aggregate demand. It covers topics such as:
- How monetary policy influences aggregate demand through interest rate changes affecting consumption, investment, and net exports.
- How fiscal policy influences aggregate demand through changes in government spending and taxes, which can have multiplier or crowding out effects on the economy.
- Arguments for and against active use of policy tools to stabilize the economy in response to fluctuations in aggregate demand. The document also discusses automatic stabilizers as a less active alternative.
Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
The document provides an overview of macroeconomic policies and concepts including:
1) It discusses the business cycle and macroeconomic equilibrium and how disturbances can cause instability.
2) Keynes argued that government intervention is necessary to address inherent instability in free markets. Fiscal and monetary policies can be used to stimulate aggregate demand.
3) Supply-side policies aim to shift aggregate supply curves by incentivizing production. Both demand and supply factors influence macroeconomic outcomes like growth, unemployment and inflation.
This document provides an overview of macroeconomics topics including:
1) The factors that determine national income and employment, and how fiscal and monetary policy can be used by governments to affect the macroeconomy.
2) The circular flow of income and macroeconomic models used to explain consumption, investment, and aggregate demand.
3) Causes of economic fluctuations and the use of fiscal and monetary policy for macroeconomic stabilization.
4) Declines in the use of discretionary fiscal policy and concerns about rising government debt levels.
The document discusses six debates around macroeconomic policy:
1) Whether policymakers should try to stabilize the economy through monetary and fiscal policy interventions.
2) Whether the government should fight recessions through spending hikes rather than tax cuts.
3) Whether monetary policy should be rules-based rather than discretionary.
4) Whether central banks should aim for zero inflation.
5) Whether governments should balance their budgets.
6) Whether tax laws should be reformed to encourage more saving.
Irving Fisher was first economist to make use of concept MEC
in 1920.
He gave it a name Rate of return over cost.
Simply MEC means “expected rate of profitability of new investment”.
It’s calculation depends upon two factors mainly
amount of profit
cost of capital asset
Macroeconomics studies aggregate economic quantities such as growth, inflation, and unemployment across entire markets and national economies. The document outlines several key aspects of macroeconomics including its focus on economy-wide phenomena, its main areas of research, major schools of thought, differences from microeconomics, features such as giving an overall view of the national economy, and examining important macroeconomic issues like employment, inflation, and economic growth.
This document defines inflation and discusses its types, causes, measurement, economic impacts, and measures to control it. It defines inflation as a sustained increase in the general price level over time. The three main types of inflation discussed are creeping inflation (under 5%), running inflation (8-10%), and hyperinflation (double or triple digit increases). The causes of inflation discussed include demand-pull factors like excess money supply, and cost-push factors like increases in production costs. Inflation is typically measured using wholesale price indices and consumer price indices. The economic impacts discussed include effects on income distribution and wealth, and changes to production patterns. Measures to control inflation discussed include monetary policies like interest rate increases and fiscal policies like tax
This document defines inflation and discusses its types, causes, measurement, economic impacts, and measures to control it. It defines inflation as a sustained increase in the general price level over time. The three main types of inflation discussed are creeping inflation (under 5%), running inflation (8-10%), and hyperinflation (double or triple digit increases). The causes of inflation discussed include demand-pull factors like excess money supply, and cost-push factors like increases in production costs. Inflation is typically measured using wholesale price indices and consumer price indices. The economic impacts discussed include effects on income distribution and wealth, and changes to production patterns. Measures to control inflation discussed include monetary policies like interest rate increases and fiscal policies like tax
This document summarizes key macroeconomic concepts taught in introductory economics courses. It discusses the short-run tradeoff between inflation and unemployment depicted by the Phillips Curve and how this relationship breaks down in the long-run. The natural rate of unemployment and expectations-augmented Phillips curve are introduced to explain why monetary policy cannot permanently reduce unemployment below its natural rate without causing increasing inflation. Several historical examples are provided to illustrate these concepts, including the breakdown of the original Phillips Curve in the 1970s and disinflation policies in the United States during the 1980s.
Fiscal policy involves government spending, taxation, and borrowing to influence economic activity. There are three main views on fiscal policy: Keynesian, New Classical, and Supply-Side. Keynesians support using deficits during recessions and surpluses during booms. New Classical economists argue deficits only affect tax timing. Supply-Siders emphasize reducing marginal tax rates to boost labor and investment. Automatic stabilizers and difficulties with proper timing make discretionary policy challenging with both benefits and risks.
This chapter discusses debates around stabilization policy. It considers whether policy should be active or passive in response to economic fluctuations, and whether policy should be set by rule or allow discretion. Arguments for active policy include reducing economic hardship, while arguments for passive policy cite lags in policy effects. Rules are argued to increase credibility and avoid time inconsistency, while discretion allows flexibility. Overall there is no clear consensus from history on the best approach.
This chapter introduces macroeconomics and the key topics studied by macroeconomists. It discusses what macroeconomics involves, including analyzing factors that influence long-term economic growth, fluctuations in economic activity, unemployment, inflation, and the effects of globalization. It also explores macroeconomic policies governments can use to impact the economy and different schools of macroeconomic thought, such as classical and Keynesian approaches. The chapter provides an overview of macroeconomics as a field of study.
This chapter introduces macroeconomics and the key topics studied by macroeconomists. It discusses what macroeconomics involves, including analyzing factors that influence long-term economic growth, fluctuations in economic activity, unemployment, inflation, and the effects of globalization. It also explores macroeconomic policies governments can use to impact the economy and different schools of macroeconomic thought, such as classical and Keynesian approaches. The chapter provides an overview of macroeconomics as a field of study.
The document discusses key aspects of the economic environment that influence business performance. It covers economic resources like land, labor, capital and entrepreneurship that are inputs for production. It also describes different economic systems such as capitalist, socialist, and mixed economies. Additionally, it discusses economic conditions in countries based on factors like per capita income. Economic output and business cycles, inflation, unemployment, and important economic policies that impact businesses are also summarized.
This document discusses the nature, scope, and objectives of business. It defines business and outlines the business system/process, which includes entrepreneurial activity, production, and marketing. It also categorizes businesses into those that produce goods, services, distribute goods, facilitate distribution, and deal in finance. Industries are classified based on their nature of activity and competitive structure, including monopoly, oligopoly, monopolistic competition, and perfect competition.
A business plan outlines a business idea, goals, objectives, and how they will be achieved. It is important for managing the business, obtaining financial support, securing contracts, and communicating with professionals. A typical business plan includes an executive summary, business overview, products, industry overview, marketing strategy, management, regulatory issues, risks, implementation plan, and financial plan. It should be based on research and realistic projections to convince readers.
This document discusses production decisions made by firms. It covers:
1. A firm's production technology can be represented by a production function that shows how inputs like labor and capital can be transformed into outputs.
2. In the short run, a firm may vary only one input like labor while capital is fixed, facing diminishing marginal returns.
3. In the long run, a firm can vary both inputs and their combinations are shown on isoquants maps, with marginal rate of technical substitution measuring the tradeoff between inputs.
4. Returns to scale describes how output changes when all inputs are increased proportionately, with possibilities being increasing, constant, or decreasing.
There are several main forms of business ownership including sole proprietorships, partnerships, corporations, franchises, and cooperatives. Sole proprietorships involve single owner management and unlimited liability, while partnerships have multiple owners who share risks and profits. Corporations separate owners from management and provide limited liability. Franchises allow businesses to use another's proven systems through contractual agreements. Cooperatives are owned and operated by their members. Entrepreneurs must understand the characteristics of each to select the best fit for their needs.
This document discusses risk management in banks. It defines risk and risk management, noting that risk management aims to reduce risks to an acceptable level. It outlines some key risk management strategies like risk identification, measurement, and control. It then discusses several types of risks that banks face, including credit risk, interest rate risk, liquidity risk, foreign exchange risk, regulatory risk, technological risk, and strategic risk. It provides brief explanations and examples of each type of risk.
Poverty in Indonesia has halved in the last 15 years but reduction is slowing as the remaining poor are harder to reach. While much of the population lives just above the poverty line, many remain vulnerable to economic shocks. Research is needed to address challenges across the lifecycle from birth to old age to promote opportunities and protect the vulnerable. Key areas for research include improving child nutrition and education, expanding access to good jobs, reducing maternal mortality, and ensuring social security for the elderly.
Risk management in banks is important as banks are exposed to various risks in the changing Indian economy. The key risks include credit risk, market risk, operational risk, and legal risk. Effective risk management involves identifying risks, measuring them quantitatively and qualitatively, monitoring exposures, and taking steps to mitigate risks. Banks must have robust policies, processes, and systems to properly identify, measure, control, and manage the various risks they face.
The document discusses monetary policy in India. It defines monetary policy as how the central bank controls money supply and interest rates to achieve objectives like price stability and economic growth. In India, the Reserve Bank of India (RBI) controls monetary policy through tools like open market operations, bank rate policy, cash reserve ratio, and statutory liquidity ratio. The objectives of monetary policy include price stability, controlling credit expansion, and promoting exports. The document also outlines some limitations of monetary policy like time lags and difficulties in economic forecasting.
The main objectives of monetary policy are economic growth, full employment, price stability, neutrality of money, and exchange rate stability. There are expansionary and contractionary monetary policies. Expansionary policy aims to increase aggregate demand through increasing the money supply and lowering interest rates, while contractionary policy reduces economic activity by raising interest rates. The tools of monetary policy include quantitative measures like open market operations and changing reserve requirements, as well as qualitative measures like moral suasion and direct action.
This document discusses the importance of resource mobilization for starting a business. It defines resources as the financial and non-financial inputs needed to operate a business. The most important resource is the entrepreneur themselves. Other key resources mentioned include human resources, business guidelines, facilities, materials, and funds.
The document outlines qualities needed to mobilize resources, such as passion, curiosity, optimism, prudence, competitiveness, risk-taking, confidence, persistence, frugality, and self-belief. Sources of resources discussed include banks, relatives and friends, microcredit organizations, equipment suppliers, and government agencies. A few steps for effective resource mobilization are preparing a business plan, examining funding prospects, creating an action plan,
This document discusses the functions and roles of central banks. It defines a central bank as the bank responsible for a country's financial and economic stability. Central banks regulate other commercial banks, formulate monetary policies, and advise governments. The first central bank was the Bank of England in 1694. Now central banks play key roles like controlling money supply, credit levels, foreign exchange reserves, public debt, and developing other financial institutions. Central banks also provide services to commercial banks like acting as a lender of last resort and managing clearinghouse activities. The document examines different methods that central banks use to issue currencies.
Central banks serve important functions in regulating currency, credit, and monetary policy. Some key functions of central banks include acting as a banker, agent and advisor to governments; controlling money supply through tools like interest rates, reserve requirements, and open market operations; acting as a lender of last resort to banks; and regulating credit allocation. Central banks aim to achieve economic stability through proper monetary management. The Reserve Bank of India operates as India's central bank and performs traditional central banking functions like currency regulation as well as development functions to support financial systems.
This document provides an introduction and overview of project management. It outlines the course objectives, which are for participants to be able to design, plan, implement, monitor and evaluate projects using practical tools. It defines what a project and project management are, and discusses key aspects like the work breakdown structure, stakeholders, planning, scheduling and risk management. The importance of proper planning, identifying risks and taking mitigation actions is emphasized.
Securities firms act as brokers, executing transactions between parties for a fee. They also act as dealers, adjusting inventories of securities to make markets. Pension funds periodically contribute funds from employees and employers. Securities with over one year maturity are traded in capital markets like bonds, mortgages, and stocks. Financial markets facilitate the flow of funds from surplus units like households to deficit units like firms.
The document discusses measuring gross domestic product (GDP), which is the total market value of all final goods and services produced within a country in a given period of time. GDP can be measured using the expenditure approach, income approach, and output approach. The expenditure approach sums consumer spending, investment, government spending, and net exports. The income approach sums compensation to employees, rental income, corporate profits, and other incomes. The output approach sums the total value of goods and services produced. GDP growth rates can be calculated by measuring percentage changes in GDP over time. Nominal GDP values output at current prices, while real GDP uses constant prices to remove inflation.
This document discusses the advantages of entrepreneurship and entrepreneurial traits. Some key advantages of entrepreneurship discussed are self-sufficient life, providing employment to others, unlimited opportunities for development, freedom and flexibility to implement one's own ideas. Entrepreneurial traits that were assessed in a behavior test include the need to achieve, willingness to take risks, self-control, initiative, problem-solving abilities, optimism about the future, constantly searching for opportunities, and being time-conscious. The document provides an overview of the benefits of entrepreneurship and characteristics common in entrepreneurs.
This document defines quality of life and discusses how it is measured. It contains the following key points:
1) Quality of life refers to an individual's well-being and includes physical, mental, social, and environmental factors. It represents how satisfied they are with their level of functioning in life.
2) Components of quality of life include physical health, psychological state, social relationships, environment, and spirituality.
3) Quality of life is assessed using valid, reliable questionnaires to evaluate things like burden of disease, impact of health policies, and patient outcomes after treatment. Common measures are quality-adjusted life years (QALYs) and disability-adjusted life years (DALYs).
This document discusses different forms of business ownership, including sole proprietorships, partnerships, and corporations. It describes sole proprietorships as businesses owned and run by one person, who takes all profits but also bears all losses and responsibilities alone. Partnerships are owned by two or more individuals who share profits, losses, and management responsibilities according to a partnership agreement. There are general partnerships, limited partnerships, and limited liability partnerships. Corporations are independent legal entities owned by shareholders, who elect directors to manage the company and share profits through dividends but have limited liability for debts.
This document discusses the importance of positive thinking for entrepreneurial success. It states that one's outlook and attitude determine one's limitations and ability to achieve success despite challenges and risks. Positive thinking means expecting to succeed and seeing opportunities rather than problems. It also involves taking responsibility for mistakes and focusing on possibilities rather than pain. The document provides examples contrasting positive thinking, which sees learning opportunities and finds solutions, with negative thinking, which makes excuses and believes problems can't be solved.
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STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
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Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
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There is no set date for when Pi coins will enter the market.
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The Rise of Generative AI in Finance: Reshaping the Industry with Synthetic DataChampak Jhagmag
In this presentation, we will explore the rise of generative AI in finance and its potential to reshape the industry. We will discuss how generative AI can be used to develop new products, combat fraud, and revolutionize risk management. Finally, we will address some of the ethical considerations and challenges associated with this powerful technology.
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby...Donc Test
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting, 8th Canadian Edition by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Ebook Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Pdf Solution Manual For Financial Accounting 8th Canadian Edition Pdf Download Stuvia Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Financial Accounting 8th Canadian Edition Ebook Download Stuvia Financial Accounting 8th Canadian Edition Pdf Financial Accounting 8th Canadian Edition Pdf Download Stuvia
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5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
2. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 2
the theory of short-run fluctuations
Keynesian Cross
Money Market
IS Curve
LM Curve
IS-LM-BP AD curve
AS curve
AS-AD model
BP Curve
FX Market
NAIRU
Productivity
3. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 3
a modern framework
IS Curve
Monetary Reaction
(MR)
Phillips Curve
(PC)
IS-MR-PC model
4. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 4
the Phillips Curve
• In 1958, A.W. Phillips of the LSE found relation an empirical
relationship between unemployment and inflation in the UK – the
Phillips curve.
• Original interpretation:
• There is a permanent trade-off between inflation and
unemployment.
• Problem:
• After sustained inflation, the empirical relationship broke down.
• New interpretation:
• There is a trade-off between unemployment and unexpected
inflation:
output=equilibrium output+ b(unexpected inflation)
• Therefore output deviates from its equilibrium level by the extent to
which inflation deviates from its expected level.
• But in the long-run, there is no such trade-off.
5. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 5
what affects the IS curve?
• Aggregate expenditure comprises five components:
• consumption
• investment
• primary government spending (i.e. net of transfers)
• net exports (i.e. exports minus imports)
• inventories (i.e. changes in stocks held by businesses)
• The level of income (both current and expected) is a major determinant of
consumption, government spending and net exports.
• The real exchange rate is a major influence on net exports.
• The interest rate is also an influence on consumption and investment (with the
latter being also dependent upon output expectations and ‘animal spirits’).
6. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 6
shocks to the economy
• Why might the economy get ‘shocked’ away from equilibrium?
• IS-curve shocks
• an investment boom;
• a pre-election government spending spree;
• a sudden rise in the real exchange rate;
• a consumer boom abroad;
• a boom in the housing market;
• an unexpected cut in interest rates;
• a slump in share prices.
• Phillips curve shocks
• a sudden rise in oil prices;
• the invention and diffusion of a new technology;
• labour market changes.
7. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 7
an IS curve shock
• An investment boom shifts the AD curve outwards. At first, expectations lag behind events, so output
and inflation rise (‘unexpected inflation’) to point B. The monetary response leads to higher interest
rates for long enough to ‘crowd-out’ excess spending (point C) and then return inflation to its original
level (point D).
Y
interest rates
LRAS
inflation
Y
LRPC
Y*
SRPC (πe=π1)
IS1
Y*
IS2
SRPC (πe=π2)
A
A
B
C
B
C
D
D
8. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 8
monetary policy reaction
• The monetary authority will
seek to offset a demand
shock by raising interest
rates.
• In order to reduce inflation,
unemployment must rise
above its equilibrium!
inflation
Y
LRPC
Y*
SRPC (πe=π1)
A
B
C
D
9. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 9
monetary policy reaction II
• Some monetary authorities
will be more averse to
inflation, some more averse to
unemployment.
• An inflation-averse authority
will seek to bring down
inflation quickly by moving to
E.
• The slope of the SRPC also
matters – if it is steep then
disinflation is relatively quick.
• It will be steeper when there is
less inflation inertia and less
real wage rigidity.
inflation
Y
LRPC
Y*
SRPC (πe=π1)
A
B
C
D
SRPC (πe=π2)
E
10. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 10
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
1992 1994 1996 1998 2000 2002 2004
Per cent
Revisions to level of UK market sector output between
May and June 2005
Source: Inflation Report, August 2005
a policy problem – data revisions!
11. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 11
monetary policy
• ‘Having regard to human nature and our institutions, it can only be a foolish
person who would prefer a flexible wage policy to a flexible money policy,
unless he can point to advantages from the former that are not obtainable
from the latter’ J.M.Keynes, 1936.
• Monetary policy can be implemented through either changes in the money
supply or interest rate, or through direct controls on lending.
• Changes in the interest rate will affect the interest-sensitive components of
aggregate demand. The exact size and timing of these effects will differ from
country to country.
• If economy is at equilibrium output, interest rate cuts will lead to an
inflationary boom, which eventually will lead only to higher prices.
• If economy is below equilibrium output, interest rate cuts will tend to raise
output (as well as prices) and shift the economy back towards equilibrium.
• Typical lag effect on output one year, inflation two years.
12. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 12
the limits to monetary policy
• But there are problems with the use of monetary policy:
• Measurement of output: where are we? where are we going?
how fast? will we know when we get there?
• Lags in the monetary policy process: implementation
(recognition & administrative lags) and operational;
• What kind of monetary policy? Interest rates, open-market
operations, quantitative controls, credit controls.
• The liquidity trap & credit channel – will policy actually affect
the interest rates and lending policies faced by agents?
13. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 13
Taylor rules and inflation targeting
• After the inflationary difficulties of the 1970s and 1980s, many countries
moved towards having independent central banks and the use of inflation
targets.
• This form of ‘constrained discretion’ seems to work because it takes control of
monetary policy out of the hands of politicians!
• In practice, most monetary authorities operate something called a ‘Taylor
rule’. That is, they raise the real interest rate (the nominal rate minus
expected inflation) whenever inflation is above target or when capacity
constraints appear in the economy (since these may predict future inflation).
• We can think of a monetary policy reaction function, where
r = inflation target + equilibrium real r
+ a(output – equilibrium output) + b (inflation – inflation target)
• The coefficient a measures how averse the monetary authority is to output
deviations and b measures how averse it is to inflation deviations.
14. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 14
UK inflation performance
Source: Carlin and Soskice (2006)
15. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 15
fiscal policy
• ‘If the Treasury were to fill old bottles with bank notes, bury them at suitable
depths in disused coal mines which are then filled up with town rubbish, and
leave them to private enterprise… to dig them up again, there need be no
more unemployment. It would, indeed, be more sensible to build houses and
the like, but if there are political and practical difficulties in the way of this,
the above would be better than nothing’ J.M. Keynes, 1936.
• Changes in the government’s fiscal stance (that is, the difference between
government spending and taxation) will change the level of aggregate
demand.
• If economy is at equilibrium output, increases in spending (or tax cuts) will
lead to an inflationary boom, which eventually will lead only to higher prices.
• If economy is below equilibrium output, increases in spending (or tax cuts)
will tend to raise output (as well as prices) and shift the economy back to
equilibrium.
16. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 16
the limits to fiscal policy
• But there are problems with the use of fiscal policy:
• Measurement of output: where are we? where are we going?
how fast? will we know when we get there?
• Lags in the fiscal policy process: implementation (recognition &
administrative lags) and operational;
• What kind of fiscal policy? Spending (on what?) or tax cuts (for
whom?);
• Will spending ‘crowd-out’ other spending, either directly or
indirectly (through interest rates, inflation, or the exchange rate)?
• Will consumers pierce the veil? Will they attempt to offset the
actions of the government (Ricardian Equivalence)?
17. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 17
fiscal rules
• Even now that most monetary policy is conducted by independent monetary
authorities, there is still the problem that politicians may pursue fiscal policies
that are incompatible with stable inflation.
• Consequently, some countries have adopted fiscal rules. The two most
famous are:
• The Stability and Growth Pact (revised!): countries should aim to run no
more than a 1% deficit over the business cycle; cannot borrow more than
3% of GDP (cf. France and Germany!) in any one year; government debt
should be kept below 60% of GDP.
• Gordon Brown’s Golden Rule: over the business cycle borrowing should
equal net government investment; government debt should be kept
below 40% of GDP.
• A fiscal rule that states that debt must be kept below a level of X% of GDP
implies that the average deficit over the cycle must be approximately equal to
the average growth rate of GDP times the target level of X%. For Britain, with
an average growth rate of 2% and a target of 40%, the average deficit must be
kept around 0.8%.
18. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 19
Source: Carlin & Soskice, p12
how does monetary policy work?
19. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 20
transmission mechanisms
Official
rate
Market rates
Asset prices
Expectations&
confidence
Exchange rate
Domestic
demand
Net external
demand
Total
demand
Domestic
inflationary
pressure
Import
prices
Inflation
20. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 21
higher interest rates do not always tighten financial conditions
Source: Goldman Sachs
A
M
F
J
D
N
O
S
A
J
J
M
A
M
F
J
D
N
O
S
A
J
2006
2005
2004
5.0
4.0
3.0
2.0
1.0
100.6
100.4
100.2
100.0
99.8
99.6
99.4
99.2
Percent Index, 10/20/03=100
Fed Funds Rate (left)
FCI (right)
21. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 22
Euro area responses to a 1% rise in ECB repo rate for two years
Source: ECB Monthly Bulletin, October 2002, p45
Real GDP Consumer prices
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
ECB -0.34 -0.71 -0.71 -0.15 -0.30 -0.38
NCB -0.22 -0.38 -0.31 -0.09 -0.21 -0.31
NIGEM -0.34 -0.47 -0.37 -0.06 -0.10 -0.19
Note: The table shows responses of real GDP and consumer prices to a two-year increase of 100 basis points
in the policy-controlled interest rates of the euro area. Figures are expressed in per cent from baseline.
Simulations are performed using the ECB’s area-wide model, the national central banks’ macroeconometric
models and the multi-country model of the NIESR
22. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 23
the Keynes view
• “But this long run is a
misleading guide to current
affairs. In the long run we
are all dead. Economists set
themselves too easy, too
useless a task if in
tempestuous seasons they
can only tell us that when
the storm is long past the
ocean is flat again.” J.M.
Keynes, 1936.
23. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 24
recent developments
• Euroland growth has been slow since 2000;
• US recovery from recession in 2000-1 has been good, although
employment has not recovered as much as output;
• The UK has grown steadily;
• Japan may be picking up; China and India continue to grow rapidly.
• World monetary policy has been extraordinarily relaxed since 2000,
with interest rates of around 0% in Japan, 1% in the USA and 2% in
Euroland.
• But short-term interest rates are now rising around the world.
39. OXFORD UNIVERSITY BUSINESS ECONOMICS PROGRAMME 40
global prospects
• While the US continues to run such large ‘twin deficits’, there is the possibility
of a disorderly correction to global imbalances. Not clear how different
Bernanke will be to Greenspan yet.
• In the absence of such a correction, continued broad growth with some
inflationary pressure is likely.
• Corporate profits have been very strong in the USA and wage growth has
been weak – not much more scope for profits to outperform revenues.
• In Europe, on the other hand, corporate profits may rise faster than revenues
as the economy picks up – assuming no more oil price rises.
• Very hard to predict changes in China. Likely to be modest upward
movement of renminbi and modest decline in share of investment in GDP
(46% in 2005!). Current policy hugely distorts price mechanism: credit too
cheap, exchange rate too low, labour market distortions.
• The need for reform in Chinese banking system and credit allocation and to
deal with inflation and excess capital investment must be balanced against
risk of sudden adjustment.