Fiscal policy aims to achieve objectives like full employment and price stability through instruments like government spending and taxation. While fiscal policy was once used actively to counter business cycle fluctuations, its effectiveness is limited by the difficulties in accurately predicting economic impacts and political interference. Additionally, persistent budget deficits can rapidly increase debt levels, raising sustainability concerns. Most countries now pursue more conservative fiscal policies focused on reducing debt burdens through surpluses rather than attempting discretionary fine-tuning of aggregate demand.
About Us:
UltraSpectra is a full-service online company dedicated to providing the services of internet marketing and
IT solutions to professionals and businesses looking to fully leverage the internet.
http://www.ultraspectra.com
http://www.ultraspectra.net
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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.
The document discusses how businesses are affected by factors in the external environment that are outside of their control, including political, economic, social, technological factors. It introduces the PEST analysis framework for examining the external environment and provides examples of how different external factors impact businesses and should be considered in their objectives and strategies. The document also gives specific examples analyzing how certain external and economic factors impact businesses.
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.
Fiscal policy aims to achieve objectives like full employment and price stability through instruments like government spending and taxation. While fiscal policy was once used actively to counter business cycle fluctuations, its effectiveness is limited by the difficulties in accurately predicting economic impacts and political interference. Additionally, persistent budget deficits can rapidly increase debt levels, raising sustainability concerns. Most countries now pursue more conservative fiscal policies focused on reducing debt burdens through surpluses rather than attempting discretionary fine-tuning of aggregate demand.
About Us:
UltraSpectra is a full-service online company dedicated to providing the services of internet marketing and
IT solutions to professionals and businesses looking to fully leverage the internet.
http://www.ultraspectra.com
http://www.ultraspectra.net
Join Our Network:
facebook.com/ultraspectra
twitter.com/ultraspectra
youtube.com/user/ultraspecra
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.
The document discusses how businesses are affected by factors in the external environment that are outside of their control, including political, economic, social, technological factors. It introduces the PEST analysis framework for examining the external environment and provides examples of how different external factors impact businesses and should be considered in their objectives and strategies. The document also gives specific examples analyzing how certain external and economic factors impact businesses.
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.
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.
The document discusses key economic concepts including different types of economic systems, key economic indicators, and macroeconomic issues. It defines market, centrally planned, and mixed economies. Key economic indicators examined are per capita income, quality of life, purchasing power, and structure of production. Macroeconomic issues covered are economic growth, inflation, external debt, and deficits. Understanding a country's economic environment can help companies predict how trends may affect future business performance.
This document summarizes key concepts in economics including:
1) National economic performance is measured by variables like growth, inflation, unemployment, and the current account, but tradeoffs may occur when trying to achieve all goals at once.
2) The circular flow of income shows how households supply factors to firms in exchange for income, which is then used to buy goods and services in a continuous flow.
3) Economic growth is defined as increases in productive capacity and output over time, measured by variables like GDP, and it contributes to improved living standards but also has critics regarding sustainability and negative externalities.
The document discusses key concepts in aggregate demand and demand-side stabilization policies according to the Keynesian model. It defines aggregate demand and its components. It then explains the Keynesian model's goal of using fiscal policy tools like government spending, taxation, to increase or decrease total demand and stabilize GDP and unemployment. The multiplier effect is discussed as how a change in spending can impact GDP multiple times through subsequent rounds of consumption. The relationships between income, consumption, savings, and how these determine the multiplier are also summarized.
This document summarizes Sonny Bautista's semester 2 portfolio covering topics in macroeconomics including:
1. Macroeconomic models, economic growth, full employment, and price stability.
2. The circular flow of income and gross domestic product.
3. Boom and bust economic cycles and factors that influence GDP.
4. Demand-side fiscal and monetary policies and supply-side policies.
The document discusses stabilization policies to address unemployment and inflation. It covers:
- The types of unemployment including cyclical, structural, seasonal, and frictional unemployment.
- How the government measures unemployment and the difficulties in doing so accurately.
- Theories of inflation including demand-pull and cost-push inflation.
- How fiscal policy, such as government spending and taxation, can be used to combat unemployment and inflation through managing aggregate demand.
- Monetarist theories that the central bank should steadily increase the money supply each year to stabilize the economy rather than using discretionary fiscal policy.
Philips Curve and all you need to know.pptmyfilesnikhil
This document discusses inflation and unemployment. Regarding inflation, it covers historical experiences, causes such as excess demand and supply factors, costs of inflation, and policies to control it. It also examines theories of inflation like the quantity theory of money and wage-price spiral. For unemployment, the document outlines historical trends, potential causes including structural mismatches, and policies to reduce it, such as improving labor market flexibility. It defines the natural rate of unemployment and identifies characteristics of countries with high unemployment levels, such as generous unemployment benefits and strong unions.
This document discusses inflation and unemployment. Regarding inflation, it covers historical experiences, causes including the quantity theory of money and excess demand models, costs such as menu costs, and ways to control inflation including central bank independence and supply-side reforms. Regarding unemployment, the document examines historical rates, potential causes like mismatch between skills and jobs, the natural rate of unemployment, and characteristics of countries with high unemployment levels including generous benefits and strong unions.
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.
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
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 discusses fiscal policy, deficits, and debt. It defines fiscal policy as using the federal budget to achieve macroeconomic goals of growth and employment. There are two types of fiscal policy - discretionary, which are deliberate changes to spending and taxes, and non-discretionary, which are automatic changes. Expansionary fiscal policy involves increasing spending or decreasing taxes to boost aggregate demand during recessions, while contractionary policy involves the opposite to reduce inflationary gaps. Large deficits and debt are a long-term concern but bankruptcy is unlikely due to the ability to refinance or collect taxes. Social security and medicare funds face shortfalls that may require reforms like raising the retirement age.
KEY TAKE AWAYS
Objectives
Definition
Basic macroeconomic concepts
Types of Macro economic Policy
Monetary Policy
Fiscal Policy
Comparison between Monetary and Fiscal Policy
Features of Macroeconomic Policy
Effect of Macro economic Policy
Importance of Macroeconomic Policy
Weakness of Macroeconomics Policy
Conclusion
The document discusses various topics related to money and banking including inflation, deflation, types of inflation, effects of inflation, demand-pull inflation, cost-push inflation, methods of controlling inflation, anti-inflationary measures, banks, and central banks. It defines key terms and provides examples and explanations of inflation, deflation, different types of inflation based on speed and inducement, effects of inflation on various economic activities, and methods used by governments to control inflation through monetary and fiscal policies.
Government economic objective and policiesJohnAde1
This chapter will explain government economic objectives like low inflation and unemployment, the business cycle stages, and fiscal and monetary policies that governments use to influence the economy. It will discuss how tax and spending changes and interest rate adjustments impact businesses and how firms can react. The chapter defines key terms and describes the main economic objectives, problems high inflation and unemployment cause, how economic growth benefits a country, the typical business cycle stages, and issues with a trade deficit. It also outlines how income, profit, VAT, and tariff taxes affect consumer spending and business activity.
This document discusses various concepts related to corporate strategy including:
- Corporate aims like survival, profit, growth which are achieved through objectives and strategies
- Mission statements which provide guidance and shared focus for employees
- Porter's strategies of low cost versus differentiation
- Ansoff's Matrix for strategic options
- Stakeholder perspectives which can conflict like shareholders wanting profit versus employees wanting better pay
- Economic, political, legal and technological factors that influence business strategy
- The importance of considering stakeholders, sustainability, ethics and social responsibility in strategy.
This document provides an overview of aggregate demand, aggregate supply, and how they interact in the short run and long run. It defines aggregate demand and supply and explains the key components of aggregate demand. It then discusses the wealth effect, interest rate effect, and international trade effect which can shift the aggregate demand curve. Next, it defines the long run and short run aggregate supply curves and explains why the short run curve is upward sloping. It identifies several factors that can cause shifts in the short run and long run aggregate supply curves. Finally, it summarizes the short run and long run effects of changes in aggregate demand and negative supply shocks.
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.
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.
The document discusses key economic concepts including different types of economic systems, key economic indicators, and macroeconomic issues. It defines market, centrally planned, and mixed economies. Key economic indicators examined are per capita income, quality of life, purchasing power, and structure of production. Macroeconomic issues covered are economic growth, inflation, external debt, and deficits. Understanding a country's economic environment can help companies predict how trends may affect future business performance.
This document summarizes key concepts in economics including:
1) National economic performance is measured by variables like growth, inflation, unemployment, and the current account, but tradeoffs may occur when trying to achieve all goals at once.
2) The circular flow of income shows how households supply factors to firms in exchange for income, which is then used to buy goods and services in a continuous flow.
3) Economic growth is defined as increases in productive capacity and output over time, measured by variables like GDP, and it contributes to improved living standards but also has critics regarding sustainability and negative externalities.
The document discusses key concepts in aggregate demand and demand-side stabilization policies according to the Keynesian model. It defines aggregate demand and its components. It then explains the Keynesian model's goal of using fiscal policy tools like government spending, taxation, to increase or decrease total demand and stabilize GDP and unemployment. The multiplier effect is discussed as how a change in spending can impact GDP multiple times through subsequent rounds of consumption. The relationships between income, consumption, savings, and how these determine the multiplier are also summarized.
This document summarizes Sonny Bautista's semester 2 portfolio covering topics in macroeconomics including:
1. Macroeconomic models, economic growth, full employment, and price stability.
2. The circular flow of income and gross domestic product.
3. Boom and bust economic cycles and factors that influence GDP.
4. Demand-side fiscal and monetary policies and supply-side policies.
The document discusses stabilization policies to address unemployment and inflation. It covers:
- The types of unemployment including cyclical, structural, seasonal, and frictional unemployment.
- How the government measures unemployment and the difficulties in doing so accurately.
- Theories of inflation including demand-pull and cost-push inflation.
- How fiscal policy, such as government spending and taxation, can be used to combat unemployment and inflation through managing aggregate demand.
- Monetarist theories that the central bank should steadily increase the money supply each year to stabilize the economy rather than using discretionary fiscal policy.
Philips Curve and all you need to know.pptmyfilesnikhil
This document discusses inflation and unemployment. Regarding inflation, it covers historical experiences, causes such as excess demand and supply factors, costs of inflation, and policies to control it. It also examines theories of inflation like the quantity theory of money and wage-price spiral. For unemployment, the document outlines historical trends, potential causes including structural mismatches, and policies to reduce it, such as improving labor market flexibility. It defines the natural rate of unemployment and identifies characteristics of countries with high unemployment levels, such as generous unemployment benefits and strong unions.
This document discusses inflation and unemployment. Regarding inflation, it covers historical experiences, causes including the quantity theory of money and excess demand models, costs such as menu costs, and ways to control inflation including central bank independence and supply-side reforms. Regarding unemployment, the document examines historical rates, potential causes like mismatch between skills and jobs, the natural rate of unemployment, and characteristics of countries with high unemployment levels including generous benefits and strong unions.
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.
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
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 discusses fiscal policy, deficits, and debt. It defines fiscal policy as using the federal budget to achieve macroeconomic goals of growth and employment. There are two types of fiscal policy - discretionary, which are deliberate changes to spending and taxes, and non-discretionary, which are automatic changes. Expansionary fiscal policy involves increasing spending or decreasing taxes to boost aggregate demand during recessions, while contractionary policy involves the opposite to reduce inflationary gaps. Large deficits and debt are a long-term concern but bankruptcy is unlikely due to the ability to refinance or collect taxes. Social security and medicare funds face shortfalls that may require reforms like raising the retirement age.
KEY TAKE AWAYS
Objectives
Definition
Basic macroeconomic concepts
Types of Macro economic Policy
Monetary Policy
Fiscal Policy
Comparison between Monetary and Fiscal Policy
Features of Macroeconomic Policy
Effect of Macro economic Policy
Importance of Macroeconomic Policy
Weakness of Macroeconomics Policy
Conclusion
The document discusses various topics related to money and banking including inflation, deflation, types of inflation, effects of inflation, demand-pull inflation, cost-push inflation, methods of controlling inflation, anti-inflationary measures, banks, and central banks. It defines key terms and provides examples and explanations of inflation, deflation, different types of inflation based on speed and inducement, effects of inflation on various economic activities, and methods used by governments to control inflation through monetary and fiscal policies.
Government economic objective and policiesJohnAde1
This chapter will explain government economic objectives like low inflation and unemployment, the business cycle stages, and fiscal and monetary policies that governments use to influence the economy. It will discuss how tax and spending changes and interest rate adjustments impact businesses and how firms can react. The chapter defines key terms and describes the main economic objectives, problems high inflation and unemployment cause, how economic growth benefits a country, the typical business cycle stages, and issues with a trade deficit. It also outlines how income, profit, VAT, and tariff taxes affect consumer spending and business activity.
This document discusses various concepts related to corporate strategy including:
- Corporate aims like survival, profit, growth which are achieved through objectives and strategies
- Mission statements which provide guidance and shared focus for employees
- Porter's strategies of low cost versus differentiation
- Ansoff's Matrix for strategic options
- Stakeholder perspectives which can conflict like shareholders wanting profit versus employees wanting better pay
- Economic, political, legal and technological factors that influence business strategy
- The importance of considering stakeholders, sustainability, ethics and social responsibility in strategy.
This document provides an overview of aggregate demand, aggregate supply, and how they interact in the short run and long run. It defines aggregate demand and supply and explains the key components of aggregate demand. It then discusses the wealth effect, interest rate effect, and international trade effect which can shift the aggregate demand curve. Next, it defines the long run and short run aggregate supply curves and explains why the short run curve is upward sloping. It identifies several factors that can cause shifts in the short run and long run aggregate supply curves. Finally, it summarizes the short run and long run effects of changes in aggregate demand and negative supply shocks.
Similar to aistra na aman kanBusiness_Ethics_EXCERPT.pdf shik.ppt (20)
aistra na aman kanBusiness_Ethics_EXCERPT.pdf shik.ppt
1. 1. The macro-economy: a theoretical model
2. Controlling the economy: fiscal policy
3. Money and the macro-economy
4. Inflation and unemployment
5. An open economy: international macroeconomics
MACROECONOMICS
2. MACROECONOMICS
What is the purpose of macroeconomics?
• to explain how the economy as a whole “works”
• to predict the consequences of policy action
• to understand why macro variables behave in the
way they do (trends and fluctuations)
What factors determine national income and employment?
Can the government affect national income through
fiscal and monetary policy?
3. How do interest rate decisions reached by the central bank
affect the economy?
What factors determine national savings and investment?
What factors determine the exchange rate?
Why is the trade balance important?
4. THE CIRCULAR FLOW OF INCOME
Households
Tax
Firms
Wages, profits
Exports Imports
Demand for
goods
Government
Investment
5. A MACROECONOMIC MODEL: THE DEMAND SIDE
Building blocks
• consumption 65%
• investment 15%
• government spending 20%
• exports 25%
• imports -25%
These five variables play a critical role in determining
national income and employment.
Hence: need to be explained.
6. What determines aggregate consumption?
• disposable income (Y - T)
• interest rates (investment)
• uncertainty (confidence in future income stream)
• wealth (asset prices, house prices)
• expected future income (e.g. pensions)
• age structure of population
7. Investment
• new capital equipment; not savings/ shares
What determines investment?
• initial cost of investment
• interest rate (cost of borrowing)
• expected future income from investment
The investment decision
Present value of investment > 0
8. Cost of capital: increases as level of investment increases
• internal funds (retained profits)
• borrowing from financial institutions
• selling equity stock in business
How would a reduction in interest rates affect investment?
• lower borrowing costs
• lower mortgage rates (higher demand for houses)
• increase in saving (lower expenditure)
9. Determination of national income: a demand-based
model
Assumptions
1. Aggregate supply of goods responds to demand
- unlimited supplies of labour and capital
2. Aggregate demand for goods and services is
determined as follows:
AD = C + I + G + X - M
Model (see figure)
Predictions:
- if AS > AD, stocks increase, output falls
- if AD> AS, stocks decrease, output rises
- if AD = AS, economy is in equilibrium
10. Factors causing national income to change
1. If expenditure increases, so will income
2. Why might AD increase?
• consumption responds to
- fall in prices (e.g. production costs fall)
- wealth increases (house prices, stock market)
- interest rates fall (monetary authorities)
- lower taxes (govt. policy)
• investment
- increase in expected profits (business optimism)
- fall in borrowing costs
11. • government spending
- transfer payments increase
- capital spending increases
- expenditure on education/ health increases
• net exports
- fall in exchange rate
- increase in competitiveness
- increase in world income
12. The supply side
So far assumed that AD alone determines national
income
What about supply-side constraints?
• capital stock is limited in the short run
• supply of labour is limited
• skills shortages may arise
13. Implications of a limited supply of factor inputs
• wages increase as labour demand increases
• diminishing marginal productivity
(fixed supply of capital)
• producers willing to supply more output only at higher
prices
• supply can be increased over the long run
(increase in capital stock)
Revised model
• interaction between AD and AS determines the
economy’s income and price levels
14. Revised model
• interaction between AD and AS determines the
economy’s income and price levels
Consider the effects of:
- an increase in production costs
- an increase in the supply of resources
(e.g. capital stock, technology)
- an increase in the demand for goods
15. Extended model
Assumption: AS is fixed by the economy’s output capacity
• labour market is assumed to clear (full employment)
• AD negatively related to price level
- fall in price leads to higher demand
(real money balances increase, spending increases)
- fall in price reduces demand for money, interest rates fall
(lower interest rate, higher spending)
• AD positively related to aggregate spending
- investment increases as business expectations improve
16. • AD positively related to money supply
- if money supply increases, interest rate falls (investment
increases)
A further modification
• AS may not be fixed at the full employment level
• AS may be upward sloping in the short run:
- sticky prices
- unemployed labour willing to work at current wages
( costs do not rise as more labour is employed)
17. MACROECONOMIC POLICY
Objectives of macro policy:
• full employment
• stable prices
• steady growth
• equitable distribution of income
• balance of payments equilibrium (medium term)
19. FLUCTUATIONS IN BUSINESS ACTIVITY
Historical record
• recessions can be very severe
• all countries experience booms /slumps
• recessions are usually shorter than expansions
• business cycles are highly synchronised between ‘partners’
- inter-country linkages
• business cycles are less severe than in past
- govt spending is stable
- automatic stabilzers have ‘worked’
- active monetary policies (Greenspan after Asian crash)
20. Causes of business fluctuations
• unexpected ‘shocks’
- wars, oil-prices, financial crises
• shifts in AD
- investment is volatile (unpredictable behaviour)
- price stickiness causes changes in ‘real’variables
• technology shifts
- new products / new processes
• govt-induced shocks
- poor management of fiscal / monetary policy
- time lags
21. FISCAL POLICY
What is fiscal policy?
- govt’s attempt to control AD via G and T
Role and importance of fiscal policy
• fiscal activism
- fine-tuning of AD to achieve full employment
- fine-tuning to reduce amplitude of business fluctuations
• fiscal balance has replaced fiscal activism
- fine-tuning via fiscal policy has failed
- monetary policy has replaced fiscal policy
• how could govt ‘pay for’ fiscal expansion in a recession?
- increasing G causes income to increase
- increase in income leads to higher taxes
22. • problems with fiscal activism
- fiscal activism involves discretionary action
- govt has to decide how much stimulus is needed
- need to know effect of fiscal injections
(macro models used to predict effects)
- budget deficits can easily get out of hand
23. • automatic stabilisers
- ‘kick in’ when economy moves into recession
- welfare payments increase
- tax revenue falls in recessions (to maintain C)
• fiscal policy stance
- budget deficit does not necessarily mean that fiscal
stance is expansionary; recessions cause deficits
- fiscal stance may be ‘tight’ at full employment
24. Reasons for the decline of fiscal activism
• difficult to predict effects
- inadequate knowledge of how economy works
- macro models are inadequate
- poor data
- long time lags in policy effects
- poor timing of policy changes
25. • political interference results in wrong policy action
- political cycles
- systematic bias towards deficits
(popularity of low taxes)
• fiscal activism results in increasing debt
- debt/gdp ratio increases (debt has to financed)
26. Dedt / gdp ratios
%
1990 2000
EU 41 69
Japan 10 113
USA 32 60
Germany 42 64
France 40 64
UK 39 50
Italy 104 113
27. Government spending / gdp
%
1960 1970 1990 2000
EU 32 37 48 44
Japan 17 19 32 32
USA 27 32 37 33
Germany 33 39 45 44
UK 32 34 53 44
France 35 39 51 48
Italy 30 34 53 44
28. Reducing debt may have expansionary effects
• cut in G can lead to:
- lower interest rates
- more confidence in govt’s macro policy
- inflow of private FDI
• greater consumer / investor confidence
29. • fiscal activism is useless due to ‘crowding out’
- ‘crowding out’ of private I via high interest rates
- households reduce spending due to expectation of
higher taxes in future
But:
- households may not make link between budget deficit
and future taxes
- households may not care about the distant future
- not much evidence to support negative impact of
‘crowding out’
30. Sustainability of debt: govts worry about debt/gdp:
• many developing countries get into trouble (Mexico)
- desire for growth
• non-tax payers / taxpayers increasing due to
‘demographic time bomb’
e.g. % 65+
2000 2050
USA 12 21
Japan 17 30
EU 16 28
• need to keep interest rates below gdp growth rate
to get debt / gdp down (or to run a deficit while keeping
debt / gdp constant)
31. Conclusions
• fiscal policy has become more conservative
• debt burden too big; need for surpluses to repay debt
• inflationary consequences of expansionary policies
• financial markets ‘nervous’ of increases in govt debt
(Can the govt meet its debt repayments?)
• pressure to reduce size of public sector
- efficiency gains from privatisation
- lower interest rates
• automatic stabilisers essential for macro stability
32. • fine-tuning replaced by coarse-tuning
sustainability of debt
- discretionary fiscal policy still has a role to play
- co-ordinated policies macro-policy between G7 (G3?)
needed to keep world economy stable
(due to high rate of transmission of economic shocks)
33. MONEY AND THE ECONOMY
What is money?
What does money do?
How does money affect the economy?
What determines the money supply?
What determines the demand for money?
What determines interest rates?
What is monetary policy?
34. What is money?
What counts as money?
• depends on its accessibility (degree of liquidity)
- cash
- bank deposits
- interest-bearing deposits
- time-deposits (savings)
- short-term Treasury bills (near money)
What does money do?
- medium of exchange
- store of wealth
- unit of account (measure of relative value)
- relates the future to the present
(wage contracts, repayment of debt)
35. How does money affect the macro economy?
Money affects the economy via interest rates:
• r affects expenditure (C and I)
• exchange rates (and therefore X and M)
• property prices
• bonds and shares
36. The financial sector: the central bank
• issues cash
• banker to commercial banks
• banker to govt (manages govt borrowing)
• regulates commercial banks
• controls liquidity position of commercial banks
• operates monetary policy
• operates exchange rate policy
37. The financial sector: the money market
Organisations
- commercial banks
- large firms
- pension funds
- building societies
- foreign exchange market
Intruments
- govt bonds / gilts
- certificates of deposit
- loans to households
- overdrafts
- mortgages
38. Monetary policy
Central bank controls monetary conditions:
• controls liquidity through lending rate (‘repo’)
- commercial banks can borrow at the repo rate
- repo rate is a ‘signal’
(determines all other interest rates)
- low repo encourages banks to borrow and lend
- high repo discourages banks from borrowing
39. Determination of interest rates
Demand for money
• transactions purposes
- price level
- income
- interest rate (opportunity cost)
• precautionary purposes
• speculative purposes
- expected change in price of bonds
- bond price inversely related to r
- hold money if bond prices are expected to fall
- hence: demand for money high when r is low
40. Causes of changes in money supply
• banks can reduce their liquidity ratios
- switch / direct debit has reduced demand for cash
- banks borrow from each other (overnight) to
achieve a satisfactory liquidity position
• surplus in balance of payments
- inflow of foreign exchange
• govt creates high-powered money to finance a
deficit
- multiplier effects on ‘broad’ money (M)
M = k (H)
M = broad money
H = high-powered money
k = money multiplier
41. • govt sells short-term Treasury bills (‘near money)
- commercial banks expand loans to customers
• govt buys long-term bonds and sells short-term
Treasury bills to increase liquidity (‘funding’)
42. Determination of interest rates
Govt sets the money supply
Private sector determines demand for money
r
Demand / supply for money
r1
M1
Md
= f(P, r, y)
M
s
= M1
What happens if:
- money supply increases
- income increases
- prices increase
43. Monetary policy in practice
Central bank
• does not control the money supply directly
• controls interest rates via open market operations
How does the CB control interest rates?
• announces an interest rate
- base rate/repo rate paid by banks for borrowing
money from the CB
• follows this up with OMO
- buys gilts from banks to increase liquidity
(results in lower r)
- sells gilts to banks to decrease liquidity
(banks earn an income from gilts)
44. Independence of central bank
• USA and Germany: long history of CB independence
• other countries followed in 1990s (e.g. UK in 1997)
Advantages of independence
• monetary policy free from manipulation
• strengths credibility (inflation targets more ‘believable’
• CB free to achieve its specific objectives
Disadvantages
• low inflation is not the only policy goal
• govt deflects blame for failure of economic policies
Performance
• lower inflation achieved
• tight monetary policy has led to higher unemployment in EU
45. The European Central Bank
• sets interest rate for all member states
• most independent CB in world; not accountable to any
single country
• sets target inflation rate for whole Eurozone
• sets 3 interest rates
- lender of last resort (e.g. 5%)
- loans to banks (e.g. 4%)
- borrowing from banks (e.g.3%) to mop up
surplus liquidity
• sets minimum reserve ratio (to keep banks under control)
46. INFLATION AND UNEMPLOYMENT
What is inflation?
Some facts
• inflation varies over time within countries
• inflation varies between countries
What causes inflation?
• quantity theory of money
• excess demand model of inflation
• cost-push factors (wages, imported inflation)
• a dynamic model of inflation
47. Quantity theory of money
Expenditure = Sales
quantity x velocity = price level x output
of money
MV = Py
Suppose V and y are constant
then P = (V/y)M
or
rate of change in P = rate of change in M
48. Excess demand model of inflation
If AD > AS……….prices rise
if AD < AS……….prices fall
AS
AD1
AD2
P2
P1
y1 y2
49. AD can increase for several reasons:
• consumption suddenly increases
• investment increases (expectations improve)
• money supply increases (fall in r)
• exports increase (world trade expands)
Inflation is self-perpetuating:
• wage-price spiral
• expectations of inflation
Cost-push shocks:
• triggered by wage push, oil price hikes
50. A dynamic model of inflation: the augmented
Phillips curve
• wage inflation = f (expected price inflation, XD)
• expected price inflation:
- based on forecasts of macro-economy
(e.g. capacity utilisation, monetary growth)
Does a trade-off exist?
- short-run
- long-run
51. Costs of inflation
• inflation increases uncertainty
- consumers get confused signals about prices
(essential information for optimal resource allocation)
• menu costs
• shoe-leather costs: searching for best buy
• adverse effects on fixed income groups
• adverse effects on savings
52. • adverse effects on growth of gdp/capita
- lower in vestment due to uncertainty
- shortens investors time horizon (quick returns)
• costly to reduce inflation: dis-inflation = unemployment
• hyper-inflation is economically and politically disasterous
53. Costs of deflation
• borrowers find their real debts increasing
- discourages borrowing
- fall in asset prices reduces consumption
• lenders lose if debtors go bankrupt
• prices decline but wages are sticky
- decline in demand for labour
- fall in profits and investment
• real interest rates increase
- discourages investment
• leads to persistent recession: consumers delay spending
54. Control of inflation
• requires a powerful commitment to stable prices
- implies strict control over G
• control over inflation in hands of CB
- inflation is lower in countries with independent CB
• govt needs to set clear inflation targets
- avoids govt pressure to relax monetary policy
• govt not permitted to borrow from CB to finance deficits
- must borrow from private sector
• supply-side policies needed
- labour market flexibility
- anti-monopoly policy to increase competition
55. • high level of scrutiny of CB needed
- openness of how decisions are reached
- subject to scrutiny / questioning by elected body
• increasing emphasis placed on controlling interest rates
- less emphasis on controlling money supply
- use open market operations to control interest rates
• accurate forecasts of macro-economy needed
- lagged effect of monetary policy on economy
- need forecasts of turning points
- need to forecast ‘leading indicators’
(change in stock, long-term bond yields, commodity
prices, overtime working)
56. • stopping hyper-inflation
- nominal exchange rate ‘anchor’(e.g. dollarisation)
(to restrain cost-push inflation, including imported
inflation)
- restrictive fiscal policies (balanced budget)
- tight monetary policies (e.g. via independent CB)
- structural reforms
(liberalise financial markets, flexible labour markets,
free trade, privatisation of public enterprise,
anti-monopoly policies)
58. Has inflation been beaten?
• strong public support for price stability
- ageing population prefers low inflation
• financial markets strongly averse to inflation
- govt keeps close eye on financial markets
- pre-emptive action taken v. inflation
• greater price competition
- supply-side changes (labour markets, privatisation,
internet trading, creation of new markets)
- erosion of trade union power
• less vulnerable to oil price hikes
- more alternative sources of energy
- diversification in use of energy
59. UNEMPLOYMENT
• varies between countries
• varies within countries over time
• varies within countries at any point in time
60. Causes of unemployment
• collapse in aggregate demand
Policy action: need for fiscal / monetary policy action
• mismatch between labour demand and labour supply
- geographical immobility of labour
- skill/occupational mismatch
Policy action:need for spatial policies / re-training
programmes
• welfare benefits ‘too high’
Policy action: creation of work incentives (New Deal)
61. • hiring / firing costs too high
- employment legislation ‘too tough on employers’
Policy action: reduce fixed costs of employing labour
• wages too high (trade union power)
- wages are sticky downwards
- efficiency wage v. nominal wage
Policy action: more flexible wages needed
(especially with fixed exchange rate e.g. euro)
62. What is the natural rate of unemployment?
Definition: unemployment existing when the
economy is in equilibrium (AD =AS)
Determinants:
• job search
• structural factors (mismatch)
• voluntary unemployment
• unemployment benefit
• hysteresis and long-term unemployment
63. THE OPEN ECONOMY: INTERNATIONAL ASPECTS
OF THE MACRO-ECONOMY
• the balance of payments
• the exchange rate
• economic and monetary union (EMU)
64. What is the balance of payments?
Why are policy makers concerned about the BP?
How can govts ‘correct’ a BP problem?
How are exchange rates determined?
How can the CB affect the exchange rate?
Is a single currency for Europe desirable?
Should the G3 (G7) co-ordinate their macro-policies?
How should world debt problems be tackled?
65. The balance of payments
• records all flows of money between countries
• BP = current acc + capital acc
Current account (or financial account)
- exports minus imports of goods / services
- govt transfers (e.g. EU taxes / subsidies)
Capital account
- fixed investment (FDI)
- bonds, equities, deposits (portfolio investment)
66. Current account
Exports +165
Imports -192
Services +11
Net income +7
Net govt transfers -4
Balance -13
Capital account
FDI (net) +173
Portfolio (net) -143
Short-term flows (net) -23
Balance +10
Reserves +1
Error -2
Balance of payments 0
67. Surpluses and deficits in the BP
Surplus: BP > 0
- foreign exchange reserves increase
- accumulation of foreign assets
- exchange rate ‘too high’
Deficit: BP < 0
- foreign exchange reserves decline
- loss of foreign exchange reserves
- deficit has to be financed (borrowing)
- loss of control over domestic assets
- downward pressure on exchange rate; inflationary
68. Determinants of the BP
BP = exports - imports + net capital flows
• exports = f (exch rate, competitiveness, world income)
• imports = f (exch rate, competitiveness, income)
• net capital flows = f (r / world r, country risk)
Model: BP = f ( e, w/w*, y*, y, r/r*)
e = exchange rate (£/$)
w = real wage; w* = world real income
y = income y* = world income
r = interest rate r* = world interest rate
69. Govt intervention
• exchange rate policy: buying / selling domestic currency
• fiscal / monetary policy to control AD
- raise / lower r (capital account)
- change G or T (trade account)
• supply-side policies
- improve competitiveness via labour market flexibility
70. The exchange rate
e = £ per $ (or s = $ per £)
Determination of e: a simple model
Demand for £s (= supply of $s)
• importers of UK goods / services
• tourists visiting UK
• foreign students in UK universities
• foreigners investing in UK
• UK citizens with foreign income
Supply of £s (= demand for $s)
• opposite to above
71. Model: e = f ( x - m, r - r*)
When will exchange rate appreciate?
Current account:
• demand for exports increases
• demand for imports decreases
• competitiveness increases (w / w* increases)
Capital account:
• inflow of foreign investment (r / r* increases)
72. Fixed or floating exchange rates?
Advantages of a fixed exchange rate
• certainty for exporters / importers/ investors
• no speculation
(e.g. between countries with common currency)
•imposes constraints on govt macro policy
- constrained by effect on BP
- constrained by effect of policies on inflation
- govt has to achieve BP equilibrium over medium term
73. Disadvantages of a fixed exchange rate
• economic policy will be constrained by fixed exchange
rate
- chronic BP deficit requires deflationary policy
- conflict between full employment and BP equilibrium
• sudden ‘shocks’ cannot be absorbed by ER adjustment
- shocks affect ‘real’ economy
• fixed ER encourages ‘protectionism’
- due to impact of shocks on ‘real’ variables
• speculators cause political crises
74. Advantages of floating exchange rates
• govt ignores ER; no intervention needed
• no need to worry about BP
• economy is insulated from shocks (absorbed by ER)
• govt can concentrate on internal policy objectives
(inflation, unemployment, income distribution)
75. Disadvantages of floating exchange rates
• exchange rate can be volatile in the short run
- causes uncertainty (harmful to investment / trade)
• capital flows can cause ER to get ‘out of line’ with its
underlying (fundamental) value
• loss of BP constraint on macro-policy may lead to
inflationary bias
- with a fixed ER, govt has to respond to BP deficits
76. Advantages of a single currency
• lower transactions costs (currency conversions)
• increased price competitiveness
- transparent pricing across countries
• elimination of exchange rate uncertainty
- encourages trade
- encourages investment (inc. FDI)
• lower inflation and interest rates
- central bank independent of member govts
- member states have to keep wage increases in line
to maintain competitiveness
77. Disadvantages of a single currency
• surrenders economic sovereignty to supra-national
authority
- no control over monetary policy
- no control over exchange rate
• deflationary effects in countries with high wage pressures
• increase in regional disparities due to greater
factor mobility
• potential loss of control over fiscal policy (cannot use
monetary expansion to pay for increase in G)
78. Why might the Euro Zone not be an optimal currency area?
• labour markets are not flexible enough
- wages may be sticky downwards
- labour is not sufficiently mobile to respond
to changes in demand
- effects of changes in euro ER will vary between
member states / regions
• But: alternative methods of dealing with adverse effects of
structural change
- structural funds for re-training
- structural funds for encouraging indigenous growth
- infrastructure policies to revive declining regions
79. Globalisation and macroeconomic policy
Interdependence
• world’s economies increasingly inter-dependent
• steadily increasing world trade
- dependent on each other’s demand for exports
• vast increase in financial flows due to liberalisation
of financial markets
- abolition of controls on currency movements
- financial markets affect each other (instantaneously)
- Fed has profound effect on rest of world’s economies
80. Co-operation between G7: policy harmonisation
• need for policy harmonisation to prevent worldwide
recession / inflation
- exchange rates should not be ‘out of line’
(need to keep current accounts in reasonable balance)
- inflationary pressures are easily transmitted to other
countries
- co-ordination of interest rates may be needed to
prevent adverse capital flows
• G7 need to deal with the problem of developing country
debt