This document summarizes the history and approaches to fiscal policy, including:
- 1850s-1950s emphasized 'sound finance' and balanced budgets
- 1950s-1970s saw the rise of Keynesian demand management using deficits
- 1980s-2008 returned to balanced budgets and using fiscal policy for supply incentives
- 2008 crisis led to increased spending and deficits before austerity reduced deficits
It discusses arguments around automatic stabilizers, supply-side vs demand-side tools, and trade-offs between equity and efficiency.
This document discusses inflation, its causes and effects. It defines inflation as a general rise in price levels over time which erodes purchasing power. Inflation is caused by excess money supply chasing limited goods. Key effects are a changing income distribution, reduced savings and capital formation, profits from price rises leading to black markets, and hardship for those on fixed incomes. While some argue low inflation spurs growth, critics say it ultimately hinders growth. The document examines India's anti-inflation measures and policies to better control inflation like monetary and fiscal policies, wage limits, spending cuts, and supply-side reforms.
The document discusses unemployment and inflation as two major macroeconomic problems. It defines unemployment as people who are able and willing to work but unable to find jobs. There are different types of unemployment including frictional, cyclical, structural, and seasonal unemployment. Inflation is defined as a continuous rise in the general price level in an economy. The document discusses two main causes of inflation: demand-pull inflation which occurs when spending outpaces the economy's productive capacity, and cost-push inflation which results from increased costs of production being passed onto consumers. Effects of unemployment and inflation include impacts on individuals, society, and the overall economy.
types of inflation and inflationary and deflationary gap ayazmashori
This document discusses different types of inflation including definitions of inflation, deflation, disinflation, and their causes. It defines inflation as a sustained increase in prices over time. Deflation is a decrease in prices, while disinflation is a slowdown in the rate of inflation. The types of inflation include hyperinflation (over 100% per year), galloping inflation (10-100%), and creeping inflation (<10%). Causes of inflation are discussed as either demand-pull inflation from too much spending, or cost-push inflation from increased costs of production. Inflationary gaps occur when current GDP is higher than potential GDP at full employment, while deflationary gaps are when demand is below full employment supply
Lecture slides for an undergraduate course on Basic Macroeconomics that I taught in the Fall of 2007.
This lecture goes over the difference between real and nominal GDP.
This document provides an overview of the Keynesian model of aggregate demand. It explains that aggregate demand is the total demand for final goods and services in an economy at a given price level. The AD curve is derived from the intersection of the IS curve, which shows combinations of output and interest rates that equal planned and actual expenditures, and the LM curve, which shows combinations that clear the money market. An increase in government purchases shifts the AD curve to the right, increasing both output and the price level if the aggregate supply curve is upward sloping.
The document discusses the transmission mechanism of monetary policy through four key points:
1. It introduces the transmission mechanism and defines it as the series of links between monetary policy changes and their impacts on output, employment, and inflation.
2. It outlines the session, which will cover the impact of interest rate changes on other interest rates, consumption, and investment.
3. It provides brief definitions and discussions of consumption and investment, and how monetary policy influences them through several channels like interest rates, asset prices, and exchange rates.
4. It notes that monetary policy is likely to influence aggregate demand in various ways and that the relationship between interest rates and aggregate demand is complex, being influenced by expectations and time
The cobweb model explains periodic price fluctuations in markets where supply decisions are made before prices are observed, such as agricultural markets. It is based on a lag between supply and demand decisions. If farmers expect high strawberry prices due to low supply from bad weather, they will increase strawberry production the next year, leading to low prices as supply increases. If prices are then expected to remain low, supply will decrease, causing prices to rise again. The model can result in converging or diverging price fluctuations depending on the slopes of the supply and demand curves.
The document discusses aggregate supply curves, including short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves. The SRAS curve slopes upward as producers are willing to supply more output when prices are higher in the short-run before input prices adjust. The LRAS curve is vertical at the natural level of output, as prices and costs have fully adjusted in the long-run. The document also discusses factors that can cause shifts in the SRAS and LRAS curves such as changes in input prices, taxes, and economic growth.
This document discusses inflation, its causes and effects. It defines inflation as a general rise in price levels over time which erodes purchasing power. Inflation is caused by excess money supply chasing limited goods. Key effects are a changing income distribution, reduced savings and capital formation, profits from price rises leading to black markets, and hardship for those on fixed incomes. While some argue low inflation spurs growth, critics say it ultimately hinders growth. The document examines India's anti-inflation measures and policies to better control inflation like monetary and fiscal policies, wage limits, spending cuts, and supply-side reforms.
The document discusses unemployment and inflation as two major macroeconomic problems. It defines unemployment as people who are able and willing to work but unable to find jobs. There are different types of unemployment including frictional, cyclical, structural, and seasonal unemployment. Inflation is defined as a continuous rise in the general price level in an economy. The document discusses two main causes of inflation: demand-pull inflation which occurs when spending outpaces the economy's productive capacity, and cost-push inflation which results from increased costs of production being passed onto consumers. Effects of unemployment and inflation include impacts on individuals, society, and the overall economy.
types of inflation and inflationary and deflationary gap ayazmashori
This document discusses different types of inflation including definitions of inflation, deflation, disinflation, and their causes. It defines inflation as a sustained increase in prices over time. Deflation is a decrease in prices, while disinflation is a slowdown in the rate of inflation. The types of inflation include hyperinflation (over 100% per year), galloping inflation (10-100%), and creeping inflation (<10%). Causes of inflation are discussed as either demand-pull inflation from too much spending, or cost-push inflation from increased costs of production. Inflationary gaps occur when current GDP is higher than potential GDP at full employment, while deflationary gaps are when demand is below full employment supply
Lecture slides for an undergraduate course on Basic Macroeconomics that I taught in the Fall of 2007.
This lecture goes over the difference between real and nominal GDP.
This document provides an overview of the Keynesian model of aggregate demand. It explains that aggregate demand is the total demand for final goods and services in an economy at a given price level. The AD curve is derived from the intersection of the IS curve, which shows combinations of output and interest rates that equal planned and actual expenditures, and the LM curve, which shows combinations that clear the money market. An increase in government purchases shifts the AD curve to the right, increasing both output and the price level if the aggregate supply curve is upward sloping.
The document discusses the transmission mechanism of monetary policy through four key points:
1. It introduces the transmission mechanism and defines it as the series of links between monetary policy changes and their impacts on output, employment, and inflation.
2. It outlines the session, which will cover the impact of interest rate changes on other interest rates, consumption, and investment.
3. It provides brief definitions and discussions of consumption and investment, and how monetary policy influences them through several channels like interest rates, asset prices, and exchange rates.
4. It notes that monetary policy is likely to influence aggregate demand in various ways and that the relationship between interest rates and aggregate demand is complex, being influenced by expectations and time
The cobweb model explains periodic price fluctuations in markets where supply decisions are made before prices are observed, such as agricultural markets. It is based on a lag between supply and demand decisions. If farmers expect high strawberry prices due to low supply from bad weather, they will increase strawberry production the next year, leading to low prices as supply increases. If prices are then expected to remain low, supply will decrease, causing prices to rise again. The model can result in converging or diverging price fluctuations depending on the slopes of the supply and demand curves.
The document discusses aggregate supply curves, including short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves. The SRAS curve slopes upward as producers are willing to supply more output when prices are higher in the short-run before input prices adjust. The LRAS curve is vertical at the natural level of output, as prices and costs have fully adjusted in the long-run. The document also discusses factors that can cause shifts in the SRAS and LRAS curves such as changes in input prices, taxes, and economic growth.
Fiscal Responsibility and Budget ManagementParas Savla
The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The main purpose was to eliminate revenue deficit. In this presentation Indian international history behind introducing FRBM Act in India and western countries and some of provisions of Indian FRBM Act has been analysed.
This document discusses the rationale for active stabilization policy using fiscal policy to reduce the severity of recessions and control excessively strong expansions. It describes how governments can use expansionary or contractionary fiscal policy through taxes, government spending, and transfers to shift the aggregate demand curve and close recessionary or inflationary gaps. However, it notes there are lags in the implementation and impact of fiscal policy that make its effects hard to predict and could potentially worsen economic situations if not applied carefully.
Inflation in India has risen to 9.89% in February 2022 according to the wholesale price index, up from 8.56% in the previous month. Inflation can be classified based on rate, degree of control, and causes. Common causes of inflation include demand-pull inflation and cost-push inflation. Effects of inflation include difficulties for companies to budget and plan long-term, discouraging investment and saving, and negative impacts to trade from currency exchange price instability. The Reserve Bank of India is taking measures to control inflation such as increasing interest rates on loans and decreasing deposit rates.
This document outlines the Absolute Income Hypothesis theory presented by Keynes in 1936. The theory states that as absolute income increases, the proportion of that income spent on consumption decreases. So while consumption increases with more income, the rate of increase declines. Key points include consumption (C) increasing at a decreasing rate as income (Y) rises, the average propensity to consume (APC) decreasing as income rises, and the theory showing consumption-income relationships in both the short run and long run.
This chapter discusses key concepts in open economy macroeconomics including imports, exports, the trade balance, exchange rates, and how fiscal and monetary policies can impact these variables. It introduces accounting identities that relate gross domestic product (GDP), consumption (C), investment (I), government spending (G), net exports (NX), and net capital outflows. It also presents models of a small open economy and how exchange rates adjust to equate the trade balance with capital flows.
The document defines and explains several key concepts related to inflation:
- Inflation is a general rise in price levels across most markets over time, eroding purchasing power. It is measured by calculating changes in the consumer price index (CPI).
- The CPI tracks price changes of a basket of common goods and services in an area. A higher CPI indicates higher costs of living.
- While some inflation is necessary for economic growth, high or unpredictable inflation can be harmful as wages may not keep pace and erode purchasing power. Hyperinflation occurs when inflation accelerates rapidly out of control.
There are two main methods to measure inflation:
1) By calculating the percentage change in price indices like the Consumer Price Index (CPI) or Wholesale Price Index (WPI). CPI measures the price of a basket of consumer goods, while WPI measures wholesale goods prices.
2) By calculating the change in the GDP deflator, which is the ratio of nominal GDP to real GDP adjusted for inflation. For example, if nominal GDP is Rs. 1740.2 thousand crores and real GDP is Rs. 1136.9 thousand crores in 1999-2000, the GDP deflator would be 153%. The percentage change in the GDP deflator from one year to the next
This document discusses different theories of inflation including:
1) Monetarist theory which links inflation to increases in the money supply.
2) Keynesian theory which attributes inflation to increases in aggregate demand beyond what aggregate supply can meet at full employment.
3) Structural theory which sees inflation as caused by inelasticities in an economy's production capacity, capital formation, institutions, agriculture sector, and labor markets.
This document provides an introduction to macroeconomics. It defines macroeconomics as dealing with the aggregate behavior and choices of the entire economy, such as national income and inflation, rather than individual behavior. It contrasts macroeconomics with microeconomics and lists the main macroeconomic goals as full employment, price stability, economic growth, and an equitable distribution of income. It also introduces the key macroeconomic concepts of aggregate demand and aggregate supply.
1) Inflation occurs when prices rise overall in an economy. It can be caused by demand-pull factors like too much spending chasing too few goods, or cost-push factors like rising wages.
2) There are different rates of inflation including low inflation under 10%, galloping inflation in the double or triple digits, and hyperinflation over a million percent. High and unpredictable inflation distorts economies.
3) While low and predictable inflation may have little impact, unexpected inflation impoverishes some and enriches others by unexpectedly changing the value of assets and debts.
The document discusses the Phillips curve, which shows the relationship between unemployment and inflation. It describes how Alban Phillips first observed an inverse relationship between wage growth and unemployment rates in Britain. Many economists then concluded there is a negative short-run relationship between unemployment and inflation rates, known as the short-run Phillips curve. However, changes in expected inflation rates can shift this curve. In the long run, policies aimed at reducing unemployment below the natural rate of unemployment lead to accelerating inflation.
The concept of impossible trinity in Macro-Economics, Course handled by Prof. Rudra Sen Sarma, IIM Kozhikode. Presented for an introduction into Macro Economics concepts
This document provides an overview of post-Keynesian economics. It defines post-Keynesian economics, outlines some of its key characteristics such as its focus on effective demand and historical dynamics. It also describes some of the different strands within post-Keynesian theory, including Michal Kalecki's emphasis on imperfect competition and class division. Additionally, it summarizes theories around post-Keynesian income distribution in corporate economies developed by Robinson, Kaldor and Pasinetti, and post-Keynesian employment analysis based on the principle of effective demand determining labor-hire decisions.
Say's Law is a classical economic idea that rejects the possibility of general overproduction or "gluts". It states that "supply creates its own demand". There are two bases of Say's Law: 1) all income not consumed is saved and all saving is invested, so there cannot be too much saving, and 2) people only hold money for transactions so will consume or invest any excess money balances. Say's Law implies full employment and that aggregate supply always equals aggregate demand (Say's identity). However, classical economists also discussed how monetary disturbances could cause temporary excess supply, suggesting Say's equality - an equilibrium condition - is a better description of their view, rather than Say's identity being always true. They believed markets would adjust
This document discusses inflation in the Indian economy. It defines inflation as a rise in the general price level and a fall in the purchasing power of money. There are two main types of inflation - demand-pull inflation, which occurs when demand exceeds supply, and cost-push inflation, which is caused by increased production costs. The consequences of inflation include uncertainty, reduced savings and investment, and income redistribution. To control inflation, the government uses fiscal measures like taxes, monetary measures like interest rates, and general measures like wage and price controls. Empirical data shows India's inflation rate was 5.96% in March 2013 according to the wholesale price index.
This document discusses the impossible trinity, which is the hypothesis that it is impossible for a country to have free capital flow, a fixed exchange rate, and an independent monetary policy simultaneously. It explains each of the three factors - free capital flow, fixed exchange rate, and independent monetary policy - and provides examples. The document then discusses India's policy approach and how it has opted to allow free capital flow and a floating exchange rate while prioritizing independent monetary policy. It concludes that there is no perfect solution and countries must choose based on their priorities and circumstances.
The Phillips curve describes an inverse relationship between unemployment and inflation, such that lower unemployment is associated with higher inflation. While observed to be stable in the short-run, it does not hold in the long-run. The document discusses the origins of the Phillips curve from William Phillips' 1958 paper and subsequent modifications by economists like Friedman and Phelps who argued it does not reflect long-run economic realities. It also examines shifts to the Phillips curve from supply shocks and how the relationship between unemployment and inflation is now understood with incorporation of inflation expectations.
Relative effectiveness of Monetary and Fiscal Policy in IS-LM FrameworkAamin22
This document summarizes the relative effectiveness of monetary and fiscal policy using an IS-LM framework. It discusses that monetary policy is more effective when the LM curve is steeper, meaning demand for money is less interest elastic. Fiscal policy is more effective when the LM curve is flatter and the IS curve is steeper. The effectiveness of both policies depends on the slope of the IS and LM curves. Monetary policy is completely ineffective if the LM curve is horizontal, while fiscal policy is completely ineffective if the IS curve is horizontal or the LM curve is vertical.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
Indifference curves show combinations of goods that provide the same level of satisfaction to a consumer. A consumer seeks to maximize utility by consuming the combination on their highest attainable indifference curve, which is tangent to their budget constraint. As more of a good is consumed, the marginal rate of substitution diminishes, following the law of diminishing marginal rate of substitution. When prices or income change, the budget constraint shifts, changing the optimal consumption bundle where the indifference curve is tangent to the new budget line.
Fiscal policy uses government spending, taxes, and borrowing to influence macroeconomic variables. Expansionary fiscal policy, such as tax cuts or increased spending, increases aggregate demand to boost a recession-plagued economy. Contractionary fiscal policy, like tax increases or spending cuts, decreases aggregate demand to curb inflation. Automatic stabilizers like unemployment insurance and the progressive tax system counter cyclical changes automatically. Discretionary policy actively manipulates fiscal tools but faces time lags and crowding out effects.
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.
Fiscal Responsibility and Budget ManagementParas Savla
The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The main purpose was to eliminate revenue deficit. In this presentation Indian international history behind introducing FRBM Act in India and western countries and some of provisions of Indian FRBM Act has been analysed.
This document discusses the rationale for active stabilization policy using fiscal policy to reduce the severity of recessions and control excessively strong expansions. It describes how governments can use expansionary or contractionary fiscal policy through taxes, government spending, and transfers to shift the aggregate demand curve and close recessionary or inflationary gaps. However, it notes there are lags in the implementation and impact of fiscal policy that make its effects hard to predict and could potentially worsen economic situations if not applied carefully.
Inflation in India has risen to 9.89% in February 2022 according to the wholesale price index, up from 8.56% in the previous month. Inflation can be classified based on rate, degree of control, and causes. Common causes of inflation include demand-pull inflation and cost-push inflation. Effects of inflation include difficulties for companies to budget and plan long-term, discouraging investment and saving, and negative impacts to trade from currency exchange price instability. The Reserve Bank of India is taking measures to control inflation such as increasing interest rates on loans and decreasing deposit rates.
This document outlines the Absolute Income Hypothesis theory presented by Keynes in 1936. The theory states that as absolute income increases, the proportion of that income spent on consumption decreases. So while consumption increases with more income, the rate of increase declines. Key points include consumption (C) increasing at a decreasing rate as income (Y) rises, the average propensity to consume (APC) decreasing as income rises, and the theory showing consumption-income relationships in both the short run and long run.
This chapter discusses key concepts in open economy macroeconomics including imports, exports, the trade balance, exchange rates, and how fiscal and monetary policies can impact these variables. It introduces accounting identities that relate gross domestic product (GDP), consumption (C), investment (I), government spending (G), net exports (NX), and net capital outflows. It also presents models of a small open economy and how exchange rates adjust to equate the trade balance with capital flows.
The document defines and explains several key concepts related to inflation:
- Inflation is a general rise in price levels across most markets over time, eroding purchasing power. It is measured by calculating changes in the consumer price index (CPI).
- The CPI tracks price changes of a basket of common goods and services in an area. A higher CPI indicates higher costs of living.
- While some inflation is necessary for economic growth, high or unpredictable inflation can be harmful as wages may not keep pace and erode purchasing power. Hyperinflation occurs when inflation accelerates rapidly out of control.
There are two main methods to measure inflation:
1) By calculating the percentage change in price indices like the Consumer Price Index (CPI) or Wholesale Price Index (WPI). CPI measures the price of a basket of consumer goods, while WPI measures wholesale goods prices.
2) By calculating the change in the GDP deflator, which is the ratio of nominal GDP to real GDP adjusted for inflation. For example, if nominal GDP is Rs. 1740.2 thousand crores and real GDP is Rs. 1136.9 thousand crores in 1999-2000, the GDP deflator would be 153%. The percentage change in the GDP deflator from one year to the next
This document discusses different theories of inflation including:
1) Monetarist theory which links inflation to increases in the money supply.
2) Keynesian theory which attributes inflation to increases in aggregate demand beyond what aggregate supply can meet at full employment.
3) Structural theory which sees inflation as caused by inelasticities in an economy's production capacity, capital formation, institutions, agriculture sector, and labor markets.
This document provides an introduction to macroeconomics. It defines macroeconomics as dealing with the aggregate behavior and choices of the entire economy, such as national income and inflation, rather than individual behavior. It contrasts macroeconomics with microeconomics and lists the main macroeconomic goals as full employment, price stability, economic growth, and an equitable distribution of income. It also introduces the key macroeconomic concepts of aggregate demand and aggregate supply.
1) Inflation occurs when prices rise overall in an economy. It can be caused by demand-pull factors like too much spending chasing too few goods, or cost-push factors like rising wages.
2) There are different rates of inflation including low inflation under 10%, galloping inflation in the double or triple digits, and hyperinflation over a million percent. High and unpredictable inflation distorts economies.
3) While low and predictable inflation may have little impact, unexpected inflation impoverishes some and enriches others by unexpectedly changing the value of assets and debts.
The document discusses the Phillips curve, which shows the relationship between unemployment and inflation. It describes how Alban Phillips first observed an inverse relationship between wage growth and unemployment rates in Britain. Many economists then concluded there is a negative short-run relationship between unemployment and inflation rates, known as the short-run Phillips curve. However, changes in expected inflation rates can shift this curve. In the long run, policies aimed at reducing unemployment below the natural rate of unemployment lead to accelerating inflation.
The concept of impossible trinity in Macro-Economics, Course handled by Prof. Rudra Sen Sarma, IIM Kozhikode. Presented for an introduction into Macro Economics concepts
This document provides an overview of post-Keynesian economics. It defines post-Keynesian economics, outlines some of its key characteristics such as its focus on effective demand and historical dynamics. It also describes some of the different strands within post-Keynesian theory, including Michal Kalecki's emphasis on imperfect competition and class division. Additionally, it summarizes theories around post-Keynesian income distribution in corporate economies developed by Robinson, Kaldor and Pasinetti, and post-Keynesian employment analysis based on the principle of effective demand determining labor-hire decisions.
Say's Law is a classical economic idea that rejects the possibility of general overproduction or "gluts". It states that "supply creates its own demand". There are two bases of Say's Law: 1) all income not consumed is saved and all saving is invested, so there cannot be too much saving, and 2) people only hold money for transactions so will consume or invest any excess money balances. Say's Law implies full employment and that aggregate supply always equals aggregate demand (Say's identity). However, classical economists also discussed how monetary disturbances could cause temporary excess supply, suggesting Say's equality - an equilibrium condition - is a better description of their view, rather than Say's identity being always true. They believed markets would adjust
This document discusses inflation in the Indian economy. It defines inflation as a rise in the general price level and a fall in the purchasing power of money. There are two main types of inflation - demand-pull inflation, which occurs when demand exceeds supply, and cost-push inflation, which is caused by increased production costs. The consequences of inflation include uncertainty, reduced savings and investment, and income redistribution. To control inflation, the government uses fiscal measures like taxes, monetary measures like interest rates, and general measures like wage and price controls. Empirical data shows India's inflation rate was 5.96% in March 2013 according to the wholesale price index.
This document discusses the impossible trinity, which is the hypothesis that it is impossible for a country to have free capital flow, a fixed exchange rate, and an independent monetary policy simultaneously. It explains each of the three factors - free capital flow, fixed exchange rate, and independent monetary policy - and provides examples. The document then discusses India's policy approach and how it has opted to allow free capital flow and a floating exchange rate while prioritizing independent monetary policy. It concludes that there is no perfect solution and countries must choose based on their priorities and circumstances.
The Phillips curve describes an inverse relationship between unemployment and inflation, such that lower unemployment is associated with higher inflation. While observed to be stable in the short-run, it does not hold in the long-run. The document discusses the origins of the Phillips curve from William Phillips' 1958 paper and subsequent modifications by economists like Friedman and Phelps who argued it does not reflect long-run economic realities. It also examines shifts to the Phillips curve from supply shocks and how the relationship between unemployment and inflation is now understood with incorporation of inflation expectations.
Relative effectiveness of Monetary and Fiscal Policy in IS-LM FrameworkAamin22
This document summarizes the relative effectiveness of monetary and fiscal policy using an IS-LM framework. It discusses that monetary policy is more effective when the LM curve is steeper, meaning demand for money is less interest elastic. Fiscal policy is more effective when the LM curve is flatter and the IS curve is steeper. The effectiveness of both policies depends on the slope of the IS and LM curves. Monetary policy is completely ineffective if the LM curve is horizontal, while fiscal policy is completely ineffective if the IS curve is horizontal or the LM curve is vertical.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
Indifference curves show combinations of goods that provide the same level of satisfaction to a consumer. A consumer seeks to maximize utility by consuming the combination on their highest attainable indifference curve, which is tangent to their budget constraint. As more of a good is consumed, the marginal rate of substitution diminishes, following the law of diminishing marginal rate of substitution. When prices or income change, the budget constraint shifts, changing the optimal consumption bundle where the indifference curve is tangent to the new budget line.
Fiscal policy uses government spending, taxes, and borrowing to influence macroeconomic variables. Expansionary fiscal policy, such as tax cuts or increased spending, increases aggregate demand to boost a recession-plagued economy. Contractionary fiscal policy, like tax increases or spending cuts, decreases aggregate demand to curb inflation. Automatic stabilizers like unemployment insurance and the progressive tax system counter cyclical changes automatically. Discretionary policy actively manipulates fiscal tools but faces time lags and crowding out effects.
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.
Fiscal policy uses government spending and taxation to influence economic activity. It aims to achieve full employment and price stability. The government establishes fiscal policy through the annual federal budget. Expansionary fiscal policy stimulates the economy through tax cuts and spending increases, while contractionary policy slows growth via tax hikes and spending cuts. However, fiscal policy faces limitations as its effects are difficult to predict and coordinate. Large, sustained deficits lead to rising national debt levels, which can crowd out private investment and increase interest payments over time.
Trying to make sense of the UK budget deficit mattbentley34
The UK budget deficit has increased significantly in recent years. There are two main views on how best to tackle this. One view is that austerity measures, like spending cuts and tax increases, are needed to reduce the structural deficit and reassure creditors. However, others argue this could slow economic growth and make reducing the deficit harder. An alternative is for stimulus policies to boost growth, which could raise tax revenues and lower spending on welfare. But there are disagreements around how best to stimulate growth in the long run. Recent forecasts have increased projections of future deficits, worsening the challenges around reducing debt levels.
The document discusses the key concepts and objectives of fiscal policy. It defines fiscal policy as using government spending, taxation and borrowing to influence economic activity and goals such as employment levels, inflation, and income distribution. The objectives of fiscal policy in developing countries are outlined as increasing capital formation, national income, price stability, equal income distribution, reducing unemployment, decreasing regional disparities, and improving the balance of payments. Tools of fiscal policy discussed include public revenue, expenditure, debt, and deficit financing.
"Keynesians in the White House" Economics Case studyNikhil Gupta
This case study is a part of cirriculum of Macro economics. This Presentation will give the idea of John Maynard Keynes General Theory which is to use the Fiscal Policy to control the Aggregate Demand of the Economy. The case deals about President Kennedy's proposal of Tax Cuts.
Fiscal policy uses government spending and taxation to influence economic activity. However, many economists and the CBO believe fiscal policy has little impact and that the economy is determined by private markets. The article argues that fiscal policy will need to be substantially expanded through increased government spending to avoid a prolonged recession, contradicting the current political view. It concludes that private borrowing cannot sustain the current expansion indefinitely and fiscal stimulus will be needed.
Minsky held that government spending and deficits were important tools for achieving full employment and price stability. However, in later writings he expressed concern that Reagan-era policies had undermined the tax base, led to large budget deficits focused on non-productive spending, and increased foreign holdings of U.S. debt. This made the economy dependent on continued deficit spending and vulnerable to a loss of confidence in the dollar or high inflation if deficits continued unchecked. Minsky still saw deficits as useful for stabilization, but argued the tax and spending regime needed reform to balance the budget under reasonable economic conditions.
Fiscal Policy by Neeraj Bhandari (Surkhet,Nepal)Neeraj Bhandari
Fiscal policy refers to government spending, taxation, and borrowing tools that are used to promote full employment, price stability, and economic growth. It involves government revenue collection and expenditures to achieve economic stability without inflation or deflation. Fiscal policy tools include taxes, public expenditures, public borrowing, and deficit financing, which governments can use in expansionary or contractionary ways to influence aggregate demand and the macroeconomy.
Fiscal Policy by Neeraj Bhandari ( Surkhet,Nepal )Neeraj Bhandari
Fiscal policy refers to government spending, taxation, and borrowing tools that are used to promote full employment, price stability, and economic growth. It involves government revenue collection and expenditures to achieve economic stability without inflation or deflation. Fiscal policy tools include taxes, public expenditures, public borrowing, and deficit financing, which governments can use in expansionary or contractionary ways to influence aggregate demand and the macroeconomy.
This document discusses the long-term implications of fiscal policy, including deficits and public debt. It explains that discretionary fiscal policy can be used to stabilize the economy in the short-run through expansionary or contractionary policies. However, long-term effects include impacts on the budget balance, debt, and implicit liabilities like Social Security. Running large deficits risks increasing debt levels to a point where a government may default or need to resort to inflation. Governments aim to balance budgets over the business cycle to avoid these problems.
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.
BUDGETING AND FINANCIAL MANAGEMENTPublic budgeting and financi.docxAASTHA76
BUDGETING AND FINANCIAL MANAGEMENT
Public budgeting and financial management are concerned with allocating limited resources to problems that governments and other public organizations face. Just as you establish a personal budget to track your income and expenses and, just as businesses create budgets to aid in decisions affecting profits and losses, so do public organizations employ budgets to help in planning and management. Public organizations must carefully and responsibly manage large amounts of money and other resources—taking in taxes and other revenues, purchasing goods and services, investing surplus funds, and managing debt wisely.
From the point of view of the manager or citizen trying to influence public policy, the budget is an extremely important tool for planning and control. To manage public programs effectively, you must be able to manage resources, both practically and politically. In this chapter we focus on the budget process from the standpoint of the individual public manager, examining how budget decisions are made and how you can influence budgetary outcomes. Although much of the budget process is highly charged politically, specific technical knowledge about budgeting systems will give you a distinct advantage.
The elaborate systems that public organizations have developed to manage their fiscal affairs are relatively recent. Prior to 1900, revenues were easily sufficient to cover the expenses of government, and financial management was merely record keeping. As the scope of government grew and new demands were placed on its resources, the need for more sophisticated systems of decision making became apparent. Moreover, repeated instances of corruption and waste made more effective control over the public's resources necessary.
In establishing its executive budget process through the Budgeting and Accounting Act of 1921, the federal government followed the lead of several local and state governments that had already taken similar actions. This municipal reform movement emphasized the budget process as a means of bringing order to public spending; consequently, by the 1920s, most big cities had established a formal budget process. Similar developments were also occurring at the state level. In 1910, Ohio became the first state to require an executive budget; within the next decade, similar actions took place in most other states. At the federal level, a special Commission on Economy and Efficiency, known as the Taft Commission, recommended establishing an executive budget in 1912; the recommendation was implemented nearly a decade later.
Since the 1920s, the federal budget has grown in both size and complexity, as have budgets at the state and local levels. This growth means that budgeting and financial management have come to involve far more than keeping a record of income and expenses. Today, how government spends its money affects many other areas of the economy; consequently, the budget is an instrument of fisc ...
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.
Fiscal policy involves a government using tax rates and spending levels to influence and stabilize a nation's economy. It is based on John Maynard Keynes' theory that governments can impact macroeconomic activity by increasing or decreasing taxes and public spending. Fiscal policy aims to stabilize growth, curb inflation, increase employment, and maintain monetary value by using public spending and tax rate changes to stimulate a recession or decrease demand and inflation during boom periods. The challenges for policymakers are deciding how much the government should intervene in the economy to sustain growth while avoiding too much or too little involvement.
1. This chapter discusses fiscal policy as a tool for stabilizing the economy through manipulating government spending and taxes.
2. It explores discretionary and automatic fiscal adjustments using the AD-AS model and covers problems like recognition lags that complicate fiscal policy effectiveness.
3. Evaluating fiscal policy involves examining standardized budgets that adjust for cyclical factors to determine if policy is expansionary or contractionary.
Michael Taft, SIPTU post budget 2020 analysis 16 Oct 19NevinInstitute
This document provides an analysis and summary of Ireland's Budget 2020. Some key points:
- The budget avoids using the term "recession" despite projections showing the Irish economy's GNI* measure will enter recession in 2020. Growth projections for GNI* are sluggish through 2024.
- In a disorderly Brexit scenario, the government is relying heavily on a €1 billion contingency fund to stimulate the economy, but there may not be enough support if the recession is longer or deeper than expected.
- In an orderly Brexit scenario, real spending cuts of 2.8% for public services and 6% for social payments are projected through 2024 to maintain prudent budgets, but this will squeeze public
The document discusses four key functions of public finance: allocation, distribution, stabilization, and growth. It also discusses principles for evaluating a good tax system, including revenue adequacy, stability, simplicity, tax neutrality, economic efficiency, and low administration and compliance costs. The document compares tax systems before and after reforms, noting the need to tailor reforms to a country's existing economic system and administrative capabilities.
Here is a draft essay in response to the question:
Part A
There are several possible causes of inflation. Demand-pull inflation can occur when there is excess demand in the economy, pushing up prices as demand outstrips supply. This may be caused by monetary factors such as an increase in the money supply or low interest rates stimulating spending. Cost-push inflation arises from rising production costs for firms, such as increased wage costs due to higher inflation expectations, or rising import prices. Supply shocks such as an oil price rise can also push up costs. Keynes argued that government spending could cause demand-pull inflation by directly injecting money into the economy. Monetarists argue that in the long-run, inflation is always
The document discusses proposed changes to the UK curriculum including replacing GCSEs with EBCs, eliminating tiered exams and AS levels, focusing on a fact-based curriculum, and making exams more rigorous. It notes concerns that the level of change could collapse the education system. It also examines implications like narrowing the curriculum, affecting student opportunities, and challenges schools may face in implementing the changes.
This document provides an overview of macroeconomics and the debate between free-market and Keynesian schools of thought. It discusses how Adam Smith developed ideas of free markets but John Maynard Keynes advocated government intervention to boost demand in response to the Great Depression. In the 1970s, Milton Friedman led a counter-revolution arguing excessive money supply and unions caused stagflation. Margaret Thatcher embraced free-market policies, but the 2007 crisis saw a return of Keynesian responses as the UK faced its worst recession since the 1930s.
The document discusses the benefits of exercise for mental health. Regular physical activity can help reduce anxiety and depression and improve mood and cognitive functioning. Exercise causes chemical changes in the brain that may help boost feelings of calmness, happiness and focus.
The document discusses the importance of property rights in economics. It covers key concepts such as:
1. Private goods which can be owned and exclude others from using. Consuming a private good diminishes the amount available to others. Property rights over private goods are important to provide incentives for innovation.
2. Free goods which cannot be owned and consuming them does not diminish the amount available. However, laws are used to turn ideas and creative works into private goods through intellectual property rights like patents and copyright to again provide incentives.
3. Common goods which are not owned but consuming them does diminish the amount available, creating a "tragedy of the commons" without property rights to regulate consumption.
The document discusses the concept of "Homo Economicus" which assumes that humans act rationally and self-interestedly to maximize their wealth. It questions the validity of this assumption by presenting experiments that show humans may not always act rationally due to emotions, sunk costs, and other factors. While rational choices consider opportunity costs and maximize utility, humans can be persuaded against self-interest or make decisions without full information. The document also suggests that while economists apply rational self-interest to firms and governments, these groups may pursue profit maximization and social welfare, respectively, rather than pure self-interest.
The document discusses the concept of "Homo Economicus" which assumes that humans act rationally and self-interestedly to maximize their wealth. It questions the validity of this assumption by presenting experiments that show humans may not always act rationally due to emotions, sunk costs, and other factors. While rational choices consider opportunity costs and maximize utility, humans can be persuaded against self-interest or make decisions without full information. The document also suggests that while economists apply rational self-interest to firms and governments, these groups aim to maximize profit and social welfare rather than individual utility.
The document discusses the concept of "Homo Economicus" which assumes that humans act rationally and self-interestedly to maximize their wealth. It questions the validity of this assumption by presenting experiments that show humans may not always act rationally due to emotions, sunk costs, and other factors. While rational choices consider opportunity costs and maximize utility, humans can be persuaded against self-interest or make decisions without full information. The document also suggests that while economists apply rational self-interest to firms and governments, these groups may pursue profit maximization and social welfare, respectively, rather than individual utility.
The document discusses the concept of "Homo Economicus" which refers to humans acting rationally and self-interestedly according to economic theories. It questions whether the assumptions of Homo Economicus are valid by presenting experiments that show humans may not always act rationally. The experiments demonstrate that emotions can influence decisions and that people do not always choose the option that leads to the best personal outcome, as they may cooperate or consider sunk costs. The document concludes that while economists often apply rational self-interest to various economic agents, research shows humans do not always behave rationally in practice.
1. The document discusses the theory that firms aim to maximize profit.
2. It explains that profit is maximized when marginal revenue equals marginal cost (MR=MC).
3. The document provides examples and diagrams to illustrate how a firm can use the MR=MC condition to determine the optimal level of production to maximize profit.
1. As firms increase their scale of production in the long-run by investing in fixed factors like larger factories, they can experience increasing, constant, or decreasing returns to scale.
2. Increasing returns lead to lower average costs (economies of scale) while decreasing returns lead to higher average costs (diseconomies of scale).
3. The long-run average cost curve is often U-shaped, falling initially due to technical economies of scale then rising due to managerial diseconomies of scale at very high output levels.
Short-run cost theory can be summarized in 3 sentences:
Fixed costs are incurred regardless of output while variable costs change with output. Total costs are the sum of fixed and variable costs. Average total costs initially fall as average fixed costs decline and marginal costs are low, but eventually rise as marginal costs increase due to diminishing returns.
Short-run production theory examines how output is affected by adding a variable factor of production, like labor, to fixed factors. Initially, marginal output increases due to specialization and division of labor. Eventually, marginal output decreases due to diminishing marginal returns, as the variable factor is added beyond the point where it yields high returns relative to the fixed factors.
The document provides an introduction to the theory of the firm, which attempts to explain how firms behave under different market conditions. It discusses three market structures - perfect competition, oligopoly, and monopoly. The theory of the firm includes production theory, cost theory, revenue theory, and profit maximization in different market types. It evaluates the market structures based on efficiency and welfare criteria.
There are three main types of unemployment:
1) Frictional unemployment which occurs during transitions between jobs due to things like searching, relocating, or retraining.
2) Structural unemployment which is caused by long-term changes in industries and technologies that make some jobs or skills obsolete.
3) Disequilibrium or cyclical unemployment which happens when there is insufficient aggregate demand in the economy resulting in unfilled jobs. Factors like sticky wages can prevent the labor market from reaching equilibrium.
The simplified electron and muon model, Oscillating Spacetime: The Foundation...RitikBhardwaj56
Discover the Simplified Electron and Muon Model: A New Wave-Based Approach to Understanding Particles delves into a groundbreaking theory that presents electrons and muons as rotating soliton waves within oscillating spacetime. Geared towards students, researchers, and science buffs, this book breaks down complex ideas into simple explanations. It covers topics such as electron waves, temporal dynamics, and the implications of this model on particle physics. With clear illustrations and easy-to-follow explanations, readers will gain a new outlook on the universe's fundamental nature.
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This presentation was provided by Steph Pollock of The American Psychological Association’s Journals Program, and Damita Snow, of The American Society of Civil Engineers (ASCE), for the initial session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session One: 'Setting Expectations: a DEIA Primer,' was held June 6, 2024.
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A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
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2. The History of Fiscal Policy
• ‘Sound finance’ approach
• A balanced budget and low tax & spend
1850s-1950s
• Use of fiscal policy in demand management
• Keynesian belief that government should actively manage aggregate demand
1950s-1970s running a deficit if necessary
• Return to principles of ‘sound finance’ and balanced budgets
• Fiscal policy used to promote aggregate supply, not demand
1980s-2008? • Cutting taxes not to boost demand but to create incentives to work and invest
Note the links with the changing role of monetary policy which has
replaced fiscal policy in the modern era as the demand management tool.
3. 2008-present
• In the latter years of the Labour government increased public
spending took precedent over fiscal discipline
• Following the financial crisis and subsequent recession the Labour
Government briefly reverted to Keynesian demand
management, reducing VAT and dramatically increasing spending
• The Code for Fiscal Stability was suspended
• ‘Loose’ fiscal discipline before the crisis and policy after the crisis
left the UK with large deficit
• The election of the coalition government resulted in the
introduction of ‘austerity’ to reduce the budget deficit (‘sound
finance’)
• Monetary policy alone had to deal with falling demand, firstly by
lowering interest rates to almost zero, then through a programme
of quantitative easing
5. Keynesian Fiscal Policy
• The free market creates volatile business cycles
• Insufficient AD leads to persistent unemployment
• Running a deficit can inject money into the economy
when needed
• Fiscal policy can be used to stabilise the economy
once back to full employment
• Assumption that the multiplier effect is large
“If economists could manage to get themselves thought of as
humble, competent people on a level with dentists, that would be
splendid.”
John Maynard Keynes
6. Supply-side Fiscal Policy
• Rejection of use of fiscal policy to manage demand as
this is inflationary in the short term and in the long term
the deficit must be paid off
• With increasing imports the multiplier effect didn’t work
and merely created inflation
• Public spending and tax to be reduced to allow private
sector to flourish
• Fiscal policy used as a micro-economic tool to target
incentives for workers and firms
Most of the energy of political work is devoted to correcting the effects of
mismanagement of government.
Milton Friedman
7. Examples of fiscal supply side policy
• Incentives to work Giving incentives to
people to work
• Minimum wage
• Welfare to work Ensuring industry have
• Education spending skilled labour available
• Reducing corporation tax
Incentives to invest
• Enterprise zones
Tackling regional
decline and structural
unemployment
8. The middle way
The choice does not have to be between fiscal demand management or a
balanced budget. There are automatic stabilisers that even out the
economic cycles.
Reduced exports Higher Weak pound Excess demand in
= lower AD unemployment improves X-M economy
Higher benefit Welfare payments Wage levels rise to
Budget deficit payments and fall and tax draw workers into
lower tax income revenues increase labour force
Reduces impact Surplus budget
of contractionary takes heat out of
multiplier economy
Dampening deflationary effects Dampening inflationary effects
9. Automatic stabilisers soften boom and bust
This leads to the conclusion that it
is important to balance the budget
not over an annual cycle but over
the period of the economic cycle.
There is a difference between the
cyclical budget deficit (caused by
the automatic stabiliser) and the
Government deficit rises in a structural budget deficit (an
recession... imbalance in the economy which
leads to a deficit even when the
And falls during a boom.
economy is growing at the trend
rate)
Context – The Government are attempting to reduce the deficit during a period of low
or negative growth. Is it reasonable to expect to ‘balance the books’ when the
economy is not booming?
10. Let us not forget though that fiscal policy is not
just about...
Economic management
i.e. As a tool to achieve macro objectives
It is also about...
Managing the allocation of resources
e.g. Affecting consumption of merit/demerit goods, limiting
externalities, controlling monopolistic excesses, creating incentives
to work, save or invest
Altering the distribution of income and wealth
i.e. The use of progressive taxation and redistributive public spending
11. Trade-off between equity and efficiency
Greater equality can be achieved
by;
• Free state services
• Welfare support
• Progressive taxation
• Pre-1979 approach
But the resultant dependency
culture requires;
• Lower taxes and benefits to
get people off benefits
• Allowing rich to keep more
of their money to invest and
create growth and jobs = greater inequality but less absolute poverty
12. And the related debate...
How big should government be?
Big governments can crowd out the private sector in
two ways;
Resource crowding out whereby resources aren’t
available for the private sector as they are employed
by the public sector
Financial crowding out whereby
• Higher taxes to pay for spending reduce consumption
on private goods
• Government borrowing (e.g. Bond issues) are
attractive investments which divert funds from
private investment
13. However...
Taxing the rich and giving to the poor CAN increase consumption as people on lower
incomes have a higher propensity to consume.
During periods where spare capacity exists the public spending can usefully employ
resources without crowding out the private sector. Furthermore, if the spending is on
capital projects (e.g. road building) the private sector may experience higher demand as
government commissions projects.
The above two points lead to calls during a
recession for redistribution of income and
government infrastructure projects - like the huge
road building effort in the US during the Great
Depression.
14. One more problem with big government...
The Laffer curve
If 100% of income is taxed then
there would be no incentive to
do anything! No economic
activity would therefore result
in no tax income.
If 0% of income is taxed then there
This model is named after the supply-side
is also no tax income.
economics Arthur Laffer. What is not clear is Government income from tax
at what level of taxation government increases as the rate of tax
revenues go into reverse? Some economists
argue that in the Keynesian era of big
increases, and falls after a
government the ‘tax burden’ was excessive certain tax rate is reached as
and lower revenues were the result. It is the disincentives send
interesting to consider that this logic leads to economic activity into reverse.
the conclusion that to increase tax income a
fall in taxation is necessary.
15. Big or small?
Other factors which affect the decision on how
big government should be are;
1. Efficiency – does government or the private
sector deliver goods more efficiently?
2. Equity – to what extent do we sacrifice
efficiency for equity? For example, private
dentistry may be more efficient but would it
exclude certain people from treatment?
16. Government size over time
The size of the state is usually driven by public sector spending., which in turn is
influenced by war, political ideology and economic orthodoxy. Public spending is
often measured by the ratio between public expenditure and national income.
The Big Picture
• Public spending steadily increased throughout the 20th century
• From around 10% to over 40% of GDP
The Peaks
• Spending increased sharply in the two World wars
• Peak in 1982/3 at 46.75%
• By 2005/6 it was again above 42%, rising to over 50% after the recession in 2008/9
Does public spending = share of output?
• Some public spending is on ‘transfers’ i.e. using tax revenues to redistribute money via
welfare benefits. This spending is not taking resources away from the private sector and is
not generating an output.
• The governments actual contribution to output is more like 20-30% of the total GDP
18. What makes a good tax?
Having considered how much we tax, let us now consider what
constitutes a ‘good’ tax.
And we may add efficiency
Equitable
and flexibility to this list.
VAT is levied at a flat rate (currently 20%). It is
therefore a proportionate tax as the rate does not
Adam change in relation to income. To some extent people
can choose whether to pay VAT as they choose
Certain
Smith’s Economical whether to purchase goods. Some goods are exempt
Cannons from VAT (e.g. children’s clothes) in an attempt to
of Taxation avoid discouraging purchase. VAT is relatively easy to
collect as firms must levy the tax and pay on behalf of
the consumer, and therefore convenient to those being
taxed. However, it is open to avoidance when ‘cash in
hand’ purchases are made. VAT can be changed
quickly and raises around £100 billion a year without
Convenient significant cost. It is generally a good tax, although not
progressive.
19. Monetary and Fiscal harmony
The Big Picture – The need to reduce the deficit has taken precedent over all other objectives. A ‘sound
finance’ approach to fiscal policy dominates, with the refusal to follow the Keynesian approach of
increasing demand in a downturn through deficit spending. Interest Rates, potentially a demand-boosting
alternative, have no room for falling further and should if anything increase to curb inflation. Quantitative
easing has propped up a flailing economy. Falling real incomes and high unemployment are the painful
medicine to a period of excessive consumption and debt. The question is whether the medicine will work
Improving economic welfare
or will a ‘lost decade’ result as the economy cannot lift itself out of a prolonged slump?
Interest Rates being used for demand
Control of management, although redundant in promoting
increased demand at present and not as yet rising to
inflation curb cost-push inflationary pressures. Other policies
are needed.
Macro-economic Drive to achieve a balanced budget through austerity
and pay down national debt. Quantitative easing
stability employed to attempt to maintain credit availability to
promote aggregate demand and supply.
Intention to reduce size of the state and create
Long-run growth competitive and efficient markets which will drive
the recovery.
20. Limitations of fiscal policy
•Increased PSNCR may require increased money •Long time to have an effect (e.g. education)
supply therefore inflation and no benefit to •Social effects (e.g. cutting benefits)
output •Difficult to predict effects
•Borrowing must be paid back, with interest
•Blunt tool
•Risk when large debts build up
As a demand
As a supply-
management
side tool
tool
To To correct
redistribute market
wealth failure
•Brain drain •Not possible to accurately assess costs
•Disincentives to work and benefits
•Political pressures •Difficult to predict effects of policy
•May make industries less internationally
competitive
•Political resistance
21. Other supply-side policies
• Privatisation / Deregulation
• Liberalising financial markets
• Open economy – reduce barriers to trade
• Well functioning labour markets (where wage
levels are allowed to fall, firms can hire and
fire, and the natural rate of unemployment is
minimised)
22. EU Perspective
Greater integration with Europe means the
transfer of national economic powers to
Controls over
budget deficits European institutions (e.g. the ECB). Those
(3% of GDP)
countries which have adopted the Euro can
no longer use interest rates as a demand
management tool. This causes problems if
Possible move their economic cycle is out of sync with the
toward a
common fiscal rest of Europe. The use of fiscal policy for
framework or
tax counter-cyclical management is also limited
harmonisation? by rules over deficits.
Single currency means loss
of monetary control at a The benefits however include currency
national level stability, free trade and movement of
resources, and access to fiscal support and
large ‘bail-out funds’.
The argument for greater fiscal integration
is that this would bring economic cycles in
Greece has a massive deficit and poorly structured economy. They
are under pressure to pay down their debts but the massive ‘austerity’ line and remove national competitive
cuts required will be devastating to an already depressed economy. If advantages which distort the patterns of
they had their own currency its value would be falling rapidly boosting trade. The argument against is that this
exports and reducing imports, bringing demand into the economy. would further remove powers from national
They would also have monetary tools at their disposal to promote government to respond ‘locally’ to
consumption and investment. As part of the Euro they are instead
economic shocks and pressures.
suffering from a strong German economy pulling up the value of the
Euro. They have, however, benefitted from European bail-outs.