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Macroeconomic Equilibrium (Macroeconomic objectives (Improvements in…
Macroeconomic Equilibrium
Macroeconomic objectives
Sustainable economic growth that reduces the environmental impact of growth and is not reliant on non-renewable resources
Improvements in productivity
to increase international competitiveness
Low and stable inflation
the Government’s inflation target is 2.0% for the consumer price index.
Reduce unemployment
Rising living standards and a fall in relative poverty
cutting child poverty and reducing pensioner poverty.
An equitable distribution of income and weath
Improve the budget position
control over state borrowing and the total national debt
Sustained economic growth, i.e, Real GDP
Policy conflicts
The economy is in equilibrium at AD = AS
the accelerator effect
a surge in capital spending by businesses when an economy is growing quite strongly
More formally, increase in national income (GDP) results in a proportionately larger rise in net investment spending (and vice versa with a negative accelerator)
Examples
Investment in 4G to meet consumer and business needs
airlines that expand their fleets
Net investment = Gross investment - Depreciation
Firms use up existing productive capacity and stock before investing
Interaction between multiplier and accelerator
The accelerator effect is strongest when...
The amount of spare productive capacity for businesses is low
The available supply of investment funds is high
The rate change of consumer income and spending is strongly positive
Multiplier and the circular flow
Diagrams
Demand-pull inflation
Cost-push inflation
Positive output gap
Negative output gap
A fall in the rate of growth
Multiplier
Negative multiplier
Increase in the rate of growth
Always link to the circular flow of income diagram