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Bouncing ball MACRO (inflation (people expect future inflation (workers…
Bouncing ball MACRO
inflation
people expect future inflation
workers bargain for higher wages
wage- p spiral
businesses raise p
more d for X
we are close/at Yfe
suffer supply constraints
firms chase scarce resources
bid up factor prices
costs rise
X-led d-pull inflation
montarist view
more money supply
,more consumption
more inlation
people see through the money illusion
less consumption
more U
U consume less
less AD
employed save more as get nervous
less self-esteem
worse health
higher suicide rates
crowding out
resource
gov needs more resources to spend more
resources are scarce
opp cost of resources enjoyed by public sector is them used by private sector
private sector is more eff due comp pressure
financial
gov needs to raise funds
issues more bonds
excess supply of bonds drives down prices
yields rise
new issues done at comp levels to attract buyers
uncertainty
difficult for business to plan
less trade
misallocation of resources
more confidence
more trade
more specialisation
more output
more comp
more eff
more access
more eco.
if eliminated...
more AD
if we have spare capacity
actual growth
lower U
upward spiral
UK suck in more M
more deficit on BoP
more leakage from economy
deflation
consumers delay purchases as believe will get lower prices (buyer's strike)
less consumption
less AD
less jobs
downward spiral
economic activity grinds to a halt
less investment
expansion in productive capacity
more spare capacity
downward pressure on raw material p
lower costs
Infrastructure
building roads/bridges & power
lower business costs
local workers get jobs in SR
more attractive to FDI
creates jobs in LR
more output
more goods & services to enjoy
more living standards
less unemployment
automatic fiscal consequences: more Y tax receipts & less benefit payments
fiscal dividend means gov can focus on capital spending
multiplier
injection into the circular flow with multiplied effects on national Y
accelerator
more growth
more sales
more profits that can be used for I
more I means more growth
speculative bubbles
rising asset prices lead to "irrational exhuberance"
excessive growth in credit & debit
bond & yields
guaranteed annual int payment (coupon) same
increase in p will mean fall in yield
int rate
hot money flows out seeking for higher returns in other banks
less d
lower value of pound
X more comp
boosted d for C (Minis made in Oxford in German mkt)
M less comp
consumers turn to domestic alternatives (Cheddar not Brie)
dampened d
systemic risk
inter-linkages betw commercial & investment banking activities
failure of investment arm (i.e.: BNP lack capital)
failure of commercial arm
cascading failures in banking system
budget balance & national debt
if G > T budget deficit
gov needs to borrow
gov unable to pay the int on debt
has to raise new funds to pay for the int on debt
debt "rolls-over"
held externally
crowding in
more gov spending
growth
accelerator
kickstart a recovery
invest in education & training
more and better skills
more productive
potential growth
higher taxes
more tax revenue
better public services
theory comp advantage
lower opp cost than other countries
specialise
terms of trade depends upon relative opp cost
net output gain
higher prices
less consumer surplus
less consumer welfare
institutional factors
legal structures, banks and education
efficient "law of contract"
trust betw consumers and businesses
more trade
less confidence
paradox of thrift as consumers/ businesses delay purchases & investment plans
less conumption
less AD
negative accelerator & multiplier
downward spiral
unemployment is involuntary= caused by lack AD
more gov spending & less tax
more consumption
more AD
decrease negative output gap
lower U
depression averted
Monetarist view on getting below NRU
more AD to reduce U
tighter labour mkt so wages rise
higher costs
higher prices
money illusion encourages firther workers into labour mkt
eventually see through money illusion & adjust their expectiations
labour withdrawn
return to NRU
more house p
more confidence
more consumption
more AD
increase in LRAS
increase quality & Q of human & physical capital
enable sustained growth without inflation
corp tax cuts
boost I & FDI
more sales
more tax paid
tax revenues rise
trickle-down to ordinary people
more ideas
more jobs
wage squeeze
less purchasing power
less consumption
less AD
growth not shared evenly
some people see falling or stagnating living standards
widening inequality
higher int rates
hot money flows in
more demand for currency
excess demand
price of currency bid up
d contracts & s extends
positive output gap means we go beyond Yfe
eco overheats
factor prices rise
costs rise
SRAS shifts left
back to natural position
deficit c/a
debits mean money is withdrawn
negative multiplier
less growth
less employment
jobs created abroad at the expense of jobs in UK
international structural U
removal of a quota
s curve shifts right & becomes more elastic
p of imports falls (pquo to p)
d extends & s contracts
new equi p & q
gov spending
direct J into circular flow
multiplied effects in the economy as money goes round more than once
more AD
more sales
more I
boosts AD & accelerates growth
ineqality