Macroeconomics
Overall Economic Activity
Aggregate Demand/Supply
Macroeconomic Objectives
Government Policies
Low Unemployment
Economic Growth
Equity in the distribution of income
Low and Stable rate of Inflation
Aggregate Demand
Aggregate Supply
AD = C + I + G + X - M
Supply-Side
Demand-Side
Interventionist Policies
Market-based Policies
Fiscal Policies
Monetary Policies
Types
Cyclical (demand-deficient)
Frictional
Seasonal
Structural
Definition: Rely on intervention from the government to achieve growth in potential output and is usually favoured by Keynesian economists.
Definition of Unemployment
Refers to people of the working age actively looking for a job but who are without a job.
Consequences
Loss of real output (GDP)
Loss of income for unemployed workers
Loss of tax revenue for the government
Cost to the government through unemployment benefits
More unequal distribution of income
Greater social problems (crime, violence, drug use, homelessness).
A shift along the AD curve occurs when the average price level changes
A shift of the AD curve occurs when one of the AD components change
Greater personal problems (Stress, family breakdowns can lead to depression or even suicide).
Types of interventionist policies:
- Investment in human capital (Education and Health Care)
- Investment in new technology
- Investment in Infrastructure
Consumption:
- Consumer confidence
- Interest Rates
- Wealth
- Disposable income
- Income Tax
- Household debt
E.g. Eurozone crisis in 2013 - Low AD lead to unemployment rate of 11.5%
Investment:
- Interest rates
- Business confidence
- Level of technology
- Business tax
- Level of corporate debt
Government Spending:
- Policy choices of the govt
Net Exports:
- Income of trading partners
- Value of home currency
- Value of foreign currencies
- Level of protectionism
Short Run Aggregate Supply (SRAS)
Long Run Aggregate Supply (LRAS)
Definition: A policy in which the market will operate on its own and without intervention to achieve an increase in supply.
Types of market-based policies:
- De-regulation
- Trade liberalisation
- Reducing Taxes
Aggregate supply in the short run
Cost of Inflation
Redistribution of income
People who have fixed wages earn less "real" income
Value of savings decrease
Lenders and Debtors will be affected by the rate of inflation
Uncertainty in the Economy
Export competitiveness
Types of Inflation
Demand Pull
Cost-push
Definition: A government adjusting its spending levels or taxation rates to monitor the economy's aggregate demand.
Neo-classical
Keynesian
Cost of Deflation
Types of Fiscal Policy:
- Expansionary (to increase AD) --> decrease tax rates
- Contractionary (to decrease AD) --> increase tax rates
Definition: How the central bank governs the supply of money and interest rates to increase/decrease aggregate demand.
Types of Monetary Policy:
- Expansionary (to increase AD) --> decrease inflation rate
- Contractionary (to decrease AD) --> increase inflation rate
Uncertainty
Risk of deflationary spiral with high and increasing cyclical unemployment
Unemployment
What shifts LRAS?
Changes in efficiency
Technological development
Changes in unemployment
Institutional/governmental policy changes
Circular Flow of Income
Measures of Economic Activity
Positive Consequences
J - W = (I + G + X) - (S + T + M)
GDP
GNP
Non-inflationary growth
GNI
The Business Cycle
Increase in national income leads to greater living standards
Can improve technology - leading to greater advancements in medicine, transportation and entertainment - also leads to greater living standards
Reasons for income to be low:
- They may have been born in a household where incomes were low
- The may have received little to no education
- They may have suffered from poor health care
- They may have attempted to find work before
Higher tax revenues
Negative consequences
Effect on environment - greater output means more pollution.
Consequences of poverty:
- Low living standards
- Lack of access to sufficient health care
- Low levels of education
Inflation Risk
Lorenz Curve and Absolute Equality
Sum of value of all goods and services produced in the economy
May lead to greater income inequality
Taxation
Direct Taxes:
- Imposed on the income/wealth and a firm's profits
Indirect Taxes:
- Taxes imposed on the price of a good or service
Income method: sum of all incomes earned in the economy
Expenditure method: sum of expenditures by all sectors in the economy
Definition
An increase in the production of goods and services produced within an economy within a given time period.
Progressive Taxation:
- As income rises, people pay a higher proportion of their income as taxes
Recovery
Boom
Recession
Trough
Regressive Taxes:
- Proportion of income paid in tax falls as your income increases because everyone pays the same amount (e.g. Indirect taxes as everyone pays the same $ in tax regardless of their income)
Proportional Taxes:
- Proportion of income paid in tax is the same for all income levels (e.g. 10% of income must be paid as tax)