Cost-Push Inflation. Cost-push inflation occurs when LRAS shifts left because resource prices rise or wages rise, firms’ costs rise and their prices rise. Credit Crunch. A situation where banks and other financial institutions decrease their lending or stop lending...
Below is a summary of macroeconomic policies (monetary, fiscal and supply-side policies) that can be used to target various objectives such as high economic growth or low unemployment.
Supply-side policies are designed to increase productivity/efficiency and shift LRAS right. The productive capacity of the economy increases because more can be produced. As LRAS shifts right, the price level falls and real GDP rises. The government could make the...
Public Sector Net Cash Requirement Public sector net cash requirement (PSNCR) is government borrowing over a period of time, the difference between government expenditure and tax revenue. A budget deficit means G>T so the government must borrow funds to spend and...
Monetary policy is the manipulation of monetary variables (interest rate and money supply) by the MPC to influence AD and inflation. An economy’s central bank controls the interest rate and money supply. In the UK the central bank is the Bank of England (BoE)....
Employment is the amount of workers with a job. Unemployment is the amount of people willing and able to work at the market wage but without a job. Many types of unemployment exist: 1) Keynesian (Demand-Deficient) Unemployment. AD is insufficient for all workers to be...
The government has four main macroeconomic objectives for the economy: 1) High Economic Growth. Basically the government aim for high economic growth because as real GDP increases, incomes grow so consumers can buy more goods and living standards rise. Also, the...
The balance of payments (BoP) is a record of all the external financial transactions between one economy and the rest of the world. The two main components of the BoP are the current account and financial account.5 Current Account The current account includes: - Trade...
An economy’s average (or general) price level is the average of all the prices in the economy. Inflation is a rise in the average price level over a given time period. Deflation is a fall in the average price level over a given time period. Demand-pull inflation...
Output Gaps The difference between actual GDP growth and the long-term trend growth rate is the output gap. A positive output gap occurs when real GDP growth is above its trend. A negative output gap occurs when real GDP growth is below its trend. Sustainable Growth...
The UN Human Development Index (HDI) is a multidimensional measure of the economic development of an economy. The HDI is an index combining: 1) Income. Measured by GDP per capita at Purchasing Power Parity (PPP), what the average citizen can afford. 2) Health....
Assume a simple model of the economy with just households and firms, there is no government and no foreign trade. Households own the factors of production (land, labour and capital) and supply these to firms in return for income (rent, wages and profit). Households...
Assume AD rises because firms increase investment on machinery. To produce the new machinery firms demand more workers so wages and employment rises. Workers’ disposable income rises, consumption rises and AD rises again. Because consumers demand more goods, firms...
Macroeconomic equilibrium occurs at the intersection of AD and LRAS. The diagram below shows macroeconomic equilibrium, the equilibrium price level is P* and equilibrium real GDP is Y*. As Keynes posits, the economy could be in equilibrium at full employment but is...
At first, long-run aggregate supply (LRAS) is perfectly elastic, real GDP increases without any inflationary pressure. This is because there is spare capacity. Resources are underutilized or unemployed so firms can employ more resources without bidding up their prices...
Investment is total investment expenditure by firms on buildings, machinery and the change in inventories. A firm invests in capital goods (machinery and buildings) and uses these capital goods to produce consumer goods. A firm invests to increase its productive...
Exports are domestic goods and services sold to foreign agents. Imports are foreign goods and services bought by domestic agents. Net exports are exports minus imports (X-M). An increase (decrease) in net exports will increase (decrease) AD and shift AD right (left)....
Macroeconomics looks at the aggregate economy. Aggregate means added up, total or whole. Macroeconomics looks at all the economy’s markets added together, the whole economy, and studies aggregate level variables such as aggregate demand (AD), inflation, unemployment,...
Many factors could increase consumption: 1) Real Disposable Income. A rise in real disposable income means consumers have more income to spend so they buy more goods. 2) Direct Taxes. A fall in direct taxes increases consumers’ real disposable income so consumption...
Government expenditure is total expenditure by the government on goods and services. The government must provide merit goods like education and healthcare and public goods like roads, parks, the police, national defence and the law. An increase (decrease) in...
AD slopes downwards because, as the price level falls, real income rises so aggregate expenditure rises. Moreover, as the price level falls, domestic goods become cheaper, UK consumers buy more UK goods so imports fall, foreign consumers buy more UK goods so exports...