Circular flow of income and spending Economic Growth Unemployment Inflation Balance of Payments Globalisation Low, stable price

inflation Sustained economic growth and a less volatile economic cycle Lower unemployment / rising employment Degree of equilibrium on the balance of payments Rising standard of living Fairness in the distribution of income and wealth Promote the international competitiveness of the economy Changes in interest rates Changes in the exchange rate Changes in the supply of money and credit Monetary Policy

Core Macro Topics (revise in this order!)

Main objectives

Good, accurate definitions provide the glue to a focused answer! Different types of income Real GDP and Money GDP GDP and GNP GDP and GDP per capita Components of the balance of payments Difference between a trade deficit and a budget deficit The Output Gap Definition of investment Difference between inflation and deflation Difference between a recession and a slowdown Difference between actual growth and trend growth

Changes in government spending Changes in taxation Changes in the budget deficit / surplus Investment in education and training Tax reforms to boost work incentives Policies towards inward migration of labour Trade union reforms Opening markets to more competition Tough competition policy e.g. on cartels Freeing up markets to international trade Changes in corporation tax to boost investment

Fiscal Policy

Labour market policies

Main policies Know your definitions well! Supply-side Policies Macroeconomic Objectives and Government Policies

Product market policies

Which economic policies are best to achieve a specific objective? Time lags between policy being introduced and its effects Unemployment and inflation Possible conflicts or Economic growth and inflation trade-offs between Economic growth and the policy objectives balance of payments Economic growth and the environment Do not assume that government policy can solve all economic ills! The limitations of government policy Possibility of government failure Imperfect information about the economy The important role of the supply-side in helping to overcome some policy trade-offs

Revising your Macroeconomics for the 2008 Exams

Total demand for domestically produced goods and services Aggregate Demand (AD)

AD=C+I+G+(X-M) Consumer spending (C) Investment spending (I) Government spending (G) Exports of goods and services (X) Imports of goods and services (M) Demand side shocks to an economy Supply should expand as AD rises Elasticity of aggregate supply is important

Policy Evaluation Short run aggregate supply (SRAS) How much output can an economy sustain in the short run or the long run? Relationships can work in both directions! Aggregate Supply (AS) Long run aggregate supply (LRAS)

Non-linear SRAS - with changing elasticity Linear SRAS with constant elasticity Curve can shift when production costs change LRAS cure drawn as a vertical line independent of prices Shifts in LRAS - same as shifts in the PPF Size of the labour force Quality of the labour force LRAS is determined by "supply-side factors" Stock of capital equipment Growth of productivity Changes to the state of technology Important for LRAS to rise for the economy's productive capacity to rise

Interest rates and the exchange rate Interest rates and the demand for credit Interest rates and the incentive to save Income tax and disposable income Income tax and the incentive to work Growth of consumer spending and business capital investment House prices and consumer spending Consumer confidence and the savings ratio VAT and the real incomes of consumers Budget deficit and aggregate demand Trade deficit and aggregate demand Company profits and planned capital investment Productivity of labour and the unit costs of production A recession in one country and the demand for exports in another

Some Common Macroeconomic Relationships Using analysis diagrams

Know what causes shifts in the AD curve Causes of shifts in the SRAS curve Causes of shifts in the LRAS curve The importance of the elasticity of SRAS Using the concept of the output gap Including employment effects when there is a change in real national income (GDP) Using a PPF diagram to show economic growth and unemployment

Revising your Macroeconomics.mmap - 19/03/2008 -