The Global Economy - Unit 4

Revision notes of material including definitions and key points

HideShow resource information
  • Created by: Andia
  • Created on: 11-04-12 07:27

Macroeconomic objectives

  • Economic Growth = inrease in real GDP
  • Sustainable Growth = limitation of ECs
  • A low and stable inflation rate = high inflation worsens competitiveness
  • Full employment= there is always frictional unemployment
  • Balance of payments equillibrium on current account
  • Redistribution of income = using progressive taxes (i.e income tax)


1 of 8

Aggregate demand and supply model

  • Aggregate Demand - the relationship between the quantity of GDP demanded and the price level (C+I+G+(X-M)) 

Affected by :

  • Asset prices
  • Interest rates
  • FDI
  • Tax rates
  • expectation about the future state of the conomy
  • decision on Gov. Expenditure
  • The exchange rate
2 of 8

Aggregate demand and supply model (3)

  • The short-run AS - the relationship between the total quantity of final goods and services supplied and the price level

Shifts caused by :

  • Changes in wage costs
  • New legislation
  • Changes in the prices of raw materials and components (i.e fall in comodity prices = shift to the right )
  • Changes in taxation of firms


3 of 8

Aggregate demand and supply model (2)

The long-run AS - the relationship between the toatal quantity of final goods and services cupplied and the price level at full employment

shifts caused by :

  • Technological change
  • The size of labour force
  • Human capital
  • Capital stock
  • Raw materials
4 of 8

Macroeconomic Policy instruments

  • Monetary policy-use of interest rates , money supply and exchange rate to influence economic activity

Aspects :

  • Inflation targets = used by countries to maintain a low rate of inflation ( UK target- 2+1%, ECB 2% )
  • Interest rae changes = used to achieve inflation target  ( time lag , increases costs, increase exchange rate , reduces competitiveness )
  • Quantitative easing : the action of the Central Bank in buying up government and corporate bonds from the commercial banks  to increase theis deposits, giving them the ability to lend more easily to private and business customers ( danger that th eincreased money supply in the economy could result in inflation + depreciation in exchange rate )
5 of 8

Macroeconomic Policy instruments (2)

  • Fiscal policy- use of government expenditure and taxation

Features :

  • Automatic stabilizers =some forms of government expenditure and revenues from some taxes change automatically in lione with changes in GDP and the state of the economy ( help to reduce flunctuatuions in the business cycle)
  •  Discretionary fiscal policy = deliberate changes in taxes and public expenditure designed to achieve macroeconomic objectives ( i.e fiscal stimulus , deflationaty fiscal policy )
6 of 8

Macroeconomic Policy instruments (3)

Supply-side policies - aimed at increasing AS by increasing competition and increasind incentives

Labour  market:

  • reduction of trade union power
  • reduction in unemployment benefits
  • improvements in human capital (increase productivity )  
  • reduction in employment protection legislation (flexible labour market )
  • reduction in income tax rates (increase incentives- Laffer curve)

Product market :

  • privatization,deregulation, contracting out
  • trade liberalisation (attract MNCs)
  • promotion of new/small firms
7 of 8

Macroeconomic Policy instruments (4)

Capital market :

  • deregulation of financial markets
  • reduction in corporation tax

Criticisms of supply-side policies :

  • Increased inequality
  • Time lags
  • The incentive effects of tax cuts may be over-estimated
  • Inneffectiveness
  • Adverse effects of deregulation

Problems faced by policy makers :

  • Inaccurate information
  • Risks and uncertainties
8 of 8


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Globalisation and trade resources »