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Slide1: 

9 The Economy and Business Activity

Macroeconomic Objectives: 

Macroeconomic Objectives Microeconomics and macroeconomics The major macroeconomic issues economic growth unemployment inflation balance of payments and exchange rates Government macroeconomic policy controlling various intermediate variables interest rates, money supply, taxes, government expenditure, etc.

The Circular Flow of Income: 

The Circular Flow of Income The inner flow

Slide4: 

The circular flow of income Firms Households

The Circular Flow of Income: 

The Circular Flow of Income Withdrawals net saving (S) net taxes (T) import expenditure (M) Injections investment (I) government expenditure (G) export expenditure (X)

Slide6: 

Factor payments Consumption of domestically produced goods and services (Cd) The circular flow of income WITHDRAWALS INJECTIONS

The Circular Flow of Income: 

The Circular Flow of Income The relationship between withdrawals and injections the links between them planned injections may not equal planned withdrawals effect of J > W effect of W > J equilibrium in the circular flow

Slide8: 

Factor payments Consumption of domestically produced goods and services (Cd) The circular flow of income WITHDRAWALS INJECTIONS

The Circular Flow of Income: 

The Circular Flow of Income The relationship between withdrawals and injections the links between them planned injections may not equal planned withdrawals effect of J > W effect of W > J equilibrium in the circular flow The circular flow and the four macroeconomic objectives

The Determination of Business Activity: 

The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram

Equilibrium GDP: 

O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) Equilibrium GDP

The Determination of Business Activity: 

The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines

Equilibrium GDP: 

O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) Equilibrium GDP

The Determination of Business Activity: 

The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines effects of E > GDP effects of GDP > E

Equilibrium GDP: 

O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) GDP1 GDP2 Equilibrium GDP

The Determination of Business Activity: 

The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines effects of GDP > E effects of E > GDP finding the equilibrium point

Equilibrium GDP: 

O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) GDP1 GDP2 GDPe Equilibrium GDP

The Determination of Business Activity: 

The Determination of Business Activity The multiplier the multiplier process definition of the multiplier GDP / J the marginal propensity to consume domestic goods and services mpcd = Cd / GDP

The multiplier: a rise in aggregate expenditure: 

O GDP (£bn) 100 160 100 120 160 Cd, E, W, J (£bn) The multiplier: a rise in aggregate expenditure

The Determination of Business Activity: 

The Determination of Business Activity The multiplier the multiplier process definition of the multiplier GDP / J the marginal propensity to consume domestic goods and services mpcd = Cd / GDP formula for the multiplier 1 / (1–mpcd)

The multiplier: a rise in aggregate expenditure: 

O GDP (£bn) 100 160 100 120 160 Cd, E, W, J (£bn) The multiplier: a rise in aggregate expenditure

The Business Cycle: 

The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession

The business cycle: 

O National output Time 1 2 3 4 The business cycle

The Business Cycle: 

The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend

The business cycle: 

O National output Time Potential output Actual output The business cycle

The Business Cycle: 

The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice

The Business Cycle: 

The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice the length of the phases

The Business Cycle: 

The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice the length of the phases the magnitude of the phases

Growth rates in selected industrial countries: 

Annual growth rate (%) UK Growth rates in selected industrial countries

Growth rates in selected industrial countries: 

Annual growth rate (%) UK Growth rates in selected industrial countries

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15 USA

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15 USA

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15 Japan USA

Growth rates in selected industrial countries: 

Annual growth rate (%) Growth rates in selected industrial countries UK EU15 Japan USA

The Business Cycle: 

The Business Cycle Causes of cyclical fluctuations Why does AD change in the first place? Why do booms and recessions persist? time lags bandwagon effects the accelerator Why do booms and recessions end? ceilings and floors echo effects the accelerator random shocks changes in government policy

Money, Interest Rates and Business Activity: 

Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration

Slide39: 

Credit creation: Banks' original balance sheet

Slide40: 

Credit creation: Effect of a new deposit of £10bn

Slide41: 

Credit creation: Full effect of a new deposit of £10bn

Money, Interest Rates and Business Activity: 

Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier

Money, Interest Rates and Business Activity: 

Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world

Money, Interest Rates and Business Activity: 

Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world banks' liquidity ratio may vary

Money, Interest Rates and Business Activity: 

Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world banks' liquidity ratio may vary banks respond to the demand for money

Money, Interest Rates and Business Activity: 

Causes of increases in money supply increased demand for money banks reduce liquidity ratio inflow of funds from abroad a public-sector deficit (PSNCR) depends on how it is financed from banking sector: money supply expands from outside the banking sector: money supply does not expand Money, Interest Rates and Business Activity

Money, Interest Rates and Business Activity: 

The demand for money reasons for holding money transactions and precautionary motive assets or speculative motive determinants of demand for money money national income speculation about future return on assets rate of interest Money, Interest Rates and Business Activity

Money, Interest Rates and Business Activity: 

Equilibrium rate of interest where demand for money equals supply Money, Interest Rates and Business Activity

Equilibrium in the money market: 

O Money Rate of interest re Equilibrium in the money market

Money, Interest Rates and Business Activity: 

Equilibrium rate of interest where demand for money equals supply if supply of money rises or demand for money falls, the rate of interest will fall Money, Interest Rates and Business Activity

Equilibrium in the money market: 

O Money Rate of interest re Equilibrium in the money market

Money, Interest Rates and Business Activity: 

Effects of changes in money supply on national income rise in money supply causes interest rate to fall fall in interest rate causes investment to rise rise in investment causes GDP to rise Determinants of the size of these effects Money, Interest Rates and Business Activity

Unemployment: 

Unemployment Measuring unemployment defining the unemployment rate claimant unemployment do claimant statistics give a true picture of unemployment? standardised unemployment (ILO/OECD) use of labour force surveys

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour

Aggregate demand and supply of labour: 

Aggregate demand and supply of labour O Average (real) wage rate No. of workers

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model

Aggregate demand and supply of labour: 

O Average (real) wage rate No. of workers We Aggregate demand and supply of labour

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment

Disequilibrium unemployment: 

O Average (real) wage rate No. of workers ASL ADL We W2 Disequilibrium unemployment

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment

Equilibrium unemployment: 

Equilibrium unemployment O Average (real) wage rate No. of workers ADL We ASL e Qe

Equilibrium unemployment: 

Qe O Average (real) wage rate No. of workers ASL ADL We N e Equilibrium unemployment

Equilibrium and disequilibrium unemployment: 

Equilibrium and disequilibrium unemployment O Average (real) wage rate No. of workers ADL We e Qe ASL

Equilibrium and disequilibrium unemployment: 

O Average (real) wage rate No. of workers ASL ADL We W2 b a e Equilibrium and disequilibrium unemployment

Equilibrium and disequilibrium unemployment: 

O Average (real) wage rate No. of workers ASL ADL We W2 b a e N c Disequilibrium unemployment Equilibrium and disequilibrium unemployment

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment Disequilibrium unemployment

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment Disequilibrium unemployment real-wage unemployment

Unemployment: 

Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment Disequilibrium unemployment real-wage unemployment demand-deficient (cyclical) unemployment

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 USA Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 USA Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Japan USA Unemployment rates in selected industrial countries

Unemployment rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Japan USA Unemployment rates in selected industrial countries

Unemployment: 

Unemployment Equilibrium unemployment frictional (search) unemployment structural unemployment changing pattern of demand technological unemployment regional unemployment seasonal unemployment

Inflation: 

Inflation Defining inflation consumer price inflation other categories of inflation Inflation in historical perspective low inflation in 1950s and 60s high inflation in 1970s and 80s low inflation since mid 1990s most developed countries gear monetary policy to achieving a low target rate of inflation

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 USA Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 USA Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Japan USA Inflation rates in selected industrial countries

Inflation rates in selected industrial countries: 

Annual growth rate (%) UK EU15 Japan USA Inflation rates in selected industrial countries

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve

Aggregate demand and aggregate supply: 

O Price level National output Aggregate demand and aggregate supply

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve

Aggregate demand and aggregate supply: 

O Price level National output Aggregate demand and aggregate supply

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards equilibrium

Aggregate demand and aggregate supply: 

O Price level National output Pe Aggregate demand and aggregate supply

Aggregate demand and aggregate supply: 

O Price level National output AS AD Pe P2 Aggregate demand and aggregate supply

Inflation: 

Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards equilibrium shifts in AD and AS curves

Inflation: 

Inflation Causes of inflation demand pull

Demand-pull inflation: 

Demand-pull inflation O Price level National output AS AD1 P1 Q1

Demand-pull inflation: 

O Price level National output AS AD1 P1 Q1 AD2 Demand-pull inflation

Demand-pull inflation: 

O Price level National output AS AD1 P1 Q1 AD2 P2 Demand-pull inflation

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push

Cost-push inflation: 

Cost-push inflation O Price level National output AS1 AD P1 Q1

Cost-push inflation: 

O Price level National output AS1 AD P1 Q1 AS2 Cost-push inflation

Cost-push inflation: 

O Price level National output AS1 AD P1 Q1 AS2 P2 Cost-push inflation

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push the interaction of demand-pull and cost-push inflation

The interaction of demand-pull and cost-push inflation: 

The interaction of demand-pull and cost-push inflation O Price level National output AS1 AD1 P1

The interaction of demand-pull and cost-push inflation: 

O Price level National output AS1 AD1 P1 AS2 AD2 The interaction of demand-pull and cost-push inflation

The interaction of demand-pull and cost-push inflation: 

O Price level National output AS1 AD1 P1 AD2 P2 AS3 AD3 AS2 The interaction of demand-pull and cost-push inflation

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation demand-side policies

Inflation: 

Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation demand-side policies supply-side policies