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AS and A Level: Macroeconomics
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The macroeconomic objectives
- 1 Growth is measured usually by the GDP per capita. Be aware that just looking at GDP as a measure of growth is flawed to some extent and know the criticisms of it e.g. ignores the distribution of income, exchange rate problems.
- 2 Full employment – This usually tracks GDP growth to a large extent. Some unemployment in an economy is normal as people change jobs (frictional unemployment) and some would say a little unemployment is useful for preventing big wage rises.
- 3 Low inflation – Inflation is a persistent rise in the level of prices. If a country has inflation its prices are likely to rise compared with foreign competitors so the country will become uncompetitive.
- 4 The balance of payments needs to be in equilibrium, where the value of imports equals the value of exports.
- 5 The most important objective varies – For many years it was the balance of payments and unemployment. Until very recently it was inflation and much more recently, growth has become the most important. Remember that all objectives need to be achieved at the same time.
- 1 The government tries to regulate the economy, mainly by affecting the level of Aggregate Demand (AD) and Aggregate Supply (AS). There are three main types of policy listed below.
- 2 Fiscal policy is using taxation and government spending to regulate AD by, for instance, increasing tax to reduce AD or borrowing more to spend on infrastructure projects to increase AD. Fiscal policy is used less to affect AD recently.
- 3 Monetary policy is essentially affecting the amount of money in the economy by changing the money supply, changing the exchange rate or altering the interest rate. In recent years, monetary policy has mainly come to mean just changing the interest rate with the main aim of affecting AD however quantitative easing is also monetary policy.
- 4 Supply side policies are designed to increase AS by improving the production potential of the economy. Examples include improving education and training, increasing competition for businesses and tax breaks for research and development.
- 5 In practice, governments use all three policies to regulate the economy. Supply side policies are seen as most effective as they also lead to lower inflation but their effects are in the long term.
Keynes versus Friedman
- 1 This is regarded as being a key ideological stand off regarding government regulation of the economy.
- 2 Keynes believed that the government had a big role to play in the economy by regulating aggregate demand. When AD was too low so there was low growth and unemployment, the government should borrow money and embark on public sector expenditure to stimulate AD and the economy. When AD was too high, the government should increase tax or reduce government spending to reduce AD.
- 3 Friedman was a monetarist. He believed that the free market should be left to itself to regulate the economy. He believed that left alone, the economy would provide full employment and growth. The government would only create inflation by injecting money into the economy. The government should regulate the money supply only.
- 4 The dominant ideology changes. From 1945 to 1979, Keynes was dominant. During the 1980s monetarism came back. Now there is arguably a more balanced view.
- 5 Avoid simplistic analysis. The debate concerning the role of the government in macroeconomics is complex.
- Marked by Teachers essays 5
- Peer Reviewed essays 35
To reduce inflation through monetary policy you must increase interest rates. By increasing interest rates it makes saving more appealing therefore reducing consumer spending, as one of the factors in aggregate demand by reducing consumer spending you ultimately reduce inflation. High interest rates not only reduce consumer spending but also investment, business will be concerned with high interest rates as it becomes more expensive to buy assets, this again reduces aggregate demand. Also people with mortgages will find themselves with lower discretionary income as they are spending more on their mortgage then before.
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Outline any two main/priority issue that concern the Australian economy & discuss the effectiveness of the governments macro and/or microeconomic policies toward the issue in the Australian economy.
Australia's Current Account is made up of a number of components. It included the balance of merchandise trade, which is export credits, minus import receipts. Net services consist of tourism, education, insurance, transport, shipping, and finance. Net income is also included, which refers to income received from Australian owned assets overseas, minus the payment of income for foreign owned assets in Australia. Finally there is Net Current Transfers, which includes foreign aid, migrant funds, and pensions. A CAD occurs when Australia's expenditure on goods, services, income and transfers overseas exceeds the receipt of such items from overseas.
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There are numerous ways to reduce or reclaim the power of monopolies, some controversial, and some are economic theory, therefore unrealistic. I will be discussing these within my essay. Monopolies tend to play as the dominant firm within their market, and as a result, tend to me price makers rather than takers. However, they can only control the price, or output, but not both. Generally, monopolies can be bad for the market mechanism as they are neither productively nor allocatively efficient.
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This research would indicate that the current government spending in environment does reflect the fact that it is one of their priorities. The government have clearly made substantial progress in dedicating more of the budget towards environment, even within the last three years. If you compare the efforts made towards improving the environment in the 2005 budget with the ones made in the 2007 it becomes clear just how much the government have started to invest in overseas projects etc.
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With the aid of diagrams, illustrate the causes if inflation and deflation, and by comparing their economic effects consider how both can effect the corporate sector
(Vaitilingam, R., 1994, p132). Now deflation must be defined. 'Deflation is the mirror image on inflation' (McAleese, D., 2004, p285) and is defined by the Collins English dictionary as 'reduction in economic activity resulting in lower output and investment' (Anon, 1998, p140). Corporate means 'relating to a business corporation' (Oxford University Press, 2006) so the corporate sector is all profit making businesses. This report will now examine the main causes of inflation. There are two main types of inflation: demand pull and cost push. 'Demand pull inflation occurs when a rise in aggregate demand leads to an increase in overall prices' (Begg, D.
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Discuss the measures taken by the current Labour government to enhance the independence of the Bank of England and the arrange
However, the Government still retains control of the final objective of monetary policy in setting the inflation target, preventing the Bank from having goal independence. It is also outlined that in extreme circumstances, if it is in the interest of the nation the Government have the authority to give instructions to the Bank on interest rates for a limited period. This policy of partial delegation of monetary policy is supported by Lohmann (1992) who believes it to yield superior outcomes, when the government is able to override the central bank at a positive cost.
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In light of the criticism's leveled at Benjamin and Kochin's 1979 article in the 1982 Journal of Political Economy, assess how successfully Benjamin and Kochin defended their statistical approach in their 1982 rejoinder.
disqualify many of the unemployed from receipt of benefit.'4 He summarises that 'the principle argument put forward here is that the Benjamin and Kochin estimates are not too credible in light of the active measures that were taken to disqualify precisely those who they allege were voluntarily unemployed from receipt of benefits.'5 Although Benjamin and Kochin refer to the 'progressive liberalisation of the insurance system'6, Cross points out that, 'what they fail to mention is that from March 1921 to March 1930, nearly 3 million claims for unemployment benefit were refused because claimants failed to prove that were '"genuinely seeking
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Discuss the view that minimum wage legislation leads to unemployment. Has this been the recent experience of the UK?
As is seen in Fig.1 there is a simultaneous move up the labour demand curve. The introduction of the minimum wage has therefore created unemployment of QaQb. Fig.1 Source: www.bized.ac.uk The introduction of a minimum wage can have one of two effects. If the theory holds out and workers are laid off, then it will be lower paid workers who lose their jobs and the effect of the minimum wage will be a detrimental one. If the theory does not hold then the minimum wage will have its desired effect and raise the wages of those low paid workers and help raise their standard of living.
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What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts support the Rational Expectation Hypothesis?
When reparation imposed on Germany, it implied that German government must buy foreign exchange to make the reparation. So demand for foreign exchange increased and demand for German currency declined, leading to large depreciation of German currency, 317.50 marks to one dollar in June 1922. This hyperinflation stopped abruptly in late November 1923 when prices suddenly stopped rising and mark stopped depreciating. One major force came into play in stabilization was that on 15 October 1923 a new currency called the rentenmark, which was equivalent to one trillion paper marks was issued.
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The desert reclamation project. ECLT 113 Mohamed Abdel Raouf Paper #3: Research 900-00-1018 Unemployment: Where is it Going? Unemployment is the cause of many problems such as the increase in the rates of poverty and the increase in crime rates in the world. The joblessness problem is a problem that is threatening every working person in the whole world. For instance, in Britain, the "policy debate has been galvanized by the spread of unemployment - and feelings of job insecurity - beyond the traditionally affected blue-collar occupations to white-collar workers and those employed in managerial and professional grades" (Philpott 1).
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Examine the difficulties which confront policy makers when they attempt to formulate macroeconomic policy.
* Balance of payments- international trade in goods and services can greatly increase an economy's wealth, output and employment. A country's transactions with the rest of the world over a year are recorded in its balance of payments. * Economic growth- despite the importance attached to the control of unemployment and inflation by many politicians, the most important of the macroeconomic objectives remains economic growth. It is measure as the average annual rate of growth of real gross domestic product (GDP)
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This figure only measures cash item, not items which will occur in future year s It is the best indicator of the short term impact of fiscal policy on the economy. * Fiscal Outcome: calculated the same way but uses a different accounting method which includes future payments that have not taken place. It is the best indicator of the long term fiscal strategy because it counts expenditure or liability from the day the transaction occurs Both the last 2 methods' figures remove the effect of ONE OFF transaction that can distort the budget outcome.
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Australia's place in the global economy - "Explain the reasons for our current exchange rate level. Evaluate its impact on the Australian Economy."
The first cause for the dramatic decrease in the Australian Dollar is the U.S Central Bank elevating interest rates too high (1999 - 2000), compared to Australia. This caused a reduction of foreign investment in Australia, and further investment into the U.S economy, causing money to flow out of the Australia's circular flow (leakage). However at the same instance, money is flowing into the U.S economy (injection) increasing the amount of money flow and demand for $US therefore appreciating the U.S dollar.
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'Less than credible stabilisation will not eliminate inertia and will generate real exchange rate overvaluation'.
show sustained inflation rates of over 25% have routinely appeared in no less than 54 countries across the world since 1965. They also identify a small group of 14 (mainly Latin American) countries, which have persistently dogged by "chronic inflation" from 1965-89. More recent examples include Argentina and Brazil in the 1990's. The effects of high levels can be devastating, with in almost all cases, huge corresponding falls in output, rises in unemployment and rises in government deficits as well as the obvious psychological harm and distress that it will cause the unfortunate members of the afflicted country.
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What conditions are necessary for a devaluation to improve the BOP? Can a small open economy successfully devalue?
is the record of the transactions of the residents of a country with the rest of the world. The BOP is split into two accounts. The current account describes the transactions in goods, services and transfers. The capital account covers transactions in assets. One of the main macroeconomic objectives of most economies is to run a small current account surplus. This essay will now explain why. It is considered to be a bad sign to have a current account deficit. For example a current account deficit may be the result of a low saving rate, which results in a high current consumption leading to lower future consumption, implying that future generations bear the burden of low national saving.
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Then I am going to concentrate on what affect unemployment has on house prices, because I think the major factor affecting house prices is Unemployment. The main things that affect the price of a house are: Unemployment This affects the price of a house because as unemployment rises then less people will have the money to buy houses and therefore the demand for the house will be lower and the equilibrium price will fall. Also if there is an area with low unemployment then people will be attracted to the area because of the jobs, and there fore demand will rise and so will the equilibrium price.
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Discuss the idea that if the economyis to prosper in the long run, the control of inflation should be the mainobjective of Government
Even if inflation is perfectly anticipated, people will still be encouraged to reduce their holdings of cash and to keep as much of their wealth as possible in the form of assets whose value rises at least as rapidly as the general price level and which therefore do not decline in real terms. The reduction in the holding of cash balances imposes costs on individuals and firms that they would not have to face if prices were stable. Economising on cash balances requires time and effort.
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Taxes may be reduced to increase the level of disposable incomes and increase consumption. Lower income tax levels would also encourage more people to take up work especially those looking for lowly skilled work, which pay poorly. On the other hand if Gordon Brown is a strict classical economist he's likely to adopt supply side policies. This means he will attempt to stimulate growth and create more jobs by increasing aggregate supply. There are obviously a number of ways this could be done, but they broadly fall into four groups.
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This report will highlight how Government policy could change to try to: Increase economic growth, Reduce unemployment, Reduce the Balance of Payments deficit, Reduce the inflation to 2.5%.
The money supply, then, should be adjusted to finance the desired level of economic growth while avoiding financial crises and high interest rates that discourage consumption and investment. The New Classical School economists look at the current state of the economy and the current policies being pursued by the government. If their information is correct people will rationally predict any change in aggregate monetary demand, which will be reflected purely in terms of changes in prices, and that real aggregate demand will remain the same.
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Fiscal policies include; lower direct taxes (causing a rise in disposable income), higher Government spending, and an increase in the amount the government sector borrows each year (PSNCR). These fiscal policies reduce the rate of leakages from the circular flow and increase injections into the circular flow of income generating economic growth and employment at the cost of demand pull inflation. An increase in government spending or a fall in taxes which increases budget deficit or reduces the budget surplus is known as expansionary fiscal policy.
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What are the government objectives? Explain why each is important and how the government can achieve each objective.
Consumers want goods and services; workers want to provide them; factories and workplaces are probably lying idle. Yet the economic system is unable to fully match up this desire for work with the desire for goods and services. The social problem lies in the poverty that unemployment brings with it, and this involves not merely a deprivation of material goods and services. It also involves the feelings of degradation and rejection that the unemployed feel, living in a society where a job give status and satisfaction whilst unemployment is considered a failure of the individual. Therefore, poverty both material and psychological is the fate of those whom are unemployed.
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This in turn further increases employment, as more factors of production are needed to meet demand. High employment means high income tax for the government and increases sales for UK businesses, which may also lead to more equality in the balance of payment deficit. High unemployment causes social problems such as crime and more specific problems such as heightened cases of alcohol consumption leading to greater stain on the NHS, who would have little funding anyway due to the lowered government income.
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