Explain why inflation is an important macroeconomic
Economics ) Explain why inflation is an important macroeconomic Macroeconomics is concerned with issues, objectives and policies that affect the whole economy. Inflation measures the annual rate of change of the general price level in the economy. Inflation is a sustained increase in the average price level. Inflation is an important macroeconomic because if it is too high then the value of money falls negating any increase in living standards. Inflation directly affects the international competitiveness. If the UK's prices rise faster than Germany's, overseas buyers (as well as all UK buyers) will buy German goods instead of UK goods and services, which would create a substitute effect. If buyers from both the UK and overseas turn away from british goods because of the higher inflation in the UK- this means that employment in the UK will fall, economic growth will also fall and the UK will import more which could undermine the balance of payments. Furthermore, with higher unemployment and lower growth, government tax revenues are lower- thereby undermining the balanced budget objective. Inflation is also an important objective because it erodes purchasing power. This means that for a given income, say £300 per week, inflation means that people can buy less, unless their income rises to compensate for it. Some sections of society are considered to be more vulnerable
Explain how fiscal policy can be used to influence both thelevel and pattern of economic activity?
Explain how fiscal policy can be used to influence both the level and pattern of economic activity? Fiscal policy involves the use of government expenditure and taxation to influence the level and composition of AD. A rise in government expenditure, or a fall in taxation, should increase aggregate demand and boost employment. The size of the resulting final change in equilibrium national income is determined by the multiplier effect. The larger the national income multiplier, the greater the change in national income will be. Fiscal policy can affect aggregate demand in a number of ways. Firstly through an increase in government spending on services such as the NHS will create more jobs and thus increase consumption as consumers now have more disposable income. A change in direct taxation such as a change in level of corporate tax on firms may cause firms to increase investment spending due to spare money that hasn't been removed by the burden of tax. This may lead to an accelerator effect which will feed through the circular flow of income and increase the level of national income and output. A change in indirect taxation will have an immediate effect on aggregate demand because goods will be cheaper and therefore consumers will respond by buying of more of the good or increasing consumption patterns due to their relative increase income. Fiscal policy can also affect
Fiscal and monetary policy - a comparison
fiscal and monetary policy - comparison Introduction Fiscal policy should not be seen is isolation from monetary policy. For most of the last thirty years, the operation of fiscal and monetary policy was in the hands of just one person - the Chancellor of the Exchequer. However the degree of coordination the two policies often left a lot to be desired. Even though the BoE has operational independence that allows it to set interest rates, the decisions of the Monetary Policy Committee are taken in full knowledge of the Government's fiscal policy stance. Indeed the Treasury has a non-voting representative at MPC meetings. The government lets the MPC know of fiscal policy decisions that will appear in the annual budget. Impact on the Composition of Output Monetary policy is seen as something of a blunt policy instrument - affecting all sectors of the economy although in different ways and with a variable impact Fiscal policy changes can be targeted to affect certain groups (e.g. increases in means-tested benefits for low income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment allowances for businesses in certain regions) Consider too the effects of using either monetary or fiscal policy to achieve a given increase in national income because actual GDP lies below potential GDP (i.e. there is a negative output gap)
Discuss the Types of Unemployment and the Benefits of Controlling It In the UK.
Discuss The Types Of Unemployment And The Benefits Of Controlling It In The UK. (20 Marks) Unemployment is the number of people out of work who are actively seeking employment at the current wage rates. To be actively seeking work you must be of working age: 16-64 for males and 16-59 for females and not economically inactive. That means you cannot be in full time education, be on a training scheme, have retired early or be raising children at home. To measure unemployment in the UK the government uses two methods to quantify the rate. The first is the Labour Force Survey, in a monthly survey of a sample of households representing the entire population. The surveys are based on the activities of each person of working age in the households, within a one week period. A person who did any work during that week for pay or profit, worked 15 hours or more as an unpaid worker in a family business, or had a job from which he or she was temporarily absent, is counted as employed. A person who was not working but was looking for work or was on a temporary lay-off and available to take a job is counted as unemployed. The second is the claimant count, where the governments collect figures on the number of people claiming unemployment benefits from the DSS. This second method often gives lower values as they is likely to be many people who do not except the benefits, purely on
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
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 This essay will aim to cover the causes of inflation and deflation and see how their economic effects influence the corporate sector. By first defining any key terms, then looking at the causes of inflation and deflation, looking at their different effects on the economy and in turn analysing how those effects shape the corporate sector. Before this can be done the terms 'inflation', 'deflation' and 'corporate sector' must first be defined. 'Inflation is a rise in the average price of goods over time'. (Begg, D., Fischer, S. and Dorndusch, R., 2000, p462) and 'The most usual measure is that of retail prices' (Sloman, J. and Sutcliffe, M., 2001, P533) (this information being gathered from the retail price index [RPI]) and 'A rise in inflation means a faster increase in prices...fall in inflation means a lower rise in prices' (Sloman, J. and Sutcliffe, M., 2001, p533). To illustrate the importance of inflation 'The COS (Central Statistical Office) says it gets more queries from the public about the RPI than any other statistic, a refection of the influence inflation has on every ones life.' (Vaitilingam, R., 1994, p132). Now deflation must be defined. 'Deflation is the mirror image on inflation' (McAleese, D.,
Describe the main changes in unemployment between 1989 and 1999 as shown in Table 2.
AS Question on Unemployment (a) Describe the main changes in unemployment between 1989 and 1999 as shown in Table 2. (5 marks) The percentage of unemployment in the labour force decreases by 0.4% from 1989 to 1990 but the following year sharply increases by 2.2%. Unemployment carries on to increase for a further two years until it reaches an all time high in the decade of 10.3% in 1993. Unemployment decreases from 1993 to 1999 with a total decrease of 6% to 4.3% with a sharp decrease between 1996 and 1995 of 1.8%. Overall we can see that throughout the decade unemployment sharply rose over three years and then steadily fell for six years resulting in a lower unemployment percentage in 1999 than in 1989 and any other year in the period. (b)(i) Explain why unemployment is likely to vary with fluctuations in aggregate demand. (4 marks) Fluctuations in aggregate demand will cause unemployment. Unemployment that occurs due to fluctuations in aggregate demand is called cyclical unemployment. Cyclical unemployment will occur when aggregate demand (D2) reduces as supply (S2) will therefore reduce due to the reduction in aggregate demand and therefore entrepreneurs will look to cut costs and to do this will make their workforce smaller. However if aggregate demand increase (D3) there will be an increase in supply (S3) and therefore entrepreneurs will look to maximise profits
Monetary policy effect on Macroeconomics
Monetary policy effect on Macroeconomics Monetary policy is the method by which the government, central bank, or monetary authority controls the supply of money, or trading foreign exchange markets. This policy is usually called either an expansionary policy, or a contractionary policy. An expansionary policy multiplies the total supply of money in the economy, and a contractionary policy diminishes the total supply. Expansionary policy is used to tackle unemployment in an economic decline by lowering interest rates, while contractionary policy has the goal of elevating interest rates to fight inflation. Monetary policy reposes on the relationship between the rates of interest in an economy and the total dispense of money. Monetary policy uses a diversity of tools to dominate exchange rates with other currencies and unemployment. This is done in order to influence outcomes like economic growth and inflation. A policy is called contractionary if it diminishes the size of the money supply or increases the interest rate. An expansionary policy raises the size of the money supply, or lowers the interest rate. Monetary policies are accommodative if the interest rate is intended to stimulate economic growth, neutral if it is intended to neither encourage growth nor fight inflation, or tight if its aim is to reduce inflation. There are several monetary policy tools available
What are the effects of inflation on an economy?
What are the effects of inflation on an economy? Inflation can be defined as a sustained rise in general price levels. This is a very general definition as there are so many factors that have to be taken into account when considering the General price level of an entire economy. In the UK, inflation figures published and announced once a month give certain percentage rates of inflation. These are annual percentage rates indicating the change in inflation between the current year and the previous of the same month. The Retail Price Index (RPI) is the most famous, but the government prefers to quote the RPIX. Although other measures are used for calculating inflation, these are the most widely used methods in the UK. The RPI is a set of numbers that show the monthly change in the average of a sample of goods and services. There is an annual family expenditure survey that is used to decide which services are to be used in the sample and which are most important of those. In this sample typical household expenditure such as, food and housing costs would be considered whereas tobacco would not. Therefore, The inflation figures that form the RPI is the annual percentage change in this index from the most recent month compared with the same month in the previous year. This is known as the headline rate of inflation. Alternatively the government will regularly publish the
Unemployment Report.
Unemployment Report Unemployment is defined as people who are registered as able, available and willing to work at the going wage rate in a suitable job but who cannot find paid employment despite being actively involved in search for work. Unemployment falls when people leave the jobless register (they either find work or leave the labor market) than sign on each week1. Unemployment is measured either according to the claimant count or the Labor Force Survey. The former counts only those people who are eligible to claim the Job Seeker's Allowance and the later is based on the International Labor Organization definition of unemployment. It covers those who have looked for work in the past four weeks and are able to start work in the next two weeks. Keynesian Unemployment (Demand Deficient): Keynesian unemployment refers to, when AD falls and wages and prices do not adjust immediately to restore full employment. This is because of the sluggish expectations and contracts (verbal or written) between employers and employees. AD is deficient because it is lower than full employment AD. As a consequence some workers will be willing to work at the going real wage but will be unable to find jobs. Only in the long run will wages and prices fall enough to boost the real money supply and lower interest rates to the extent required to restore AD to its full employment level and only
A Study of Economic Development across the world
A study of Economic Development across the World Economic development is the increase in the well being of a country or region's inhabitants including an improvement in the standards of living and quality of life through the increase and development of economic wealth. Economic development is measured by the HDI or Human development index which gives a country a rank depending upon 3 main areas of development; health, education and GDP per capita. The HPI or human poverty index is also used as this is thought to better reflect the extent of deprivation than the HDI. The HPI measures life expectancy (in particular the number of people expected to die before the age of 40), knowledge and standards of living. The worse a country scores on these indicators the higher it is ranked. The development of a country can also be measured by the Millennium Development Goals. These are 8 goals that were set by the United Nations in 2000 to be achieved globally by 2015 and aim to improve all areas of human and economic development. Firstly Latin America and the Caribbean, this region has shown good economic development in recent years but this has only been in some areas; mainly education and some health aspects. They have achieved the Millennium Development Goal of universal primary education and have attained better gender equality in education with more girls enrolling in Secondary
