Transcript money supply

F1 Macro economic factors
1. Define macro-economic policy
Definition
It is the study of the aggregated
effected of the decision of individual
economic units (such as households or
business).
It looks at a complete national
economy, or the international economic
system as a whole.
2. The circular flow of income and expenditure
Income
Firms
Households
Consumption
Savings
Financial sectors
Taxation
Government
Import demand
Investments
Expenditure
Export
Foreign sector
2. The circular flow of income and expenditure
 Example question
Which of the following is not a withdrawal to the
circular of income?
A. Savings
C. Taxation
B. Export
D. Import
3. Factors affect the economy
The multiplier in the national economy
Increase in national income=Initial investment*multiplier
Multiplier is depended on factors such as the proportion
of new investments spend and the proportion of saving.
3. Factors affect the economy
 Aggregate supply and aggregate demand
Aggregate supply (AS) refers to the ability of the
economy to produce goods and services while
aggregate demand (AD) is the total demand in the
economy for goods and services.
The prices, national income and consumer
confidence will influence AS and AD.
4. The determination of national income
 Equilibrium national income
It will be reached where AD equals AS.
 Full-employment national income
It will be reached if there is full employment where AD
equals AS.
It is the ideal equilibrium level of income
4. The determination of national income
 Inflationary gaps
It happens where there is full employment, and
AD>AS.
 Deflationary gap
It happens where there is unemployment, prices are
fairly constant and AS changes as AD varies.
4. The determination of national income
 Stagflation
It is a combination of unacceptable high
unemployment and high inflation.
It is caused by a long-term major increase in costs.
4. The determination of national income
 Example question
What is the situation where the increase in demand
will cause increase in output rather than increase in price?
A. Full employment national income
B. Inflationary gap
C. Deflationary gap
D. Stagflation
5. The business cycle
Boom
Output
output
Trend in
Recession
Recovery
Depression
Time
6. Inflation and its consequences
 Definition
Inflation is an increase in price levels
generally. It means the decline in the
purchasing power of money.
 The impact of inflation
a. Redistribution of income and wealth
b. Balance of payments effects
c. Uncertainty of the value money and prices
d. Economic growth and investment
6. Inflation and its consequences
 How to measure inflation?
a. Retail Prices Index (RPI)
b. The underlying rate of inflation
RPIX (RPI- mortgage interests)
PRIY (PRIX-sales tax)
c. Consumer Prices Index (CPI)
CPI=RPI-housing costs
6. Inflation and its consequences
 Cause of inflation
a. Demand pull factors
b. Cost push factors
c. Import cost factors
d. Expectation
e. Excessive growth in money supply
6. Inflation and its consequences
 Example question
Which of the following organization might benefit
from a period of high price inflation?
A. An organization which has a large number of longterm payables
B. An exporter of goods to a country with relative low
inflation
C. A supplier of goods in a market where consumers
are highly price sensitive
D. A large retailer with a high level of inventory on
display and low rate of inventory turnover
7. Unemployment
 Flow into unemployment
Redundancies, voluntary quitting from a job, lay-offs,
school leavers without a job, others rejoining the
workforce but with no job yet
 Flow out of unemployment
a. Unemployed finding the job
b. Laid-off people being re-employed
c. Unemployed people stopping search for work
7. Unemployment
 Consequences of unemployment
a. Loss of output
b. Loss of human capital
c. Increasing inequalities in the income distribution
d. Social costs
e. Increased burden of welfare payments
7. Unemployment
 Cause of unemployment
Category
Comments
Real wage
Labor supply>labor demand, strong labor unions
or minimum wages
Frictional
Short-term, difficulty in matching workers with jobs
Seasonal
Short-term, occur in certain industries
Structural
Long-term changes in industries
Technological
Long-term changes due to new techs
Cyclical/demand
deficient
Long-term, caused by the business cycle
7. Unemployment
 Example question
Which of the types of unemployment is short term?
A. Structural unemployment
B. Seasonal unemployment
C. Technological unemployment
D. Cyclical unemployment
7. Unemployment
 Government employment policies
Job creation ≠ Reducing unemployment
Ways to reduce unemployment:
a. Spending more on jobs
b. Encourage growth
c. Encourage training
d. Encourage labor mobility
e. Abolishing minimum wage regulations
8. The objective of economic growth
 Economic growth
It can be measured by GNP/head
 Actual economic growth
It is determined by AD and AS
 Potential economic growth
It is determined by AS rather than AD
8. The objective of economic growth
 Technological progress
Capital saving
Neutral
Labor saving
Example:
A product requires $10 of capital and labor each.
After an innovation, only $10 of capital and $5 of labor
are required. Then which type of technological progress
has been achieved?
8. The objective of economic growth
 Appraisals of economic growth
Advantage
Disadvantage
A higher income per head
Faster usage of natural
resources
Higher levels of
consumptions and living
Increasing pollution
Providing more welfare
services
Increasing structural
unemployment
In the short run, higher growth
requires a cut in consumption
9. Government policies for managing economy
 Macroeconomic policy objectives
a. To achieve economic growth
b. To control price inflation
c. To achieve full employment
d. To achieve a balance between exports and imports
10. Fiscal policy
 Definition
Fiscal policy is a kind of government policy which
focus on taxation, public borrowing and public
spending
 Budget surplus, budget deficit and PSBR
Budget deficit Public Sector Borrowing Requirement
(PSBR)
10. Fiscal policy
 A combination of expenditure and taxation
Increase spending, reduce tax (Stimulate demand)
Reduce spending, increase tax (Reduce demand)
10. Fiscal policy
 Example question
When the economy is in the recovery stage of the
business cycle, which type of policy is helpful?
A. Budget surplus
B. Increase taxation, reduce spending
C. Reducing taxation, reduce sending
D. Reducing taxation, increasing spending
10. Fiscal policy
 Functions of taxation
a. To raise revenue for the government
b. To cause certain products to be priced to take into
account their social costs
c. To redistribution income and wealth
d. To protect industries from foreign competition
10. Fiscal policy
 Types of taxes
A. Direct taxes (Income taxes, capital gain taxes,
inheritance taxes)
Indirect taxes (Other taxes)
B. Regressive taxes
Proportional taxes
Progressive taxes
11. Monetary policy
 Definition
The monetary policy is a kind of government policy
uses money supply, interest rates, exchange rates or
credit control to influence aggregate demand.
11. Monetary policy
 The money supply as a target of monetary
policy
The increase in the money supply will raise prices and
income which means demand will be raised.
However, money supply is a medium-term target.
11. Monetary policy
 Interest rate as a target of monetary policy
The increase in interest rates will reduce investments
and borrowing which means demand will be reduced.
Interest rates influence the exchange rates and inflation
etc.
Interest rate also has a considerable time leg.
11. Monetary policy
 Exchange rates as a target of monetary
policy
The fall of exchange rates will stimulate exports and
reduce demand for imports
When a country is heavily dependent on overseas trade,
it might be appropriate to establish a target exchange
rate.
However, the exchange rate is dependent on inflation
and interest rates.
11. Monetary policy
 Example question
Which type of monetary policy cannot benefit the
national income growth?
A. Lower interest rates
B. Increase money supply
C. Increase in exchange rate
D. Increase credit
11. Monetary policy
 Targets and indicators
Leading indicators
Coincident indicators
Lagging indicators
12. The balance of payment
 Current account and capital account
Capital account (Public sector flows of capital into and
out of the country such as the government loans)
Current account (Others)
12. The balance of payment
 Example question
Which of the following is not consisted in the current
account of a country?
A. Trade in goods and services
B. Foreign government loans
C. Interest received from
D. Donations abroad by non-government sectors
12. The balance of payment
 The equilibrium in the balance of payment
If the exchange rate remains stable and the annual
trades of goods and services is in overall balance over a
period of years.
However, if these things requires government to
introduce measures which will cause unemployment,
inflation, reduced economic growth or trade barriers ,
then the equilibrium does not exist.
12. The balance of payment
 Surplus and deficit in the current account
Surplus (Export>import, currency will appreciate)
Deficit (Export<Import, currency will depreciate)
The end