Notesale: Turn your study into money

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Chains of Reasoning

MACRO
AD curve sloping downwards
1
...
Inflation -> ↑APL -> foreign goods cheaper -> ↑current account deficit (↓(X-M)) ->
↓AD
3
...
↑Confidence -> ↑I ↑C due to expectation of higher return
2
...
↓Tax -> ↑real disposable income
4
...
Inflation -> UK goods increase in price quicker -> less competitive -> depreciation of
currency -> ↓D for Pounds -> currency cheaper -> export cheaper import dearer
6
...
houses -> people feel wealthier -> ↑C
Ev: Most people in UK own houses
7
...
↓IR (-> ↓debt -> ↑real disposable income) -> ↑C ↑I
Ev: lag time
2
...
↑Growth -> ↑C -> ↑AD -> ↑profit -> ↑I
2
...
↑Exports -> ↑jobs -> ↑D -> ↑I to meet D
4
...
↓Credit availability (banks & lenders unwilling to lend) eg
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↓Tax -> firms keep more profit -> ↑I

Chains of Reasoning
Gov’t spending

1
...
Economic growth
2
...
Economic growth fast -> inflationary/unsustainable
b
...
(Near) full employment
d
...
↑Confidence -> ↑I
f
...
Recession
a
...
Lots of spare capacity/negative output gap
c
...
Low inflation rates
e
...
↑G to stimulate econ eg
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Growth
a
...
↑Growth -> ↑real income -> ↑C -> ↑consumption for imports (stronger ExRate ->
imports cheaper) -> ↑current account deficit
Ev: In economic decline where real income fall, UK current account will improve
2
...
t
...
State of world econ: ↓growth in one of UK’s export markets -> ↓real income in that
country -> less able to afford imports -> ↓C -> ↓export for UK
4
...
Competitiveness: ↑innovation/↑quality of G&S/operating in niche
markets/↓labour cost/↑productivity/better infrastructure -> ↑competitiveness ->
↑exports –> ↓trade deficit
6
...
Being part of trading blocs: closes country from exports –> ↑trade deficit
Multiplier effect
↑AD (↑injection) -> ↑income into circular flow -> ↑growth -> ↑jobs -> ↑income -> ↑C ->
↑income created ->↑GDP
Spare capacity: ↑AD -> output produced quicker + ↓CoP -> ↑output w/o increase in cost > SRAS elastic -> ↑size of multiplier -> ↑AD = ↑↑GDP
Ev: SRAS inelastic -> when ↑AD -> ↑price rather than increase national income -> inflation
-> depreciation of currency -> ↑IR to prevent overconsumption when everything is
‘cheaper’ -> ↓C ↓borrowing ↑S -> multiplier smaller than potential
Reverse multiplier: withdrawal of income from circular flow -> larger ↓income -> ↓growth
-> decline in economy
SRAS shift right (↑)
1
...
wages, taxes, labour productivity
2
...
raw materials, commodity prices, XRate: ↑currency ->
↑imports
3
...
↓Net outward migration -> keep skilled workers
5
...
↑Money spent on tech -> produce good at ↑volume/↑quality
2
...
↑Quality of human capital -> ↑productivity & ↑variety of G&S
4
...
↑Net outward migration -> ↑size of labour -> ↑output
Ev: Migrants are of working age
6
...
labour overtime -> ↑productivity -> actual level
of output >> potential -> ↑AD -> ↑inflationary pressure

Chains of Reasoning
Employment & Unemployment
Effect
1
...
Firms: ↑Rate of unemployment -> ↑supply of labour to employ from -> ↓wages ->
↓costs
Ev: Consumers ↓disposable income -> ↓C ->↓firm profits -> firms that sell inferior
goods ↑sales -> cost firms to retrain workers
3
...
Gov’t: ↑spending on JSA -> OC as could be invested elsewhere
5
...

crimes/vandalism
6
...
Globalisation: manufacturing productions move abroad to countries w/ lower labour
costs -> industry decline in size/removed -> trained workers unemployed
2
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Depreciation of XRate -> imports dearer exports cheaper -> ↑AD
2
...
↓IR -> ↑borrowing ->↑C
4
...
World commodity prices: cost of raw materials more expensive -> ↑CoP -> domestic
inflation
2
...
Expectations of inflation: workers ask for higher wages -> inflation
4
...
Depreciation in XRate -> imports dearer -> ↑price of raw materials
6
...
↓Purchasing power of money -> ↑cost of necessity -> regressive effect -> low and
fixed incomes hit hardest
2
...
↑IR -> ↓borrowing ↓I
2
...
↓Competitiveness on global scale
Ev: depending on other countries
Gov’t: ↑cost of living -> ↑value of state pension & welfare payments
Workers:
1
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Firms face higher costs -> ↑redundancies -> cut costs by firing

Chains of Reasoning
BoP
UK: spends more on imports -> current account deficit -> can have financial difficulties
financing the deficit
Ev: UK surplus w/ services deficit w/ goods
Factors
1
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Decline/recession -> ↓C -> ↓current account deficit
3
...
↑Raw materials prices -> ↑production cost -> cost-push inflation
5
...
Downturn in UK main export markets -> less able to afford imports in that country ->
↓demand for UK G&S
Trade-off
1
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labour overtime -> ↑productivity -> actual level of output >> potential > ↑AD (faster than AS) -> ↑PL -> inflation
2
...
Growth vs budget deficit: ↑tax ↓G ->↓budget deficit -> ↓AD -> ↓growth
4
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Unemployment vs inflation: growth -> ↑jobs -> ↓unemployment -> ↑wages -> ↑C
-> ↑APL -> inflation
Ev: supply side policy to shift AS out to reduce structural unemployment -> not
increase wages

Chains of Reasoning
Monetary policy
Methods
1
...
High inflation -> want: ↑S ↓C -> ↑IR -> ↑rewards for saving ↑cost of
borrowing
b
...
5% despite high inflation: aim to simulate
AD and ↑growth
2
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Low inflation + IR cannot possibly be any lower -> BoE create money to buy
assets in form of gov’t bonds -> buy bonds from investors -> ↑amount of
cash flowing into financial system -> ↓cost of borrowing -> encourage
lending to firms & individuals -> ↑I ↑C -> growth -> inflation -> BoE sell
assets -> ↓money supply -> ↓C -> ↓IR
Factors considered when setting bank rate
1
...
Savings rate: ↑S -> ↓C -> MPC ↓IR -> ↑C ↓S
3
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XRate: weak Pound -> ↑PL -> UK exports cheaper -> ↑exports -> imports dearer ->
↑net export -> MPC ↑IR -> ↑value of Pound & ↑demand for currency
XRate effect to AD & macro obj
↓XRate –> exports cheaper -> ↑exports -> imports dearer -> improve current account
deficit -> ↑cost of imported raw material -> ↑CoP -> cost-push inflation
Ev: assumes D for export elastic

Chains of Reasoning
Fiscal policy
Change gov’t spending & taxation -> influence size of circular flow -> stabilise + stimulate
econ
1
...
Deflationary: ↓G/↑T -> ↓C -> ↓AD
Ev: improves gov’t budget deficit
Methods
1
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Subsidise training/spend on edu -> firms train fewer workers -> ↓CoP
3
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↑Spending on infrastructures eg
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Gov’t imperfect information -> inefficient spending
2
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Borrowing from private sector -> ↓funds available -> crowding out
4
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↑IR -> ↓effectiveness of policy on AD increase
6
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Incentives: ↓income & corporation tax -> ↑C ↑I
2
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Reform labour market: ↓min wage -> allow free market forces to allocate wages //
↓power of trade unions -> ↓restriction on employing workers -> ↑mobility of
labour -> ↑efficiency // gov’t subsidise relocation of workers/improve availability of
job vacancy info -> improve geographical mobility
5
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Infrastructure: ↑spending on infrastructures eg
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Only policy to deal with structural unemployment
2
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Significant time lags
4
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reduce tax rate -> ↑unequal distribution of
income



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